When to Sell: Reasons to Sell that are Unrelated to the Stock

When should I sell stock I bought as an investment?

At heart, I’m a “dividend growth” investor. So, logically, when a stock ceases to be a dividend growth stock I should sell it. But, economic cycles and temporary misfortunes don’t necessarily turn a good company bad. So, under what conditions should I decide that a formerly good dividend growth stock has ceased to be one?

In my previous two posts I identified four analytical criteria and three qualitative reasons I’ll use to make that decision. But there are other reasons I‘ll consider selling that are unrelated to a specific stock.

H. I’ll sell when I believe there is a market crash or a significant correction pending and I want to preserve my capital for reinvestment at substantially lower prices.

This happened in 2008. Although I was slow to recognize the crash, I did manage to sell everything I wanted to sell about 30% into the downward leg. I started buying again near the bottom and continued buying until the Dow approached 11,000. This enabled me in 2009 and 2010 to more than make up for my 2008 losses.

I believe we are on the verge of repeating the crash. Consequently, over the past weeks I’ve sold most of my equity positions so I’ll be prepared to start buying again when the market is 20% to 30% lower.

I don’t know how to time the market better than anyone else. But I’m convinced that the current economic “recovery” is phony and more importantly – it’s over. I’ve no idea where the bottom will be. That’s why I’ll start buying when the market is 20% to 30% down and I’ll continue buying a little at a time while events play out.

I hope to “dollar cost average” the market bottom and “bracket it” in field artillery terms.

I. I’ll sell my weakest investments when I need cash to invest in a much better opportunity.

When I identify a strong new investment opportunity and I have insufficient cash available to purchase it, I’ll chose one or more of my least attractive current positions to sell. Using the proceeds of the sale, I’ll buy the new stock.

In practice, I’m never fully invested. I maintain a cash reserve in case an extraordinary opportunity presents itself. However, if my reserve is at my minimum target value, I’ll still sell my weakest investments to raise additional cash for the new stock.

Since the recent rally peaked, I’ve steadily increased my cash reserve in preparation for the expected downturn. As my target cash reserve figure increased, there have been multiple occasions when I sold weaker investments to purchase stronger ones.

J. I’ll sell my weakest investments if an emergency situation requires more cash than I have available.

If a family disaster occurs selling investments could become necessary. However, my wife & I maintain emergency accounts as well as insurance that we hope will prevent this situation.

Retirement Income

Most people would include generating income in retirement as a reason to sell stocks; not me. I buy only dividend stocks and I plan to use only the dividends as retirement income. I’ll let the stocks appreciate over time and continue increasing their annual dividend payouts.

Summary of the Reasons I Will Sell Stocks

A. The company stops paying a dividend.

B. The stock’s price increases such that the dividend yield falls below 2% and the P/E ratio rises above 25.

C. The company’s earnings decline enough that the dividend payout ratio exceeds 100%.

D. The stock’s “Financial Score” is a negative number.

E. The company’s survival is threatened by a very large legal liability.

F. The company enters into a major merger agreement.

G. The stock’s total return falls below 10%.

H. I’ll sell when I believe there is a market crash or a significant correction pending and I want to preserve my capital for reinvestment at substantially lower prices.

I. I’ll sell my weakest investments when I need cash to invest in a much better opportunity.

J. I’ll sell my weakest investments if an emergency situation requires more cash than I have available.

I hope you find this series of posts on “When to Sell” interesting. Writing it has clarified my thinking about selling stock. For me, it was a profitable exercise.

Link to Topics in the Special Report: "When to Sell"

When to Sell: More Reasons to Sell a Stock

When should I sell stock I bought as an investment?

At heart, I’m a “dividend growth” investor. So, logically, when a stock ceases to be a dividend growth stock I should sell it. But, economic cycles and temporary misfortunes don’t necessarily turn a good company bad. So, under what conditions should I decide that a formerly good dividend growth stock has ceased to be one?

