Using the Value Stock Buy List Program Productively - Within the S & P Quality Rating, Additional Factors & Numbers

If you didn't have questions, the "Selection Universe" itself, and the refined and filtered "Value Stock Watchlist" would be just another stock picking gadget, easy to slip into like a well worn pair of loafers. This is not your ordinary list of hyped up "story" stocks. It is the result of applying a time tested set of selection rules, concepts, and experiences, to a pre-selected group of securities that are of a known level of quality i. e., Investment Grade only. Here's a fairly comprehensive Question and Answer [more accurately, a Question & Discussion] list that should help you to use the Value Stock Buy List Program productively. Remember, the program is designed to follow the investment process defined and explained in "The Brainwashing of the American Investor". The more times you read it, the better your performance will be. Steve Selengut has been kind enough to answer some questions about his methodology. Here are my questions (and some that he has fielded directly). with his responses. (If you have additional questions, please send them to: brainwashed@optonline.net.)

Within the S & P Quality Rating, Additional Factors & Numbers:

The Specimen Stock Worksheet included in the Brainwashing Book lists only two non-price items: S & P Rating and Current Yield. Why aren't such fundamental standards as P/E Ratio included there?

• The Selection Methodology presented in "Brainwashing" is a management technique employed to simplify, organize, and control the decision making process so that a consistent approach to stock selection, and trading, evolves... the KISS Principle. A basic assumption, and the rationale for using the S & P letter rating system in the first place, is that their thousands of analysts consider the important fundamentals in determining the Quality rating.
• A key problem that most users of investment letters, newspapers, chart selection techniques, and computer models have in common is the inability to make decisions... simply because they have much too much information and opinion in front of them. The Selection Universe removes the "analysis paralysis" and provides an efficient tool for identifying buying opportunities.
• As you become more experienced as a user of the Value Stock Buy List Program, you will find that the vast majority of the stocks you purchase will fall within the "Lower P/E" category. Generally speaking, stocks that make the Watch List will have reasonable P/E ratios, but there can be exceptions.
• When making the final selection from the "Watch List" candidates for purchase (and before you have the experience referred to in the Brainwashing Book) it may be wise to use P/E and/or other Stock Guide data (profitability, current ratio, institutional holdings) to select your daily "Best Buys".

When you refer to "profitability", are you referring to more than the fact that the company is paying a dividend?

• Yes, absolutely. I focus on the right hand columns of the "Stock Guide" ( Earnings per Share) to make certain that there are no recent negative numbers (a recent operating deficit). It's not uncommon for companies to pay a dividend for a while after they begin leaking oil. A dividend cut or omission won't be far behind. We want both, profits and dividends.
• Always keep in mind that a bad "quarter", in a generally profitable long term picture, sets the stage for those good quarter to quarter comparisons that Wall Street gets all excited about down the road. Such "earnings surprises" always make the news, and often cause a severe decline in market price.

I stay away from companies with a "current ratio" [Current Assets vs. Current Liabilities] less than 1. Does that seem like a reasonable threshold to you?

• For the most part, but there are certain industries where the current ratio can't be calculated [financial companies]. Also, if there is a lot of inventory [retailers], I like a higher ratio. If everything else looks good, see if there is a simple explanation for a negative number. If not, find something else.

Could you refresh my memory about the significance of the Guide's Institutional Holdings columns?

• The more institutional interest there is in a stock, the more likely it is that there will be the kind of volatility we need for successful trading, and the amount of trading volume we need for instant liquidity. Also, analysts follow the larger holdings, creating more news and more volatility. These are the guys who buy on good news and sell on bad.
• Although I've never tried to come up with a "level" of institutional popularity that is the best, I'd tend to avoid issues where there seems to be very little interest.

There are Investment Grade Securities that generate very little trading volume. Are they included in the Selection Universe?

• No, they are purposely excluded if they average less than 5,000 shares per day, because the trading methodology really does require liquidity in Common Stocks. Some newspapers include only the x,xxx most active issues in their listings, and this may be an inconvenience for travelers without Internet access.
• On the other hand, many investors will have CEFs (Closed End Funds) in the Fixed Income portion of their portfolios, and these trade in much smaller volumes. When selling, this needs to be taken into consideration because, believe it or not, even small traders can affect market prices. It's not unusual for me to trade positions a few hundred shares at a time, based on the supply and demand numbers.