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# Chuck Carnevale's  Instablog

Chuck Carnevale
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Charles (Chuck) C. Carnevale is the creator of F.A.S.T. Graphs™. Chuck is also co-founder of an investment management firm. He has been working in the securities industry since 1970: he has been a partner with a private NYSE member firm, the President of a NASD firm, Vice President and Regional... More
My company:
F.A.S.T. Graphs™
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F.A.S.T. Graphs Research
• ##### The Interpretation Of The Earnings And Price Correlated F.A.S.T. Graphs™ Made Simple

At their core, F.A.S.T. Graphs™ are easy to interpret and understand. When you are clear on what the lines and shaded areas on a F.A.S.T. Graphs™ represent, you will experience an instantaneous and comprehensive understanding of the business behind the stock, and how the market has, and is, pricing it.

The Orange Line and Green Shaded Area

First, F.A.S.T. Graphs™ plots the earnings of the company and calculates its growth rate for the time period being graphed. Then presented as a theoretical calculation or metaphor for intrinsic value, an orange line with white triangles is generated based on applying widely-accepted formulas for valuing a business. The orange line represents the same P/E ratio on every point on the graph and is also reported in the orange rectangle in the FAST FACTS box to the right. The green shaded area is simply a mountain chart of the company's earnings each year.

For companies growing earnings at a rate of 15% or better, the classic formula P/E equals growth rate, commonly referred to as PEG, and made famous by Peter Lynch is applied. Therefore, when a company's earnings growth is 15% or greater, the orange line will have a P/E ratio that is equal to its growth rate. When this formula is used, it is designated with the letters "P/E=G" in the orange rectangular box on the FAST FACTS to the right. The following F.A.S.T. Graphs™ on Visa Inc (NYSE:V) is an example of a fast-growing company utilizing the P/E=G formula.

For the timeframe graphed below, Visa achieved an operating earnings growth rate of 24.9% which is listed in the green rectangular FAST FACTS box to the right. Then notice that the P/E ratio of Visa's orange line is also 24.9 which is equal to its earnings growth rate. The designation P/E=G in the orange rectangle designates what formula the F.A.S.T. Graphs™ has used to calculate fair value.

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Our second example is Southern Company (NYSE:SO), a slow-growing utility stock whose operating earnings growth rate has only averaged 2.9% during the 11-calendar year timeframe graphed. Here we see the operating earnings growth rate of 2.9% shown in the green rectangle on the FAST FACTS to the right. However, in this case the P/E ratio of the orange line is 15, and was calculated using the famous formula authored by Ben Graham. The designation GDF, which stands for Graham Dodd Formula, is included in the orange rectangle in the FAST FACTS to alert the reviewer to the formula used, and to the growth rate the company has achieved.

Across the entire span of the graph, the P/E ratio in this low growth example is 15. Additionally, the slope of the orange line in this example is 2.9%, or the earnings growth rate of Southern Company in this example. Once again, the green shaded area represents a mountain chart of Southern Company's earnings.

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Our third example is Colgate-Palmolive Company (NYSE:CL), which has a moderate rate of operating earnings growth that has averaged 8.6% per annum. When earnings growth is above 5% but below 15%, the P/E ratio is calculated utilizing an extrapolation of the two previous formulas (P/E=G and GDF) with the connotation GDF...P/E=G - Formula (note that the dots between them are utilized to indicate that the extrapolated formula is being used).

Once again, the fair value P/E ratio that applies to the orange line is listed in the orange rectangle under the FAST FACTS to the right of the graph. In the Colgate Palmolive example the P/E ratio of the orange line is 15 across the entire span of the orange line on the graph. However, the slope of the line is equal to the company's 8.6% growth rate, which is listed in the green rectangle in the FAST FACTS to the right.

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To summarize, the orange line and green shaded area depict the company's operating earnings during the timeframe graphed. The intrinsic value, or P/E ratio, is calculated and listed in the orange rectangle in the FAST FACTS. The earnings growth rate, which is also the slope of the orange line, is listed in the green rectangle in the FAST FACTS to the right of the graph. Finally, the green shaded area represents a mountain chart of the company's earnings.

