Ever get the feeling that there just aren't any stocks worth adding to your portfolio? Instead of trying to interpret the "noise" coming out of the mouths of talking heads on your television set, why not try a more refined method of uncovering interesting stocks for study? NAIC Stock Prospector lets you use sophisticated stock screening techniques to eliminate unworthy companies from consideration, freeing you to focus on the important elements of research and analysis on a short list of individual companies and industries.

NAIC Stock Prospector works with NAIC's Online Premium Services datafiles, providing a database of more than 7,000 companies from which you can build a screen to identify stocks that meet your personal criteria. Once you've whittled down those 7,000 stocks to a manageable few, move on to research those companies that look most interesting.

If you're new to stock screening, the software simplifies the process by allowing you to choose from a list of pre-defined criteria. Several of these use NAIC-suggested guidelines to help you find high quality growth companies. Just select the chosen criteria set and the software generates a list of those stocks that fit the bill.

(Editor's Note: NAIC's Stock Selection Guide is the cornerstone of the Investor Advisory Service, and is used by Ralph Seger and the analysts at Seger-Elvekrog to select and follow each company included in the newsletter. In this issue, we are pleased to offer the first of a multi-part series of tips that delve into the basics of the SSG and how it can best be used to identify stocks for your portfolio.)

After you've reviewed page one of the SSG, next turn to Section 2, "Evaluating Management," at the top of the reverse page. In Section 2A, compare the percent pre-tax profit margin on sales of the company being investigated with competitors and the industry norms.

In Section 2B, "percent earned on equity capital" is a traditional way to compare management ability of companies in the same industry.

After-tax profits reinvested in the company are a source of funds to finance expansion. Debt, increasing accounts payables and issuance of stock can also be used to finance expansion, however, there are limitations imposed by the capital markets. As long-term and short-term debt rise above reasonable levels, risk also increases.

Debt, though, is a double-edged sword. During good times, a company is able to use the cost of debt (which is usually less than the cost of equity capital) to leverage operations upward. During economic recessions, the reverse situation rears its ugly head, and the interest to be paid on debt can become a drag on profits. Good management is judicious about employing appropriate amounts of debt. You can check a company's debt levels on a Value Line report, in the box in the upper left side of the report headed "Capital Structure." One of the pieces of data you should consider is the coverage of interest requirements by pre-tax profits. Some industries are little affected by economic cycles and can easily pay debt interest. Others tend to be adversely affected by a downturn in the economy. Generally, interest coverage of 6 to 7 times in good times will translate into adequate coverage during a stressful economic period.

There is also a theoretical measurement of the rate of return on reinvested capital that measures the sustainable growth of the company's earnings. The assumption is that the fraction of after-tax earnings reinvested into the company at the rate of return on equity capital will furnish the funds required to sustain growth. On a Value Line report, see the second to last line in their display of data entitled "Retained to Common Equity," or calculate the rate yourself as follows:

% Return on equity x (1 - Dividend payout ratio) = Sustainable growth rate

This is a theoretical concept and not always realistic. However, it does pay to look at Retained to Common Equity and judge whether it is sufficient to support long-term growth. If the figure falls somewhat short of expectations of future growth rate, see if the debt to equity ratio is rising at an unsustainable rate or there are other signs of stress in the capital structure.

To be continued....

We wish we had a dime for every time we heard someone say that the user's manual alone for NAIC Investor's Toolkit is worth the price of the software. Well, we don't -- but we do have a closet full of these user manuals, and we're selling them to make room for the other exciting things that can go in a closet.

This weighty tome is over 400 useful pages long and is spiral-bound for your reading ease. Nearly every page includes a screenshot, and the whole thing is printed in a very pleasing sans serif font. It's hard to write this without feeling like we're hawking commemorative plates on QVC, but the fact of that matter is that once these are gone, they're gone. Toolkit hasn't shipped with a printed manual since last August (though there is a PDF manual on every disk), so when these are sold, we don't plan to print any more.

Is your computer fitted out with the latest and greatest NAIC software? Here's an overview of the programs currently offered by ICLUBcentral: