Simplicity of the SSG
Modified: November 2, 2006
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Credits
C. H. Hodgkin, from a note on the I-Club-List
June, 2005.
This
material is ©copyrighted and may be used for BetterInvesting
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educational purposes only.
Annual High and Low Price
We can look historically at a stock's price
performance, especially it's high and low prices
each year
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Price Chart on the SSG
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Historical Earnings Per Share (EPS)
We can look historically at a stock's earnings per
share (EPS)
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EPS Chart on the SSG
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Calculate High and Low PE Ratio
 From high price, low price, and earnings we use
simple arithmetic to calculate two more numbers:
 High PE ratio is high price divided by EPS
 Low PE ratio is low price divided by EPS
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High and Low PE Chart on the SSG
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Formula for PE Ratio
 The formula is PE = Price / Earnings
 By simple algebra, we re-work the formula to read:
Price = PE x Earnings
 Substitution gives two similar formulas:
High Price = High PE x Earnings
Low Price = Low PE x Earnings
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Predicting High and Low Prices
 Ergo, if we project what the earnings will be in five
years…
 and can project what the high and low PE ratios
will be in five years…
 Then, we can project what the high and low prices
will be for the next five years
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Stock Requirements
 What this requires is that we select stocks that:
1. We think we can project the earnings in five years with
reasonable accuracy. Our assumption is that, if nothing
else changes dramatically, a stock with a basically
straight earnings line for the past ten years will continue
to grow at approximately the same rate, so we can
project its earnings in five years.
2. The PE ratios have been relatively consistent for the
past five to ten years so we can predict that they will
remain approximately the same for the next five years.
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In Conclusion…
 Now, of course there are complexities
 But the core principle of the SSG is simplicity itself
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Summary
 Take the PE = Price / Earnings ratio and recast it
to read Price = Earnings x PE
 Then pick stocks where we have some confidence
that the Earnings and PE values can be
reasonably projected five years from now
 Multiply and you have the price range over the
next five years
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Now, isn't that simple?
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Contact Information
Southeastern Michigan Chapter BetterInvesting
P.O. Box 251832
West Bloomfield, MI 48325-1832
Phone: (248) 683-1005
Check our web site for our schedule of classes:
www.BetterInvesting.org/chapter/semich
E-mail me if you ever have any questions:
[email protected]
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