More simply stated, the orange line and green shaded area give you a graphic portrayal and instant look at the business behind the stock. This is the most distinguishing and salient feature of the F.A.S.T. Graphs™ (Fundamentals Analyzer Software Tool) stock research tool. Most other stock graphing tools plot price only. As you will soon see, F.A.S.T. Graphs™ in contrast reveals the earnings and price relationship of the stock and the business behind the stock.

Dividends are Expressed in Two Important Ways

First, dividends are expressed on the F.A.S.T. Graphs™ reflecting that they have been paid out by the light blue shaded area sitting on top of the orange earnings justified valuation line. Later when price is included on the F.A.S.T. Graphs™, you will see how the market prices earnings, representing capital appreciation, and how the dividend represents the second component of total return - dividend income. This is the primary reason why the blue shaded area representing dividends is included and depicted outside the green shaded area, which depict earnings.

Another advantage of expressing the dividends paid out in this manner is that the reviewer of the F.A.S.T. Graphs™ can instantly see whether or not a company pays a dividend, and for companies that have just started paying a dividend, they can also see when the dividend has first been initiated.

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In addition to expressing dividends after they have been paid out by the light blue shaded area on top of the orange earnings justified valuation line, dividends are also expressed by a light pink line within the green shaded earnings area. This serves two important purposes. First, it allows the reviewer to instantly see whether dividends have grown consistently, or have been cut at any time during the timeframe graphed. The pink line is simply a plotting of the company's dividends each year utilizing the same multiplier that applies to the orange line on the graph.

When expressed this way, the second purpose of the pink line is to graphically illustrate the dividend payout ratio of the company. The entire area below the pink line represents the portion of the earnings (the green shaded area) that are paid out and simultaneously expressed by the blue shaded area on top of the orange earnings justified valuation line. In the case of our Church & Dwight Inc (NYSE:CHD) example below, the pink line also alerts the reviewer to any changes in the company's payout ratio (Notice how Church & Dwight Inc's payout ratio increased dramatically in 2012 and 2013). To understand this better, think of the area below the pink shaded area as a blank spot in a puzzle, and the light blue shaded area as the puzzle piece that would fit there.

This would still be true for a company with very cyclical earnings, however, the light blue shaded area could give the illusion that dividends were being cut because they are stacked on a rising and falling orange earnings line. This is an additional benefit of the light pink dividend line, it will instantly reveal whether the dividend has been cut, raised, or lowered over the timeframe graphed.

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In the Chevron Corporation (NYSE:CVX) example shown below, by observing the pink line we see that their dividend increased even during the time following the Great Recession when earnings dropped. Because dividends paid are stacked on top of the orange line, the light blue shaded area would give the false illusion that dividends fell when in actuality they increased.

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Introducing Monthly Closing Stock Prices

The black line on a F.A.S.T. Graphs™ plots monthly closing stock prices for the timeframe being graphed. When added to the earnings and dividend graph, the correlation between how well the business has done and how stock price has reacted and correlated is vividly revealed. On graph after graph where earnings go the price is sure to follow. With this example we turn to Ross Stores Inc (NASDAQ:ROST) that represents a quintessential example of the earnings and price relationship.

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The Blue Normal P/E Ratio Line

Moreover, and as an oversimplification, when the black line is above the orange line, overvaluation is indicated. When the black line is touching the orange line, fair value is indicated. When the black line is below the orange line, undervaluation is indicated. However, the real world does not always cooperate as planned. There are certain companies that the market typically overvalues or undervalues, and the F.A.S.T. Graphs™ research tool reveals these situations when they occur by adding an additional line to the graph called the normal P/E ratio line (the dark blue line).

F.A.S.T. Graphs™ automatically calculates the P/E ratio that the market has most commonly applied to a given stock over any timeframe that is graphed. This adds a second metaphor of valuation to the F.A.S.T. Graphs™. It's important to state here that F.A.S.T. Graphs™ were not designed to dictate fair value. Instead, they were designed to reveal it. In other words, it is up to the user to decide whether or not the blue normal P/E ratio line on the graph, or the orange earnings justified valuation line on the graph, is the right one to base valuation decisions on. The essence of FAST Graphs™ is that they are "a tool to think with."

