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Mon Oct 6, 2008 / Jeff Fischer

Get to Know the CAPShot


What's a CAPShot?
Great question! The CAPShot is a complete guide to any stock (stocks only -- the guide will be incomplete for ETFs) rated by our CAPS community. When you enter a ticker in the Get CAPShot box (look to your right), you'll get instant access to everything we know about that company, especially Motley Fool Pro's proprietary CAPShot Report, which shows you how that company stacks up against the kind of businesses Pro favors (more on that in a moment). You'll also find basic quote information, links to Fool.com and AP News stories about that ticker, and snippets of commentary from our CAPS community. And if the stock you entered is a current or past Pro recommendation, you'll get the team's complete analysis of the company and links to all mentions of it from within the Pro website.

The CAPShot Report


Were particularly excited about the CAPShot Report, available only to Pro members. We created a special checklist to help everyone here find the strongest stocks in the CAPS universe -- those with leading growth rates, strong margins, and healthy financials. The CAPShot Report checklist rates stocks on four CAPS criteria and eight of our own hand-picked fundamental criteria. It then applies a score from 1 (lowest) to 12 (highest). Few stocks will score 11 or 12, but when they do, you can bet that well be taking a closer look. The CAPShot Report is still a work in progress. With your suggestions, well continually find ways to make it more powerful, more predictive, and most important, more profitable! Were very excited about how both CAPS and the CAPShot Report will help us find outperforming investments, but neither will dictate what we buy and sell. Some excellent long-term performers may score poorly on our checklist due to low margins or other factors. On the flip side, not all stocks that earn a 12 will merit investment, either. Well research each opportunity carefully before making decisions that affect the portfolio. Without further ado, lets look at each checklist item and why weve chosen to include it.

The Metrics CAPS-based Criteria


The following criteria are derived straight from the compiled ratings of all CAPS members as always, the ratings of the very best players are weighted more heavily. CAPS Community Rating: To earn a check here, a stock must have earned a four- or five-star rating from our

http://newsletters.fool.com/37/News/Features/capshotguide.aspx

2/9/2009

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community of CAPS members. CAPS data tells us that fourand five-star stocks strongly outperform, while one- and two-star stocks tend to lag.

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CAPS 1000: Of the top CAPS players who are rating a particular stock, we want at least 80% of them to currently believe that it will outperform. In other words, we want a vast majority of the very best CAPS players to believe strongly in a stock. Industry Rating: For our industry ratings, we calculate the average numerical rating of all the stocks in that industry on a scale of 1 to 100. We prefer industries with a rating of at least 65 out of 100, which means that the industry contains mostly four- and five-star stocks. Company Ranking Within Industry: We like companies to be rated higher than their industry peers. To earn a check for this metric, a company must be ranked in the top 20% of all companies in its industry.

Fundamentals
The next eight ratings were selected by the Motley Fool Pro team. These are the fundamental strengths that we seek in each of our typical stock candidates. 5-Year Revenue Growth: We wont only buy companies with established track records, but history shows that the markets best winners often go on winning. Judging companies on annualized sales growth over the past five years (we want to see growth of 19% or more), we aim to find firms that can grow sales strongly and consistently in various environments. Well often seek companies with naturally recurring revenue bases, because consistency is rewarded. Revenue Growth (Year over year): We want to weed out strong five-year growers that have started petering out. This screen helps us find companies that, on top of great five-year results, are still growing strongly in the latest year, too. Were looking for growth of at least 14% here. Gross Margin (TTM): Deducting the material cost of a product or service from its sale price provides us the gross margin, or the amount left to run the business. Gross margins of at least 35% usually indicate a more profitable business. TTM stands for trailing 12 months. Pre-tax Margin (TTM): This metric narrows our search to companies with healthy operating margins of at least 20%, indicating that theyre highly profitable. Total Debt to Equity: We favor companies with much more equity than debt. In our screen, a company must have at least $1 in equity for every 50 cents in debt. In many cases, our stocks will have no debt. Return on Equity: We want our companies to earn market-beating rates of return on their equity. The S&P 500 index, with dividends, has returned about 10.4% annualized since 1926. We want to better that, and we want any company we buy to do so, too, earning a return on equity of at least 14%. Revenue per Employee: This figure tells us how productive, in sales, a company is per employee. We want to see at least $300,000. This metric has implications well beyond that, perhaps suggesting how close to the bone a company is running operations, or how difficult things need to be before it might lay off people. Current Ratio: Total debt to equity tells us the overall financial health of a company. The current ratio tells us how easily the firm can pay its current bills, or how liquid it is. This ratio is current assets divided by current liabilities, so a company with $10 million in cash and $5 million in payables would have a current ratio of 2.0. We want to see 1.25 or higher.

What!? No Free Cash Flow?


As youll see in our investing philosophy, true free cash flow (TFCF) and structural free cash flow (SFCF) are two of the valuation and business strength measures that we rely on most often in evaluating our companies. We dont screen for them on the CAPShot, however, because for these metrics to be 100% accurate, we need to calculate them ourselves using company SEC filings. All of our stock reports will

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2/9/2009

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highlight our TFCF and SFCF valuation measures and growth rates whenever relevant for a company.

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http://newsletters.fool.com/37/News/Features/capshotguide.aspx

2/9/2009