In my previous post I identified four criteria I’ll use to make that decision. But there are other, less analytical, reasons I may consider selling such as:

E. The company’s survival is threatened by a very large legal liability.

The BP oil spill in the Gulf of Mexico springs to mind; as do Toyota’s recent multiple recalls. In the case of BP I actually did sell when it looked to me that the magnitude of BP’s growing potential liability could bankrupt the company.

I sold my BP shares at a 10% loss and ended the transaction a happy man. I didn’t own Toyota so, I don’t know if I would’ve sold my position or doubled down when the second recall was announced. By the time of the fourth recall, however, I’m pretty sure I’d have bailed.

F. The company enters into a major merger agreement.

I own shares in CenturyLink (CTL) and I’m very happy collecting its big dividends every quarter. Nevertheless, when CenturyLink announced its pending merger with Qwest I immediately started thinking of cashing out my entire position.

Without any details of the planned merger, I anticipated that Qwest was buying CenturyLink. But, when I read the information packet sent to shareholders I was pleasantly surprised to discover CenturyLink is buying Qwest, and for small fractional shares of CenturyLink for each share of Qwest.

I’m still a little concerned that the merger might screw up CenturyLink’s future dividend increases. But, I think the odds are that CenturyLink will continue to grow its payout as a result of the merger. So, although I certainly considered selling, in the end I chose to retain my CTL shares.

Last year ExxonMobil (XOM) entered into an agreement to buy XTO Energy (XTO). XTO was one of my favorite and most profitable holdings at the time and I was sorely disappointed at the announcement. I didn’t hesitate to pull the trigger on XTO, however. I sold my shares within the week. XTO was going away and there was no help for it.

G. The stock’s total return falls below 10%.

I recently sold my positions in several stocks because my projection of their total return was less than 10%. I estimate total return by adding the current dividend yield to the five year earnings growth rate (earnings not earning per share).

I nearly sold my Johnson and Johnson (JNJ) stock for the same reason. But, it’s such a good dividend payer that I haven’t yet been able to pull the trigger on that sale. I certainly considered it though.

As you can see, these three additional reasons to sell are not as conclusive as the previous set. They are, however, reasons I consider valid. They will cause me to consider selling.

Next, I’ll review reasons to sell stock that are unrelated to the specific company,

Link to Topics in the Special Report: "When to Sell"

When to Sell

Links to Special Topics in the Discussion of "When to Sell" a "Dividend Growth Investment

When to Sell: What Are the Right Reasons?
When to Sell: Why Did I Sell?
When to Sell: When Should I Sell?
When to Sell: More Reasons to Sell a Stock
When to Sell: Reasons to Sell that are Unrelated to the Stock

When to Sell: When Should I Sell?

When should I sell stock I bought as an investment?

As I’ve stated in previous posts, at heart, I’m a “dividend growth” investor. So, logically, when a stock ceases to be a dividend growth stock I should sell it.

Economic cycles and temporary misfortunes, however, don’t necessarily turn a good company bad. So, at what point should I stop giving an investment the “benefit of the doubt”? The answer to this question is different for different people.

Traders might place stop loss orders at 10% or 20% below current asking price and revise the orders upward as the stock goes up. The stop loss strategy tracks the sentiment-driven price of the stock, but not its fundamentals.

I’ve already proven that I lack the temperament of a trader. I’m successful with a long term fundamental approach – hence my attraction to dividends.

Along with Warren Buffet, my favorite holding period is forever. So, for me, the point when I’ll give up on an investment is partially answered by the following.

I’ll determine that a stock’s no longer appropriate for my “dividend growth” investment portfolio if:

A. The company stops paying a dividend.

B. The stock’s price increases such that the dividend yield falls below 2% and the P/E ratio rises above 25.

C. The company’s earnings decline enough that the dividend payout ratio exceeds 100%.

D. The stock’s “Financial Score” is a negative number.

As I thought through this partial list of sell signals, I revised my stock analysis workbook to measure them and generate a visible sell signal when they occur.

