Lowell

One change I made in Mark's RQR is to take the Sales and divide it up into two sections.  Instead of giving all 25% to Sales over a five year period,  6.25% or 1/4 of the 25% is given to current quarterly sales vs. quarterly sales one year ago.  While this does not make a huge difference in the final RQR value, it does provide me with a clue that something may be going south for the stock.  If the entire industry is going down, I see that as well and can make exceptions for a stock within the industry.

I recall you had made this change and I had overlooked it when I responded.  I do agree a fall off in sales can be an indicator of bad things to come, but I tend to pay more attention to PTPM's and EPS trends.

You mention that most of the alerts I listed are lagging indicators.  I don't know of any forward looking indicators that tell one the fundamentals of a stock are deteriorating. (g) Deteriorating fundamentals implies it has already happened and one needs to take action.

This gets back to my favorite question for which I do not have an answer that satisfies me.  How does one determine if a short term downward trend is a temporary one providing a buying opportunity or one of a more permanent nature indicating a need to sell the stock?

I will add another indicator to the list and that is the MSN valuation number.  I prefer this to be seven or above.  The average of all stocks in my "Watch List" equals 7.34 so I have a good group of stocks to track.  The average of the modified RQR is 71.  Another confirmation as to the quality of the list.

I also like the MSN StockScouter number. In addition to the number itself, if you click on this you will find it provides verbal pros and cons as well as a concise summary of the fundamental, ownership, valuation and technical factors they us to compile the ratings.  I have not seen or am aware of any back testing to see how accurate these numbers are but they interest me and seem to make sense.  Interestingly of the stock I own the StockScouter number is 7.1 and I note this is held down by several stocks I view as being of marginal quality on my weed list with ratings of less than 5.

Dan

Another fairly easy clue is when the growth rates of sales and earnings start to diverge.  Specifically watch for a company who continues to grow earnings while sales deteriorate. We know some companies can increase earnings while maintaining sales through improving margins and stock buybacks. But when trends between the two start diverging, it is time to figure out why. Many companies get into trouble by trying to maintain eps growth to keep Wall Street happy and declining sales trends were a flag to those who focused on more than just eps.

Diane Graese

Las Vegas

---5. The price is below its 200-Day EMA.---

I would consider this as a signal to watch for purchase, not for a sale, in much the same context as we express PE expansion

I forgot to mention that quality monitoring is done primarily with the PERT Report or any of its various siblings.

I don't use the Challange Tree to monitor any of the fundamentals.

I use the Challenge Tree to compare quality and decide upon trading stocks based upon differences in potential returns.

So I use PERT Report to check for defensive fundamental problems and the Challenge Tree to help in offensive decisions dealing with grossly overvalued situations. Those seem pretty clear to me.

What I'm still unclear about is the last suggestion for selling - to improve the portfolio.

Jim Thomas has said that defense (fundamental problems) and offense (grossly overvalued situations) are extreme situations improving the portfolio.

Having again read the chapter on the Challenge Tree in Starting and Running a Profitable Investment Club, I never was able to make much sense of it. I've attached the example of the Challenge Tree from this chapter.

What I see here is that Weis Markets has an US/DS of 2.4:1. Not in the "buy" range, but at the high end of the "hold" range. I was expecting this to be closer to 1:1. The challenger does have a better US/DS at 5.7:1.

I'm also surprised the S&P quality ratings are A+ for the currently held company vs. B+ for the challenger.

Not at all what I'd expect to see on the Challenge Tree.

What I've come to currently believe (all beliefs are open to change) is that in addition to defense and offense you should continously seek to maintain or improve quality while attempting to capture additional profits. Is this what they are trying to demonstrate in this chapter?

So there should be three levels of portfolio management?

1. defense - monitor the fundamentals

2. offense - monitor fundamentally sound stocks for grossly overvalued situations.

3. challenge - constantly seek to replace less grossly overvalued stocks with other stocks of equal of greater quality, but superior potential return.

What don't I understand?

I'm still trying to fit all of these pieces together.

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