Therefore, with the Coca-Cola Company (NYSE:KO) example below, there are two expressions of valuation included. The blue line representing the normal P/E ratio, and the orange earnings justified valuation line. The key to evaluating either of these metaphors of valuation is simply to look closely at the graph and ask yourself which line most appropriately represents a reasonable valuation for the company over the timeframe being graphed. It is also important to notice how the black monthly closing stock price line trends and correlates with both lines. In other words, where earnings go, price is sure to follow.

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Understanding the Associated Performance Results

As a great convenience and benefit to the subscriber, F.A.S.T. Graphs™ automatically calculates the performance of the company over the timeframe graphed. The performance results table is easy to interpret and understand. Just under the company's name and symbol is the performance table. The top of the table shows the amount invested, the beginning shares purchased, and the split-adjusted price for the date in which the graph begins. At the top right corner we see the closing values and closing prices through the previous day's close.

Next we have the dividend cash flow table. Here you see the fiscal year-end, the dividends per share, the dividend growth rate, earnings per share payout ratio in percentages year-by-year and averaged for the timeframe, the end of period shares, dividends paid, and finally, yield on cost. Tallies are given at the bottom of the table for the appropriate columns.

Finally, the performance report shows total cumulative dividends paid, the amount of capital appreciation and the annual return it represents, followed by total return information that includes dividends in the total. In the example below, dividends are not reinvested, but F.A.S.T. Graphs™ are given the option to calculate the same performance with dividends reinvested by simply checking a box and redrawing the graph.

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The Estimated Earnings and Return Calculator - A Forecasting Graph

Finally, the basic Earnings and Price Correlated F.A.S.T. Graphs™ set includes a forecasting graph. Before we explain the components of this simple graph, the reader's attention is drawn to the word "calculator" in the description. Subscribers are given the option to input their own estimates into the Estimated Earnings and Return Calculator (Note: The growth rate in the calculator may be different than the growth rate on the historical graphs above.)

However, the default setting for F.A.S.T. Graphs™ is based on reporting the consensus estimates of leading analysts reporting to S&P Capital IQ. The number of analysts providing estimates for the long-term earnings growth rate (the estimated three to five-year earnings growth rate) is listed in the green rectangular box in the FAST FACTS to the right of the Estimated Earnings and Return Calculator graph.

Additionally, there are several other estimates that the Estimated Earnings and Return Calculator provides. The second estimate is a specific dollar amount for the current fiscal year (in the example below 2014) earnings per share is found directly below the graph, and is marked with a capital "E" for estimate.

Just below the earnings per share figure is a column depicting each year's change per year (Chg/Yr) thereby enabling the subscriber to compare the current fiscal year forecasts against the company's historical norm. Just under this column are the number of analysts (#Analysts) comprised in the forecast. The next estimate is also a specific earnings per share number forecast for the next fiscal year, and again, the number of analysts making this forecast is indicated. Beyond these numbers there will be one or two additional years of specific estimates. However, it should be noted that the number of analysts providing these forecasts tend to drop off significantly. Following the final specific forecasts the graph simply extrapolates the long-term estimated earnings and growth rate.

As a general rule, it is suggested that more credence be given to near forecasts. It is only logical to assume that the closest forecasts could be expected to be more accurate than for years farther out. Furthermore, there are typically more analysts comprising the consensus for the closest years.

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Summary and Conclusions

F.A.S.T. Graphs™ are easy to interpret and utilize when you know what you are reviewing. The orange line on the graph shows earnings per share and reflects the growth rate of the company's operating history. The black line represents monthly closing stock prices and how they track those earnings. The light blue shaded area shows dividends, and an additional dividend expression is given by the light pink line in the dark green shaded earnings area. The dark blue line on the graph calculates the price earnings ratio (normal P/E) that the company has historically traded at during the timeframe being graphed.

Now you know why we state that F.A.S.T. Graphs™ provide essential fundamentals at a glance. In an instant you can see how well the business behind the stock you are reviewing has done, how the market has historically priced it, how the market is currently pricing it, what type of performance this has generated for shareholders, and finally, how the stock is currently being valued by the marketplace.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

• ##### Addendum To Going For Growth Portfolio

The following fifteen 5-year Earnings and Price Correlated FAST Graphs™ provide the detail on the portfolio from the Going For Growth article found here. These are not recommended for current investment into an aggressive growth portfolio. Instead, these represent companies that appear to be attractive candidates for additional research based on their 5-year track records of historical earnings growth exceeding 20% per annum, plus consensus forecasts for continued growth of 20% or better over the next 5 years.