In my next post I’ll explore further reasons I should sell an investment stock.

Link to Topics in the Special Report: "When to Sell"

When to Sell: Why Did I Sell?

Twenty-three years ago I dabbled in trading individual stocks. It was a lot harder then, before the Internet. I’d read a couple of books on the stock market and investing and I’d made some money earlier investing in a front loaded mutual fund every month for about five years.

So, I thought pretty highly of my investing skills; I was a natural!

I actually did have decent reasoning ability and without training but with eight years of working for General Motors I decided I could ride the cyclical automotive stocks. I looked at the price charts – not the “technical” charts – to see where the stock was relative to its tops and bottoms of the past several cycles.

I bought some GM stock when it seemed below its average price and I sold some when it seemed above its average. And I made a little money.

I bought some Jaguar when it seemed low. And, I got really lucky when Ford tendered for Jaguar. I sold my stock to Ford for a very nice profit.

Then I bought some Western Union when it seemed low – but it went lower & I bought some more. Then it went to zero and I lost my entire investment.

It wasn’t too bad though. I sold my remaining position in GM and overall I broke even on two years of trading. I learned that I wasn’t, after all, a natural.

During this period I sold because:

a. My stock was near a cyclical top.
b. I received a tender offer.
c. I gave up investing in individual stocks

For many years thereafter, My only investments were in themutual funds of my 401k retirement plan.

Then I discovered Jim Cramer. Say what you will about Jim Cramer, but he says his mission is to get people interested in stock market investing and that’s exactly what he did for me. I started trading a little bit based on things he said on his television program.

In 2005, I made a little money overall. I also discovered that Cramer’s relatively short holding periods of one to three months simply didn’t work for me. And, I started to diverge for his teachings.

By 2007 I’d converted my Traditional IRA and my Roth IRA into self-managed brokerage accounts and, along with the much smaller taxable account I started with, I was managing a portfolio containing 30+ stocks – though the total value is and remains quite modest.

I’d discovered long term holding periods and dividends. I was constantly changing my criteria for selecting stocks and with every change I sold stocks that no longer fit with my new thinking.

During this process, I sold because:

d. I made 10% to 20% and wanted to lock in the profit.
e. I lost money and was afraid I’d lose more.
f. The stock seemed to be going no where and I wanted to use the money to buy something else.

By 2008, my stock selection was becoming more of a system; not fully developed but no longer whimsical.

Then, the market crashed. I was heavily invested in dividend paying financials; banks, insurance companies, and business development companies (BDC’s). These stocked started down and at first I bought more.

During a causal conversation with my wife, she suggested that perhaps I should sell my bank stocks. I defended them as being the best bank stocks out there. But, a few days later, recognizing her intuition as better than my own and having no systematic criteria for selling, I sold all of my bank stocks and most of the other financials.

This decision saved my portfolio. Even though I’d already lost money on all of the financial stocks – as well as everything else; I created a cash reserve that I started redeploying as the market bottomed.

As the rally progressed I continued to buy a little bit at a time and I continued to revise my buying criteria. As my criteria changed I sold stocks that didn’t fit my new criteria. I didn’t always sell every stock that didn’t fit. There were a few that I just liked.

Often, during later criteria changes one of the stocks I just liked would again meet my ever changing selection process and I was glad I didn’t sell.

As the rally started to peter out and I came to believe there would eventually be a major correction or another crash, I sold most of the remaining stocks that did not meet my selection criteria.

The frequency and scope of the changes to my evolving system were diminishing. My stock selection process was becoming clearer and my confidence in it were increasing and I decided I needed, once again, to build up a cash reserve so money will be available to redeploy when the market tanks.

That’s where I’m at as I write this piece.

In this most recent phase I sold because:

g. My wife’s intuition suggested I should.
h. My criteria for selecting stocks as investments changed.
i. To rebuild a cash reserve in order to take advantage of an anticipated market downturn.

