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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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MisterValuation
• ##### The Interpretation Of The Earnings And Price Correlated F.A.S.T. Graphs™ Made Simple 12 comments
Aug 22, 2014 12:22 PM | about stocks: ROST, CVX, CHD, CL, SO

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.

(click to enlarge)

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.

(click to enlarge)

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.

(click to enlarge)

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.

(click to enlarge)

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.

(click to enlarge)

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.

(click to enlarge)

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.

(click to enlarge)

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.

(click to enlarge)

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.

(click to enlarge)

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.

(click to enlarge)

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.

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• Penny Lane
, contributor

Mr Carneval, thank you!
22 Aug 2014, 02:34 PM Reply Like
• anonymoose
, contributor

F.A.S.T.Graphs is a super, super helper for maximizing your stock profits. I'm not suggesting it is the sole tool in the tool kit, but IMO it is an essential one, and the first place to look when thinking about making a stock purchase. You can tell, at a glance, whether the stock is properly valued, how shaky its financial history has been, and whether it can realistically afford to continue increasing its dividends (because if not, the price WILL go down, often dramatically). Thus, even when the P/E 'sounds' good, you can double check that against history, reality, and known potential for gains. Thank you so much, Chuck, not only for a great product, but for great ongoing columns that give us good investment ideas.
22 Aug 2014, 03:56 PM Reply Like
• OntheRock
, contributor

Thanks, Chuck, for the primer on Fast Graphs, very useful reference, and I have printed it out and will keep it next to the computer. The FAST Graphs tool has helped me immensely as I am somewhat challenged mathematically, so to speak, and seeing the graphs helps me to grasp many difficult concepts quickly and easily.
22 Aug 2014, 05:38 PM Reply Like
• jjonesg1
, contributor

Chuck thank you for breaking down and explaining in detail the key areas of the FAST Graphs website. I use this tool "FIRST" before conducting further research on all existing stocks I own and potential new purchases. Your tool allows me to get an upfront pictorial view of a business finances. I have also suggested its use to some of my investing friends and they are impressed as well. Thank you and please keep the helpful knowledge you share coming with those helpful FAST Graphs embedded. Great work Sir...

Long - CVX, KO and researching new positions in CL and SO.
22 Aug 2014, 07:06 PM Reply Like
• Chuck, thank you for writing this "primer"! I thought I knew how to use FAST Graphs, but each time you write, I learn something new, and become a better investor.

Thank you!

Robert
23 Aug 2014, 09:35 AM Reply Like
• Zolimox
, contributor

As an exercise for the more adventurous, try generating the same graphs yourself (it is publicly available data although not easily automated pulled that i can find) and compare. It really helped my understanding of what he was doing with fastgraphs. Simply put, fastgraphs is a huge time saver, all condensed into overlaid graphs/charts.

Summary: Well worth the 10\$ / mo. I will cry if they ever jack the price significantly.
23 Aug 2014, 02:55 PM Reply Like
• banmate6
, contributor

When I like something, I repeat my endorsements. Hence, I'm doing so again here.

I love Fast Graphs. They help me identify potential alpha. Efficiently and quickly. I then review in more detail cash flow, balance sheets, and relevant markets. Hence, Fast Graphs is a complementary but decisive tool in my value investing endeavors.

Again, I emphasize the time savings. There's a reason we colloquially say "time is money". Last but not least, and speaking of money at that...Fast Graphs is a bargain.
25 Aug 2014, 02:58 PM Reply Like
• Late Night Owl
, contributor

Mr. Carneval,
Thank you for a wonderful explanation, and forever thank you for Fast Graphs!! I use it all the time and it is extremely helpful!

I just attended the Money Show in SF, and frequently used it on my cell phone to look at stocks mentioned. I showed and explained it to multiple people, who were all very impressed and interested. When I was visiting Brad Thomas' booth, he mentioned how wonderful Fast Graphs was to some attendees, and I showed them on my cellphone. Both Jeff Miller and Brad Thomas showed off Fast Graphs in their presentations, and I kept telling the people next to me "they really *are* amazing".

Believe it or not, I have even used them with my 8 year old nephew! He has a small portfolio of boring DG stocks which he chose after looking at the products they produced. (helping him learn the benefits of long term DGI) He had money to reinvest, and I printed out the Fast Graph for each one, and explained the lines and chart for dividend growth ("allowance" being increased), the relationship between the black line and the orange (or blue) line to decide if it was "on sale", and showed him where to find the current dividend ("allowance"). He decided to take the graphs of 10 companies and group them into piles of more and less desirable stocks based on current conditions. Down to a choice between two, he debated "higher dividend/lower growth" and "lower dividend/higher growth, before using the "on sale" metric to break the tie. It was very fun watching him reasoning it out, and he had an easy time understanding your graphs, although obviously in only a basic way.

Thanks again for a GREAT product!!
25 Aug 2014, 06:08 PM Reply Like
, contributor

How was the "on sale" metric utilized? I still have difficulties with "hi div/lo growth" vs "lo div/hi growth".
12 Sep 2014, 10:44 AM Reply Like
• WALT T.
, contributor

An excellent primer. How can one subscribe to this service?

Thanks, Walt T.
11 Sep 2014, 02:02 PM Reply Like

Under the Demo Tab of the website you will find tutorials to help you in navigating through FAST Graphs™.

Regards,
Chuck
11 Sep 2014, 03:26 PM Reply Like
• Chuck,

Many thanks for the tutorial. Greatly appreciated.

Best wishes,

Kiisu
12 Oct 2014, 01:01 AM Reply Like

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