In other words, these are offered as potentially exciting opportunities for investors seeking a high potential future total return. However, each of these companies should be researched deeper with the objective of determining whether or not the consensus estimates provided are reasonably accurate. If they prove to be, then these might represent exciting opportunities for investors willing to take a high level of risk in order to achieve extraordinary future total returns.

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Chicago Bridge & Iron Co (NYSE:CBI)

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Celgene Corp (NASDAQ:CELG)

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Continental Resources Inc (NYSE:CLR)

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Catamaran Corp (NASDAQ:CTRX)

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Discovery Communications Inc (NASDAQ:DISCA)

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First Cash Financial Services (NASDAQ:FCFS)

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Fossil Group Inc (NASDAQ:FOSL)

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GeoSpace Technologies Corp (NASDAQ:GEOS)

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Hibbett Sports Inc (NASDAQ:HIBB)

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Manitex International Inc (NASDAQ:MNTX)

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Old Dominion Freight (NASDAQ:ODFL)

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Questcor Pharmaceuticals Inc (NASDAQ:QCOR)

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Stamps.com Inc (NASDAQ:STMP)

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Oct 25 3:01 PM | Link | 1 Comment
• ##### How To Interpret FAST Graphs™

FAST Graphs™ are a "tool to think with" and as such, have no agenda of their own. Instead, they are designed to provide "essential fundamentals at a glance" and allow the user to interpret the data according to their own philosophies, strategies and beliefs. In this context, FAST Graphs™ are the deliverer or reporter of important information.

Essentially, the FAST Graphs™ stock research tool provides investors many benefits, but there are four things they do very well.

1. They provide a historical review and instantaneous perspective of how well the business behind the stock has historically performed (the orange earnings justified valuation line).

2. They provide an instantaneous perspective of how the market has historically capitalized or priced the company's operating results or business performance (the blue normal PE ratio line).

3. They provide a precise consensus estimate of leading analysts' near term earnings expectations for a company's current fiscal year and next fiscal year followed by a five year earnings growth consensus estimate (estimated earnings and return calculator graph).

4. They provide the opportunity to override and therefore input the user's own estimates or expectations of the company's future prospects (override function is located on navigation bar).

Tool To Think With

FAST Graphs™ are a dynamic tool that calculates the company's changing growth rates each time a different time period is selected. Therefore, the user can determine such things as whether the company's earnings growth rates are accelerating, decelerating or staying the same, and see major inflection points, if any, with a company's business vividly revealed. This is a major component of the "tools to think with" aspect of this fundamental research tool.

Earnings & Price Correlation

FAST Graphs™ reveal the undeniable correlation and relationship between earnings and stock price on any publicly traded company. This "tool to think with" helps the user determine fair valuation; past, present and future, on any company being examined. Therefore, the user is empowered with the proper perspectives towards making sound buy, sell or hold investing decisions.

The Key

The key to running the FAST Graphs™ tool is the proper utilization of the light brown or tan vertical navigation bar to the left. This navigation bar is what drives the FAST Graphs™. We suggest clicking the drop-down menu box titled "Select Yrs" and running multiple graphs starting with a 15-year default graph and then shortening the graphs to, for example, a 10-year graph, followed by a 5-year graph, followed by a 2-year graph, etc. Any combinations of years, from as short as the last 2 years all the way out to the last 20 years, can be run.

A Dynamic Tool

When running multiple graphs you will notice that FAST Graphs™ is a dynamic tool that automatically calculates and recalculates growth rates and valuations. The most obvious advantage to running dynamic graphs over multiple time periods is to determine whether or not growth rates are accelerating, decelerating or staying the same. Consequently, it might also make sense to focus more on the most recent time frames such as the last five years, two years, etc.

Comprehensive Research More Efficiently

The FAST Graphs™ research tool is designed to help the user more efficiently conduct a comprehensive research effort. Just above the historical graph is a link to the company's website. This enables the researcher to access the company's financials, review any presentations they have provided, read news releases, etc.

In addition to the link to the company's website on the top of the historical chart, there are three additional links in the tan navigation bar to the left of the graphs. Two of the links, "Summary" and "Quote" will take the user to Google Finance and MSN Money respectively. These links provide additional research that the user can quickly and easily examine.