These are the reasons I’ve sold in the past. Now why should I sell in the future?

Link to Topics in the Special Report: "When to Sell"

When to Sell: What Are the Right Reasons?

Books, newsletters, and seminars use millions of words teaching people how to select stocks and when to buy them. Selling is largely ignored or given lip service. I haven’t actually counted the words but in several investing books I own I can find references to selling in only about 10 of the 200+ pages.

This figure actually overstates the sell/buy ratio since each of the 10 pages containing references to selling stock has only a few lines about selling – roughly 10% of the page. 10% of 10 pages is one page equivalent out of 200+; less than 0.5% of the total pages.

Yet selling is just as important as buying. After all, for every share bought by someone that same share is sold by someone else – every time.

People sell stock for all sorts of reasons. Such as:

(1) Fear of losing money when the investment or the market is going down.
(2) Fear of losing money based on intuition.
(3) To lock in profits that seem “too high” or “high enough”.
(4) To raise cash for a personal emergency.
(5) To reduce portfolio risk as retirement approaches.
(6) To rebalance a portfolio in accordance with target asset allocations.
(7) Because the investment has risen to a target value.
(8) Because the investment has fallen to a “stop loss” price.
(9) Because the investment is “overvalued” or “fairly valued”.
(10) To raise cash for a “better” investment.
(11) Because their investment advisor recommended it.
(12) To raise cash for living expenses during retirement.

I’m sure there are many other reasons people sell their stock. These are just the ones that come to mind as I write this.

The questions for me are:

(1) Why have I sold stock?
(2) Why should I sell stock?

In the following series I’ll try to find my answers to these questions

Link to Topics in the Special Report: "When to Sell"

What Is Intrinsic Value? – Simplifying the Value Elements

My definition of intrinsic value boils down to “a wonderful company fairly valued”. In previous posts I defined 14 value elements describing what I mean by that phrase. Now I’m looking for a better, simpler way to present the elements & the way I use them.

The 14 Elements Value Elements Are:

(1) Strong Cash Flow

(2) Strong Earnings Growth

(3) Dividend Consistency

(4) Consistent Dividend Increases

(5) Profitability

(6) The Formula: E(2R+8.5)*Y/4 = Intrinsic Value per share

(7) Good returns on equity

(8) Little or No Debt

(9) Business Model I Understand

(10) A Durable Competitive Advantage

(11) Measure Risk

(12) Reliable Long term Dividend Income Stream

(13) Increasing Annual Dividends Faster Than Inflation

(14) Expect at least a 9% Total Return Compounded Annually

I use a three level hierarchy to test each stock. In previous posts I explained the 1st Level, the 2nd Level, and the 3rd Level analysis. Summarizing the three levels produces the following.

In the 1st Level a company must:
1. Pay dividends with a current annual yield of more than 2.00%
2. Have current earnings that cover the dividend payments
3. Have a forward looking Price/Earnings Ratio (P/E) of less than 16
4. Be favorably viewed by The Motley Fool CAPS community

In the 2nd Level a company must:
5. Generate expected positive cash returns to me above a 9.0% discount rate
6. Have increased revenues over five years
7. Be reasonably priced by the Ben Graham Intrinsic Value Formula
8. Have a Total Annual Return (growth rate plus dividend yield) greater than 8%

In the 3rd Level a company must:
9. Have superior financial performance; low debt; high cash flow, and high returns on equity & assets
10. Have a long term competitive advantage that I can recognize
11. Have a business model that I can understand

This list isn’t much help. It reduces the number of elements from 14 to 11 but more simplification is needed.

Numbers 1 & 2 can be combined into: Generate useful, reliable, and safe dividends.

Number 4 can be dispensed with. I use it but I also override it on occasion.

Number 3 and number 7 can be combined into: Be fairly valued or better at the current price.

