Drawing the EPS line

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Purple Chips - Tutorial – Drawing the EPS Line TRANSCRIPTION FOLLOWS. Welcome to the Purple Chips tutorial. I am John Schwinghamer, the author of Purple Chips published by John Wiley & Sons and available everywhere. Our tutorial today is about drawing your own EPS line on a chart. Part of the reason that I am doing this is because I received a response from someone who had read the book and they referred to page 77 where I explained how to do this and in fact there was a little bit of mistake in the way that I approached it in the book and so I would like to clarify that and I will give a better and a clearer explanation of how you can draw your own EPS line on a chart. Key Points; You need two things:

1. First of all some tracing paper,

2. You will need the EPS figures

Once you have those EPS figures I will show you how to line them up so that you can make your own scale on the tracing paper for the graph that you have printed. We will be using the first and the last EPS figures in the series, we will be aligning those with the first and the last stock prices and we will be using the tracing paper to move or shift the EPS line as you wish so that you can determine the valuation range which is what we talk about in Purple Chips and which is the central theme of seeing opportunities. Let’s go on to the data series. Over here we are using the example of McDonalds (MCD). What you are seeing here is one column has the date here (I will just use a little marker, pen here so that you can see the date series). This column here has date, this column is the trailing twelve months EPS (TTMEPS). The first number in our series is $5.33 and the last number in the series if I go right till the end of this spread sheet here which gives me all the data is the October 31, 1992 and so this is the other number that is very important to us. Now, let’s go to our chart and we will figure out how we can use this data series to draw our own EPS line. Here you have got the chart of McDonalds without the EPS overlay. You would put your tracing paper over the chart. You can print the chart from any website which will give you the time scale and the price scale. Then on the left of that chart with the tracing paper you will build your own scale. Now, what you would do is that you would take those numbers that we looked at; the first and the last in the data series; in case of McDonalds $5.33 we would set it. You would basically be going right across here; you would follow the same line as where the last trade is. So it turns out being something like this, right to the end till here so your scale would be right around there for the high; that would be the $5.33 mark and on the bottom you would put the $63 and a quarter cent mark right around here. So your scale for 63 cents would be right there. Then you would choose the midpoint of those two numbers which would be here and you would determine your scale until you continue your scale on the upside there and continue your scale right to the bottom, so using the same scale that you determined by fixing those two points with the stock prices. So the first and the last data points in the EPS series matches the first and last data points in the stock price. Then once you have overlaid that or you have drawn that on the tracing paper you are actually going to end up with your data series which is going to look like this. So just like you would see normally that’s what it would look like because if you took the EPS series that I had in the excel spreadsheet you would come up with exactly this. So your data series starts at the fist point of the stock price and it actually end right at the last point here, the last trade and that’s the key; it has to end at the last trade because that’s really what’s showing you valuations. Because what you want to be able to do is that once that EPS line is drawn on that tracing paper you want to be able to move it so that you could say for example that low valuation would be somewhere around $85 or so in McDonalds and high valuation would probably be some around $98 which is consistent with previous highs. That’s how you would use that tracing paper. Once you have done it that’s essentially what you would do. The other thing that you could do is of course you could refer to the Purple Chips website and you could just go and look at the charts that we have but if you want to do it yourself this is the good way to do. So you would build and replicate the same charts that we use every day when we make an update or do a tutorial or web in hour. That’s it; that’s all for now; I am John Schwinghamer the author of Purple Chips. Thank you for watching and if you want to have any feedback please feel free to contact me. Thank you very much. 

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