The final link at the bottom of the navigation bar "To Find Other Estimates or Symbols" takes the user to the MSN Money page where Zacks' earnings estimates can be reviewed. This provides the user a cross-check of the earnings estimates that can be compared to the Standard & Poor's Corp. Capital IQ that FAST Graphs™ defaults to.

The following screenshots depict all of the historical and forecasting graphics available with FAST Graphs™. Remember, the live fully functioning FAST Graphs™ are dynamic tools that can be utilized instantly and easily provide a comprehensive perspective of a stock, how its business has performed and how the market has value that performance over time.

Historical FAST Graphs™

The historical charts provide you historical information. This includes historical growth rates, normal P/E ratios, earnings per share, dividends, etc. In other words, they tell you what has happened and how the stock price has reacted to what has happened. Running multiple graphs allows you to determine whether earnings growth has accelerated, decelerated or stayed the same.

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PE & Interest Rates and Sales & Price/Sales

Regarding the red graphs with the blue lines, the first one simply graphs interest rates for whatever time frame you are drawing, and either the year-end PE or year-end P/FFO, whichever is appropriate. If you point your curser at the top of the red area a pop-up will appear showing you what the interest rate on a 10-year treasury was on that date. If you put your mouse pointer on the dark blue squares on the dark blue line, the year-end PE or P/FFO will pop up.

In theory, there should be an inverse relationship between the blue line and the red shaded area. In other words, during normal times, as interest rates would rise, PE ratios would fall, and vice-versa. However, since the irrational exuberant period (1999-2001), there has been a direct relationship. As interest rates have fallen so have PEs. Nevertheless, the point of those graphs are to allow you to see what normal PE ratios (P/FFO) for the company have been, and whether or not interest rates had any effect.

The second graph is simply sales (the red shaded area) and price (the blue line) overlaid in order to determine the current and historical price to sales. This is an important valuation measurement that this graph reveals. When you point to the red shaded are, sales in millions and date will pop up. When you point to the blue line, the price to sales ratio will pop up. This graph helps you determine whether the company's current price to sale ratio is high, low or normal.

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Performance Graph

The Performance graph calculates the performance of the stock over whatever time frame has been graphed. The dates that the performance is measured against are listed at the top of the graph. If the company pays dividends, a dividend cash flow table will be included. The performance is calculated as if the dividends were paid out and not reinvested. Therefore, you can see the entire performance that came from dividends, the entire performance that came from capital appreciation, and the total return combination of both.

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Forecasting Graph

The Earnings and Price Return Calculator (forecasting charts) plot weekly closing prices, and the last plot is the previous day's close. The dark orange line is calculated using one of three formulas. Follow this link here to the definitions. However, once the PE valuation is calculated, the lighter orange lines above and below are drawn at the same slope, however, they are 10% increments above and below the dark orange line. Notice they are parallel. The scale to the right tells you what PE ratio each of the orange and blue lines on this graph represent. To be clear, if the price is touching one of those lines, then it is trading at the PE ratio that can be determined by the scale to the right. Again, assuming this stock is precisely touching one of those lines. If not, then you simply eyeball extrapolate between the two.

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10-Year Earnings Yield Estimate (EYE Chart)

The EYE ratio chart and table, which stands for Earnings Yield Estimator, generates the table that translates the Estimated Earnings and Return Calculator graph into numbers. The table is based on whatever earnings estimate is found on the Estimated Earnings and Return Calculator. However, you do have the option of over-riding the earnings estimate to a higher or lower number according to your belief, and a new EYE table will be generated based on your over-ride. The basic idea is to mathematically determine whether or not an investment in a prospective company justifies you for the risk you are assuming based on the earnings yield.

The columns are color-coded in order to provide a quick perspective of certain relationships. When the column turns blue, this indicates that the cumulative dividend yield would now surpass the cumulative interest payments from the 10-year Treasury bond it is compared to in yellow.

Importantly, focus on the columns at the top of the table which tell you what you are looking at in each column. The brown cell in the Target Prc Est Tot Ret Column indicates the last price for the fiscal year and the rate of return it represents.

To summarize, the EYE ratio estimator simply puts the estimated earnings and return calculator picture into numbers and compares it to an equal investment in a 10-year Treasury bond.

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