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The old SSG had reference numbers (x,x) for each number used in a new calculation showing the section and line where that number came from which I miss on the new Stock Study Format.
In section 5C where does the % avg yield and % annual appreciation used in calculating comp ann tot return come from? Same question for section 5D.
Pls explain difference between compound & projected total annual return and which you would use as best estimate of expected return.
Thanks
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Rank: Advanced Member
Posts: 105
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> In section 5C where does the % avg yield and % annual appreciation used in calculating comp ann tot return come from?
The computation of 5C avg yield is shown in the first row of 5B ... Avg % Payout divided by High P/E (from 4A). % annual appreciation is the change from the current price to the Forecast High Price (from 4A), annualized over 5 years.
> Same question for section 5D.
The computation of 5D avg yield is shown in the second row of 5B. The % annual appreciation is the same as 5C, except using a high price equal to average PE (see below) x EPS (rather than high PE x EPS).
> Pls explain difference between compound & projected total annual return ...
Both 5C and 5D are % potential compound annualized total returns. (I think the titles used in Toolkit 6 suggest that they are more different than they are.) The only difference is that 5C is based on a forecast *high* P/E (from 4A) while 5D is based on a forecast *average* P/E equal to the average of the 4A high P/E and the 4B(a) low P/E.
> ... and which you would use as best estimate of expected return.
Neither one is an estimate of expected actual return (so, neither one is a "better" estimate than the other). Each is a precise calculation of *potential* return based on specific assumptions about the future (5-year holding period together with specific future PE and EPS levels). If the actual future turns out to be different than those assumptions (as will almost certainly be the case), the actual return will differ as well.
-Jim Thomas
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Jim Thomas,
Thanks for your reply of 3/1. I cannot believe that I missed the first part on SSG (5,C & 5,D) avg yield. But Ann. Appreciation is still confusing. Consider the below example of a stock on Stock Study.
Input: Current Price = 13.60 Sel. High P/E = 19.3 Forecast High Price = 25.1 Sel. Low P/E = 9.3
SSG Results: (5,C) Ann. Appreciation = 13.0% (5,D) Ann. Appreciation = 6.5%
Calculations:
For (5,C): (25.1-13.6)/13.6 = .8456 divided by 5 (yrs) =.169 or 16.9% compared to 13.0% ??
For (5,D): (19.3-9.3)/9.3 = 1.075 divided by 5 (yrs) =.215 or 21.5% compared to 6.5% ??
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Rank: Advanced Member
Posts: 105
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> For (5,C): (25.1-13.6)/13.6 = .8456 divided by 5 (yrs) =.169 or 16.9% compared to 13.0% ??
The computation doesn't involve dividing by 5 (years). It involves taking the 5th root (or raising to the 1/5th power, which is the same thing).
25.1/13.6 = 1.8456 which means that 25.1 is 1.8456 times 13.6.
So, what annual rate of *compound* growth is needed to grow to 1.8456 times an original value over 5 years. The answer is approximately 13% *compound* growth each year for 5 years. Why? Because 1.13 x 1.13 x 1.13 x 1.13 x.1.13 = 1.84. In math-speak, 1.13 raised to the 5th power is 1.84.
So, starting with 25.1/13.6 = 1.8456 and doing the inverse computation, 1.8456 raised to the 1/5th power is 1.1304 or 13.0% annual compound growth (appreciation).
-Jim Thomas
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Could you go thru the calculations for % Annual Appreciation for section (5,D) used determine proj. avg. total return?
Input: Current Price = 13.60 Sel. High P/E = 19.3 Forecast High Price = 25.1 Sel. Low P/E = 9.3
SSG Results: TTM EPS = 1.17 FTM EPS = 1.19 AVGTTM + FTM EPS = 1.18 (5,D) Ann. Appreciation = 6.5%
As I understand your instructions my calculations:
Avg P/E = (19.3+9.3)/2= 14.3
((Avg P/E) x EPS)/(current price) = (14.3)(1.18)/13.60 = 1.24.
5th root of 1.24 = 1.044 or 4.4% proj avg tot return vs. SSG 6.5% ??
What am I missing here?
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Rank: Advanced Member
Posts: 105
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> ((Avg P/E) x EPS)/(current price) = (14.3)(1.18)/13.60 = 1.24.
You need to use the Estimated High Earnings/Share shown in section 4A (instead of 1.18). That EPS value should be 1.30 (25.1/19.3).
Using that value you'd have 14.3 x 1.30 / 13.60 = 1.367.
1.367 ^ (1/5) - 1 = 6.5%.
-Jim Thomas
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