Numbers 5, 6, & 8 can be combined into: Extrapolated earnings & dividends growth indicate market beating returns are likely.

Number 9 can’t be combined or ignored. I’ll have to keep it in roughly its current expression.

Numbers 10 & 11 can be stated in a single sentence as: Have a long term competitive advantage and a business model that I can understand.

My restated elements now become:

1. Generate useful, reliable, and safe dividends.
2. Be fairly valued or better at the current price.
3. Extrapolated earnings & dividends growth indicate market beating returns are likely.
4. Have superior financial performance; low debt; high cash flow, and high returns on equity & assets
5. Have a long term competitive advantage and a business model that I can understand.

I can further shorten them to concepts.

1. Generate useful & reliable dividends.
2. Be fairly valued.
3. Market beating returns seem likely.
4. Demonstrated superior financial performance.
5. Has a strategic competitive advantage and business model I understand.

These then, are my revised & simplified value elements. They accurately represent my criteria for selecting the stocks I buy.

The next question is - when do I sell?

Link to Other Topics in the Get Rich Slowly Report: What Is Intrinsic Value?

What Is Intrinsic Value? – 3rd Level Calculations

My definition of intrinsic value boils down to “a wonderful company fairly valued”. In previous posts I defined 14 value elements describing what I mean by that phrase. Now I’m looking for a better, simpler way to present the elements & the way I use them.

The 14 Elements Value Elements Are:
(1) Strong Cash Flow
(2) Strong Earnings Growth
(3) Dividend Consistency
(4) Consistent Dividend Increases
(5) Profitability
(6) The Formula: E(2R+8.5)*Y/4 = Intrinsic Value per share
(7) Good returns on equity
(8) Little or No Debt
(9) Business Model I Understand
(10) A Durable Competitive Advantage
(11) Measure Risk
(12) Reliable Long term Dividend Income Stream
(13) Increasing Annual Dividends Faster Than Inflation
(14) Expect at least a 9% Total Return Compounded Annually

I use a three level hierarchy to test each stock. In previous posts I explained the 1st Level and 2nd Level analysis. In my recent post I reviewed the 3rd Level Data; Now, I’ll take up the 3rd Level calculations & decision criteria.

The essence of the 3rd Level analysis is a deeper look at the company’s financial data and including it in the resolution of the Meta-Parameter introduced in the 2nd Level analysis.

The Meta-Parameter is adjusted by the additional data but the same decision criteria are applied to the revised value.

All 3rd Level data discussed in the previous post are involved in the revision of the Meta-Parameter as are the following elements.

“Cash Flow per EPS” is a simple ratio and equals “Cash Flow per Share” divided by “Earnings per Share” (EPS).

“Inverse Cash Flow Payout Ratio” is similar and equals “Cash Flow per Share” divided by “Annual Dividend”.

Financial Score:
The “Financial Score” aggregates all 3rd Level data elements from the previous post with the two elements above. It’s calculated by:

First, testing the “Business Model” data element; If the value of “Business Model” is less than zero the Financial Score is assigned a value of negative one hundred (-100). If “Business Model” is greater than or equals zero then the calculation continues.

Second, the value of the data element “Inverse Current Ratio” is subtracted from an initial value of zero.

Third, two times the “Debt to Equity” value is subtracted from the interim value.

Fourth, “Cash Flow per EPS” is added to the interim value.

Fifth, “Inverse Cash Flow Payout Ratio” is added to the interim value.

Sixth, “Return on Equity” is added to the interim value.

Seventh, Two times the “Return on Assets” is added to the interim value.

Eighth, “Insider Owners” is added to the interim value.

Ninth, “Competitive Advantage” is added to the interim value producing the final value of the “Financial Score”.

The above calculations are performed on a tab separate from the 2nd Level Analysis tab. The value of the “Financial Score” element is then brought over to the 2nd Level Analysis Tab.

