Q. In chapter 5 you explained the use of Graham's intrinsic value formula and how it can be used to calculate implied growth rate. That formula uses an 8.5 figure that G&D uses but there is no explanation as to what it means. What is it?
L.Z 

Q. In chapter 5 you explained the use of Graham's intrinsic value formula and how it can be used to calculate implied growth rate. That formula uses AAA bond rate and AAA bond yield. I could find the average AAA bond yield. However, I am not sure what term AAA bond rate I should use?
D.B. 

A. Graham and Dodd were referring to long-term bond rates, which means 30-year bonds. That is what is displayed at www.neatideas.com/aaabonds.htm.

Please keep in mind that the purpose of the exercise is to give you a feeling for the growth expectations priced into a stock, and wasn't meant to be calculated down to decimals. In others words, is a stock price to grow earnings 10% or 50% annually -- not is it 21% or 25%.

Q. The chapter on financial fitness is very timely in today's market. My question is how do you adjust the score if the financial numbers are negative. For example test question #10: Total liabilities/ EBITDA. If EBITDA is negative how do you score this question? I am assuming -1 but I would appreciate your views as this is an important one for the overall score.
C.H.

A. You can deal with negative numbers in some tests. For instance the test that awards a point if operating cash flow is greater than net income. If they are both negative, then you can still award one point if the cash flow is less negative (therefore greater) than net income.

However the Total Liabilities/EBITDA ratio evaluates the firm's capability to service its debt. Negative EBITDA means that it isn't generating any cash. If that condition persists, the firm will not be able to service its debt. That's as bad or worse than TL/EBITDA greater than 8, and thus requires deducting one point. You should determine if the negative EBITDA is a short-term problem, or is likely to persist. It's a big problem if you think negative EBITDA will persist. In that instance, you should disqualify the stock.

Q. I'm frustrated! I've analyzed many stocks following your procedures, and only two have earned scores of at least four on your analyses scorecards (without the business plan score). Most are between 0 and + 2. and few companies have return on assets exceeding 14%. Also, regarding growth vs. value: Your cut-off is Price to Sales of 2.5; but MSN Money does not always agree with that in their Stock Rating section...what to do?...nearly impossible to build a portfolio of 25-30 stocks. 
G.K. 

A. I know that I suggested low P/S stocks in my value screen, but that is just a way to get a list of stocks to analyze. The Step 1 (Analysts), Step 2 (Valuation) and Step 11 (Price Chart) grades are the main differentiators between value and growth.

Step 1 should separate value from growth.

The Sentiment indicator in Step 1 looks for negative sentiment to define value stocks and positive for growth. Further, low year-over-year earnings forecasts define value stocks, and high earnings growth forecasts indicate growth candidates. A decreasing trend in earnings forecasts disqualifies growth candidates, but is okay for value stocks.

Step 2 looks at Implied Growth which reflects valuation ratios.

Value candidates should reflect 10% maximum implied growth looks for implied growth up to 40%.

Step 11 uses the price chart to separate value from growth.

Value candidates should be below or near their 200-day moving averages while growth stocks should be above.

Use Steps 1, 2 and 11 to separate growth from value. You are probably seeing low scores because you are trying to analyze growth prospects as value, or vice-versa.

At this point in time, not many stocks will score high, and that is the point. This a a terrible economy and you you will not find many worthwhile stock candidates in this market.

I suggest that you screen for high ROA stocks, and use them for your initial candidates.

Q. What do you consider a good "total score"? for growth and value stocks without the business plan score - is four a buy?
G.K.

A. Regarding the scorecards, I haven't gathered enough evidence to say, for instance, that three is fail and four is pass. The scorecards are best used to compare candidates, and to alert you to your candidate's weak points. Given all that, I would say that not considering the business plan, four is okay, but five or more would be better.

Q. In your book you mention that no one is keeping track of changes of management guidance. Is this still the case? 
J.L.

A. JL is referring to my statement that although changes in management's sales and earnings forecasts (guidance) move share prices just as much as earnings surprises, no website tracks those guidance changes. As far as I know, that is still the case. Please advise me if you know different.