Calculation of Valu-Trac Statuses

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1 Calculation of Intrinsic Value Yield Latest Cash Earnings (Net Income + Depreciation and Amortization) (put aside) Dividend (subtract) Provision for Depreciation (Net Assets x Inflation Rate) (subtract) Provision for Growth capex (Net Assets x Growth Rate*) (divide by 3) Allow conservative Board to retain 2/3 of gross free cashflow (add back) Dividend (equals) Cash earnings a company could reasonably distribute to shareholders Project forwards using objective Growth Rate* Discount by Inflation (5 year average of local consumer price index) (equals) Intrinsic Value is Net Present Value of potential future income streams (divide) Divide Intrinsic Value by Price Intrinsic Value Yield = Net Present Value of Future Income Streams Price *GROWTH RATE: To avoid third party forecasts and other subjective inputs, the model borrows logic from Fed studies that show that general market expectations for inflation etc are closely related to past experience. We therefore calculate an objective future growth rate for each Stock as follows: Historical trend rate of growth in the local market index X Stock s ROE Country s ROE Equal parts Real GDP per capita and distributable earnings of market Summary Starting with Cash Earnings per share for each Stock, we make standard provisions for growth, depreciation and retention in place of subjective provisions arising from often differing accounting policies and tax regimes to arrive at a globally consistent level of what a conservative Board of Directors could reasonably afford to distribute to its shareholders. Adjusted earnings are then projected at an objective growth rate rooted in the past and this future stream of shareholder income is discounted to net present value using historic price inflation as the discount factor, then annualised and related to latest share price. The indicated annual real rate of shareholder return Intrinsic Value Yield can be used meaningfully to compare latest levels of each to their histories as well as to those of other Stocks etc for research and portfolio construction purposes.

2 Calculation of Price Momentum Price Momentum is calculated by taking the annual percentage price change over each of the last 10 months. The weighted average of these percentage changes is then calculated using a weight of 1 for the first month, 2 for the second month and 10 for the latest month resulting in a 10 month weighted moving average of annual change in Price, sometimes known as the Coppock indicator. Our model does not care about the level of momentum, but rather the direction: is Price Momentum this month above or below that of last month? Direction of Price Momentum never tells the model what to buy, but helps with the timing of when to buy (and sell) what has been selected according to Intrinsic Value Yield. Price Momentum: XYZ Corp

3 Use of Intrinsic Value for Statuses We plot the long term history of Intrinsic Value Yield to date and look to buy when it is high, and to sell when it is low. Statuses are arrived at according to absolute and relative levels of Intrinsic Value Yield using the quartiles into which their long term history divides (see bar coloured green, blue, grey and red below). Also used are the grey bands of standard deviation from mean Intrinsic Value Yield over the last three years. Absolute Intrinsic Value Yield: XYZ Corp Long Term: Latest level of Intrinsic Value Yield for XYZ Corp is in the First Quartile (of four) of its history since It ranks absolutely therefore as an A (A=Best to D=Worst) in determining Status. Shorter Term: Latest Intrinsic Value Yield lies BETWEEN the bands of ±1.5 standard deviations from its mean over the last 36 months. This is used as part of the behaviour test in determining Status (Above the bands = Best, Below the bands = Worst etc, see Status Rules). Relative Intrinsic Value Yield: XYZ Corp Sector Adjustment: The level of a Stock s Relative Intrinsic Value Yield is displayed in graph form before adjustment. But when assigning a relative quartile, we adjust for its Sector s Intrinsic Value. For example Utilities tend to have higher Intrinsic Value Yield than other Sectors such as Technology, so we subtract from a Stock s latest Intrinsic Value the average Intrinsic Value of all Stocks in its Sector, assigning an A to those that rank in the top quartile through to D for those that rank in the bottom quartile.

4 Total Leading Behaviour Score Total Leading Behaviour Score is a weighted average of three leading behaviour measurements - Deviation from Trend in Intrinsic Value, Deviation from Trend in the Margin of Safety Ratio and Deviation from Trend in the Equity Risk Premium. A Deviation from Trend is a gauge of how extreme each of these underlying measurements is in relation to their trend. Because Deviation from Trend tends to move inversely to Price change, positive Deviations indicate opportunity, and vice versa. Total Leading Behaviour Score: XYZ Corp Maximum Opportunity Maximum Danger The Margin of Safety Ratio, a Benjamin Graham test, compares the actual price to the theoretical price of a Stock arrived using Cash Earnings capitalised at 4% plus the yield on the local 10 year Government Bond. The Equity Risk Premium is the ratio of the Cash Earnings yield of a Stock to the local 10 year government Bond yield adjusted by the local short term interest rate.

5 Status Rules Intrinsic Value Yields and Price Momentum measurements are used to create a Valu-Trac Score. These Scores are then mapped to arrive at a Signal. The Valu-Trac Score consists of four characters - two letters and two numerals. The letters A to D reflect the latest level of Intrinsic Value Yield, absolutely and relatively over the long term. The numbers 1-5 reflect the more recent levels of Intrinsic Value Yield and the direction of Price Momentum. XYZ Corp: What does A4A3 ATTRACTIVE mean? Absolute Level of Value A = Top Quartile B = Second Quartile C = Third Quartile D = Fourth Quartile Relative Level of Value (Sector Adjusted) A = Top Quartile B = Second Quartile C = Third Quartile D = Fourth Quartile Behaviour 1 = Intrinsic Value Yield ABOVE the band and RISING Price Momentum 2 = Intrinsic Value Yield BETWEEN the band and RISING Price Momentum 3 = Intrinsic Value Yield BELOW the band and RISING Price Momentum 3 = Intrinsic Value Yield ABOVE the band and FALLING Price Momentum 4 = Intrinsic Value Yield BETWEEN the band and FALLING Price Momentum 5 = Intrinsic Value Yield BELOW the band and FALLING Price Momentum Relative Behaviour 1 = Intrinsic Value Yield ABOVE the band and RISING Price Momentum 2 = Intrinsic Value Yield BETWEEN the band and RISING Price Momentum 3 = Intrinsic Value Yield BELOW the band and RISING Price Momentum 3 = Intrinsic Value Yield ABOVE the band and FALLING Price Momentum 4 = Intrinsic Value Yield BETWEEN the band and FALLING Price Momentum 5 = Intrinsic Value Yield BELOW the band and FALLING Price Momentum Mapping Valu-Trac Scores into Statuses BUY ATTRACTIVE NEUTRAL AVOID SELL A1A A2A B1A B2A A1B A2B B1B B2B A1C A2C A3A B1C B2C B3A A1D A2D A3B B1D B2D B3B A3C A4A B3C B4A A3D A4B B3D B4B A4C A5A B4C B5A C1A D1A A4D A5B B4D B5B C1B D1B A5C B5C C1C C2A D1C D2A A5D B5D C1D C2B D1D D2B C2C C3A D2C D3A C2D C3B D2D D3B C3C C4A C5A D3C D4A D5A C3D C4B C5B D3D D4B D5B C4C C5C D4C D5C C4D C5D D4D D5D

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