Meta-Parameter Revision:
When 3rd Level Analysis data is available an additional parameter, the “Financial Score Parameter”, is activated in the calculation of the Meta-Parameter value.

“Financial Score Parameter” = 0 if the value of “Financial Score” is less than zero; = 1 if the value of “Financial Score” is greater than or equal to zero; = 2 if the value of “Financial Score” is greater than 2.

The pre-existing Meta-Parameter value is multiplied by the new “Financial Score Parameter”. It's clear that a zero value of “Financial Score Parameter” will drive the Meta-Parameter to zero; a value of one will leave it unchanged and a value of two will double it.

The decision criteria remain the same, so if the revised Meta-Parameter value is greater than or equal to 16 (an arbitrary cut off) the stock passes the 3rd Level Analysis test.

My stock analysis for the buy decision is, for me, a very complicated algorithm. Working through it has helped me refine it, correct some mistakes, and understand it better.

Next, I’ll try to develop a way to summarize it so I can clearly communicate the concepts behind it.

Link to Other Topics in the Get Rich Slowly Report: What Is Intrinsic Value?

What Is Intrinsic Value? – 3rd Level Data

My definition of intrinsic value boils down to “a wonderful company fairly valued”. In previous posts I defined 14 value elements describing what I mean by that phrase. Now I’m looking for a better, simpler way to present the elements & the way I use them.

The 14 Elements Value Elements Are:
(1) Strong Cash Flow
(2) Strong Earnings Growth
(3) Dividend Consistency
(4) Consistent Dividend Increases
(5) Profitability
(6) The Formula: E(2R+8.5)*Y/4 = Intrinsic Value per share
(7) Good returns on equity
(8) Little or No Debt
(9) Business Model I Understand
(10) A Durable Competitive Advantage
(11) Measure Risk
(12) Reliable Long term Dividend Income Stream
(13) Increasing Annual Dividends Faster Than Inflation
(14) Expect at least a 9% Total Return Compounded Annually

I use a three level hierarchy to test each stock. In previous posts I explained the 1st Level and 2nd Level analysis. Now I’ll take up the final and 3rd Level.

The 3rd Level analysis requires eight additional data elements. Five elements I pick up from The Motley Fool website. I enter the ticker symbol of interest in the search box that appears in the upper right corner of the site and press the “Search” button to the right of the box.

When the company data page appears I select the “Stats” tab located in the middle of the row of tabs just below the company name and description; And, I start collecting data.

Inverse Current Ratio:
With the “Stats” tab displayed I navigate to the “Financial Strength” group on the left side of the page and find the “Current Ratio”. I enter the current ratio in the designated cell of the 3rd Level Data Tab, but I enter it as its inverse; using the formula “=1/(Current Ratio)”.

Debt to Equity:
Two lines below the Current Ratio the “Total Debt/Equity” ratio is found. I copy this value into the “Debt to Equity” cell of my workbook.

Cash Flow per Share:
At the bottom of the left side of the page in the “Per Share Data” group, the value for “Cash Flow” is found. This value is entered in the workbook’s “Cash Flow per Share” cell.

Return on Equity:
On the right side of the page in the “Management Effectiveness” group I find the “Return on Equity” value and copy it into the “Return on Equity” cell of the workbook.

Return on Assets:
Just below the “Return on Equity” data the “Return on Assets” value appears. This value is entered in the “Return on Assets” cell in the 3rd Level Data Tab.

Insider Owners:
I get the “% of Shares Held by All Insiders and 5% Owners” value from the YAHOO! Finance web site under the subtitle “BREAKDOWN” in the upper left quadrant of the page. I enter this value as a decimal fraction in the “Insider Owners” cell in the workbook.

Competitive Advantage:
“Competitive Advantage” is a subjective value from “0” to “5” that I assign based on my understanding of the company’s business and markets.

Business Model:
“Business Model” is a subjective value from “-5 to “+5” that I assign based on how well I think I understand the how the company makes money.

