Understanding Stock Fundamentals with SRC’s Stock Charts
Before we explore the use of individual SRC charts, let’s discuss the features that we believe you will find of most value in helping you make valid investment decisions.
There are two kind of price scales used on stock charts: arithmetic and semi-logarithmic (ratio). Arithmetic scales are easy – the chart grid is divided equally and each space is a fixed amount: a fraction of a point, one point, two points, five points. Semi-log scales have variable size spaces, each of which (whether a fraction, one two or more points) is sized in proportion to the price at each level.
You will notice that SRC charts use the semi-logarithmic or ratio scale. The great advantage of such as scale is that every movement on a chart is in exact proportion to every other movement. This makes it possible to compare one company with another company because of the uniform ratio scale. That is impossible to do with arithmetic scales. To illustrate: if a stock moves from 2 to 4, it has appreciated two points or 100%. It it rises another two points from 4 to 6, the gain is only 50%. To gain another 100%, it would have to move from 4 to 8.
Even though the number of dollars or points may be greater at higher levels, the principle remains the same – the stock must move from 20 to 40 or from 200 to 400 to achieve a doubling, or 100% rise. This logarithmic scale is formulated so that any move of 100% (or any other percent) uses the same vertical linear distance on the chart, regardless of price level where it might occur.
The arithmetic scale chart, does not work that way. A move on an arithmetic scale from 2 to 4 looks exactly the same on such charts as a jump from 4 to 6, or even an edging up from 98 to 100. Obviously, a move of two points has much greater significance when a stock is selling at 2 than when it is selling at 8, but the arithmetic scale conceals this. When using an arithmetic scale rather than a semi-logarithmic scale, the extent of a price movement, large or small, is easily hidden, and comparisons of one stock with another on such a chart are difficult if not impossible to make – and may even be deceptive.
The SRC relative performance is used to graphically depict in an easy-to-read manner a stock’s performance relative to the widely used S&P 500, and is read from the right scale. It shows how a stock is doing not in absolute terms, but how it is performing relative to the stock market as a whole as represented by the S&P 500. Thus, if a stock is doing better than the S&P 500 – its relative performance will go up. In fact, a stock could be declining – but at a slower rate than the market – and the relative performance line would be rising. If a stock is performing worse than the S&P 500 – either going up slower or declining fast, the relative performance line will head downward. Similarly if the stock performs about the same as the S&P 500, the relative performance will be horizontal.
One way of tuning out short-term gyrations from the chart of a stock’s price is the use a Moving Average which is read from the right scale. SRC uses different moving averages depending on the amount of time covered by chart. For example, with SRC’s 12-year charts, we use a 48-month moving average which is the average of the previous 48 months closing prices. Each month this average is extended, it measures a different time period, as earlier months are dropped off and the latest month’s price is averaged in. This average is an essentially conservative measure, whose effect is to “damp out” wild price swings, seasonal variations, and other factors. Keep in mind, however, the it tends to diminish the effect of anything that happens quickly, no matter how important it might be.
One technical theory holds that the time to buy stock is when the stock price is above the moving average, dips towards it, but does not break through it, and then starts up again. In other words, if the moving average acts like a support level, watch carefully, it could be a buy signal.
Earnings Per Share
Earnings on SRC’s charts are adjusted for extraordinary items, such as sale or divestiture of real estate holdings or other effects on earnings which don’t pertain to the company’s core business. The exclusion of one-time events from earnings gives you the clearest picture of earnings performance – which is unique to SRC. Earnings on SRC chart are read from the left scale.
It’s important to note that a key difference in SRC charts is the way price and earnings are depicted. With SRC Charts, price and earnings are set by a ratio of 15:1. This means if price and earnings line meet, the P/E ratio is 15. If the earnings line is above the price line, then earnings is less than 15:1. If the earnings line is below the price line, then the earnings are greater than 15:1. Coincidently, if price and earnings are consistently increasing at the same rate the overall rate of growth can be easily defined at 15%. By consistently showing all of SRC’s charts this way, you can easily and efficiently compare literally hundreds of charts for price and earnings growth.
Earnings averages vary by industry – price/earnings ratios (P/E) which may be 10: 1 for one industry, and may be higher or lower for another – so it’s important to understand what the P/E ratio is for the industry the stock belongs to.
One technical theory holds that depending on the industry and company, earnings would fall to meet some future price or the price may rise to meet future earning potential.
Unlike most stock charts, dividend payments are displayed directly on SRC’s charts. Dividend payments, like earnings, are read from the left scale and are plotted on an annual basis. Dividends above or below the charts, as well as specials, extras, irregular payments are placed on labels.
Dividend growth can give the chart user a very good idea of how the company is performing. Are dividends growing? Is there consistency to the dividend payments? How does dividend growth compare to price and earnings growth?
Given the recent turbulence in the stock market, as well as more investors nearing retirement years, the dividend a stock produces can significantly increase the overall return for a stock.
All stock splits are noted with a label on the chart – and all SRC charts have been fully adjusted for stock splits.
Take, for example, a company with 100 shares of stock priced at $50 per share. The market capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25. The market capitalization is 200 × $25 = $5000, the same as before the split.
Ratios of 2-for-1, 3-for-1, and 3-for-2 splits are the most common, but any ratio is possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are used, though less frequently. Investors will sometimes receive cash payments in lieu of fractional shares.
It is often claimed that stock splits, in and of themselves, lead to higher stock prices; research, however, does not bear this out. What is true is that stock splits are usually initiated after a large run up in share price. Momentum investing would suggest that such a trend would continue regardless of the stock split. In any case, stock splits do increase the liquidity of a stock; there are more buyers and sellers for 10 shares at $10 than 1 share at $100.
Other effects could be psychological. If many investors believe that a stock split will result in an increased share price and purchase the stock the share price will tend to increase. Others contend that the management of a company, by initiating a stock split, is implicitly signaling its confidence in the future prospects of the company.
In a market where there is a high minimum number of shares, or a penalty for trading in so-called odd lots (a non multiple of some arbitrary number of shares), a reduced share price may attract more attention from small investors. Small investors such as these, however, will have negligible impact on the overall price.
Each SRC Chart gives volume information in the panel at the bottom of the chart. Notice that the vertical scale on this chart is not logarithmic, but arithmetic. Volume is most often represented by height. Volume is crucial to interpreting price data. An extremely high or low price reached on very light volume may indicate the opinion of only small number of investors: possibly not good data. However, any price supported by massive buying or selling volume, conversely, can usually be taken seriously. Like heavy turnout in a presidential election, heavy volume is a mandate, and likely to indicate wide acceptance of the valuation of a stock.
Growth Performance Measurement
The growth performance of a company is provided in a block that appears in the upper left corner of each long-term company chart. The percent gain or loss for price, earnings and dividends is given for specific time periods as indicated by the number of years shown. This feature is unique to SRC gives the investor an excellent snapshot of the company’s performance over time – without having to use other reference sources.
An additional feature is the bold circled P,E, or D that may appear above the block. This highlights price “P”, earnings “E”, or dividend “D” when any of the three meet or exceed pre-set parameters for: price growth greater than 20%, earnings growth greater than 15%, and dividend growth greater than 10% for a specified period of time for that chart type.
Important single events in a company’s history are noted on SRC Charts. These events could be an acquisition, merger or divestiture of another company or division, and can explain
Capitalization data is included at the bottom of each chart and includes:
- Shares Outstanding
- Book Value/share
- Industry P/E Ratio
- Company P/E Ratio
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