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How to Identify Excellent Companies

by David Van Knapp, author of

SENSIBLE STOCK INVESTING:
How to Pick, Value, and Manage Stocks
and
THE TOP 40 DIVIDEND STOCKS FOR 2010:
How to Generate Wealth or Income from Dividend Stocks

September, 2006

The first stage in Sensible Stock Investing is to identify excellent companies as
possible candidates for your investment dollar.

To do this, we have created a point-based scoring system called Easy-Rate. It is
a trademarked approach that enables the individual investor, in a reasonable
time, to score companies and rank them against each other.

There are three categories in which a company can score points, in keeping with
our principle of coming at problems from different angles to get the best results.
The three categories are:
  • The company's Story.
  • The company's Financial Picture.
  • Bonus Points.

1.  The company's Story is a few sentences about what it does and how it
makes money. Famed investor Peter Lynch said that before buying a stock, he
liked to create a two-minute monologue about the company: what's good about
it, what's necessary for it to succeed, what pitfalls it faces. Lynch said, "Once
you're able to tell the story of a stock...so that even a child could understand it,
then you have a proper grasp of the situation."

The book
Sensible Stock Investing shows you how to construct the story and
how to score it. The book provides a handy questionnaire that you can use to
be sure you are focusing on the important facts. Answer those questions, and
you'll have the company's story down cold.

2.  The importance of the company's
Financial Picture should be obvious. The
time-pressed individual investor needs to home in on the most important data
and ignore the "noise." Financial information is abundant and free these days.
The danger is getting lost in the deluge instead of extracting meaning from just
the right elements.
Sensible Stock Investing shows you how to score the five
most important financial factors in a company's record, plus how to rate its
dividend policy. The book also provides a formatted way to record this
information to make scoring the company easy. Even if you know nothing
about finance and accounting, filling out the form is straightforward and fun.
Sometimes your eyes will pop out as the financial picture takes shape--because
not all highly touted companies are as sound as you might think, while others
that you hardly ever hear of have beautiful businesses that are virtual cash-
generating machines. In scoring the financials, you will literally see the
companies separate from each other. The truly excellent ones rise up to the top
of the rankings, and the bad ones sink like stones. Every time.

3.  
Bonus Points are awarded for third-party opinions, such as Wall Street's
analyst ratings. They do not comprise a high percentage of the company's total
score, but they can be useful and should not be ignored.

In a nutshell, that is how excellent companies worthy of your consideration are
identified. Filling out the entire Easy-Rate form takes about an hour the first
time you score a company. Periodically updating the score takes maybe 10-15
minutes, and you should do it every few months. This is time well spent for the
huge leg up it gives you on investors who do not do this most basic of
homework.
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