These are the data I need for the 3rd Level analysis. In the next post I’ll review the calculations and decision criteria leading to the final “Buy” or “Reject” decision.

Link to Other Topics in the Get Rich Slowly Report: What Is Intrinsic Value?

What Is Intrinsic Value? – 2nd Level Calculations – Part 2

My definition of intrinsic value boils down to “a wonderful company fairly valued”. In previous posts I defined 14 value elements that describe what I mean by that phrase. Now I’m looking for a better, simpler way to present the value elements & the way I use them.

The 14 Elements Value Elements Are:
(1) Strong Cash Flow
(2) Strong Earnings Growth
(3) Dividend Consistency
(4) Consistent Dividend Increases
(5) Profitability
(6) The Formula: E(2R+8.5)*Y/4 = Intrinsic Value per share
(7) Good returns on equity
(8) Little or No Debt
(9) Business Model I Understand
(10) A Durable Competitive Advantage
(11) Measure Risk
(12) Reliable Long term Dividend Income Stream
(13) Increasing Annual Dividends Faster Than Inflation
(14) Expect at least a 9% Total Return Compounded Annually

I use a three level hierarchy to test each stock. In previous posts I explained the 1st Level analysis, 2nd Level data collection, & began explaining the 2nd Level calculations continued here.

The remaining 2nd Level calculations screen my previously described results against a minimum standard; they apply weighting factors to rank the survivors. Each result is used to assign a parameter value.

To screen out the results that are below the minimum standard, I set the parameter value to zero. Some parameters are binary – their only possible values are zero or one. Other parameters have possible values greater than one.

When all parameters are multiplied together a meta-parameter is created. If any parameter is zero the meta-parameter is also zero. If all parameters are greater than zero the meta-parameter is relatively higher as more parameter weighting factors are employed. The meta-parameter determines whether or not the stock passes the 2nd Level test.

Parameter values are listed below.

“ScoreParameter” = 0 if Score is less than or equal to 0.5; = 1 if Score is between 0.5 & 30; = 2 if Score is greater than 30

“IRRParameter” = 0 if IRR is less than or equal to 0; = 1 if IRR is greater than zero but less than or equal to 30%; = 2 if IRR is greater than 30% buy less than or equal to 60%; = 3 if IRR is greater than 60%

“NPVParameter” = 1 if NPV is less than or equal to $0; = 2 if NPV is greater than $0 but less than or equal to $100; = 3 if NPV is greater than $100

“CAPSParameter” = 1 if CAPS is less than or equal to 4; = 2 if CAPS is greater than 4 (5 is the only allowable value of CAPS greater than 4)

“AchieversParameter” = 1 if the stock is not listed in the Dividend Achievers index or in the Dividend Aristocrats index; = 2 if it is listed in either or both indexes

“SalesGrowthParameter” = 0 if the Sales Growth Ratio is less than or equal to 1; = 1 if the Sales Growth Ratio is greater than 1 but less than or equal to 2; = 2 if the Sales Growth Ratio is greater than 2

“SafetyParameter” = 0 if the Margin of Safety is less than negative 50%; = 1 if the Margin of Safety is less than 0% but greater than negative 50%; = 2 if the Margin of Safety is greater than or equal to 0& but less than 20%; = 3 if the Margin of Safety is greater than or equal to 20%

“ReturnParameter” = 0 if the Total Return is less than 8%; = 1 if the Total Return is greater than 8% but less than or equal to 20%; = 2 if the Total Return is greater than 20%

“FlagParameter” = 0 if the stock fails (right now) the 1st Level test; = 1 if it passes the 1st Level test

These parameters are multiplied together to produce the meta-parameter. If the meta-parameter is greater than or equal to 16 (an arbitrary cut off) the stock passes the 2nd Level Analysis test.

It’s then subjected to the third and final level of analysis – the subject of the next post.

Link to Other Topics in the Get Rich Slowly Report: What Is Intrinsic Value?