My grandmother called me today. I knew something was up when she didn't want to talk about her favorite subject: flowers. She instead went on and on about how some nice ladies had been calling to talk to her and how they had been trying to sell her some stock in this new company, INTERNET SMARTS [Nasdaq: SMART]. Immediately I felt my adrenal glands go into overdrive. Call 911.

It wasn't that Gram was having a heart attack, but I had seen the work of these villains before. Smile 'N Dial were their name, and relentlessly selling hyped-up stocks on the phone was their game. I knew I had my villain when Gram said something about both of them being in the Guinness Book of World Records. It was widely known that the twins are in the record book for cold-calling the greatest number of investors in a twenty-four hour period, all the while smiling. I had even seen a picture of them in the record book. They had pearly whites worthy of a Colgate commercial!

Instead of telling Gram "Just don't talk to them," I decided to have a little fun. Not only did I make sure to warn her not to make any rash decisions before consulting me, I also told her to tell the twins that she had an interested grandson with a lot of money. The bait was out.

Sure enough, I had Smile on the phone within hours. "Hello! Is this Paul? This is Smile from UNF (UN-Foolish) Investments. How's that cold you had last week?" If she knew about my cold, I knew she was a pro at extracting information. She continued, "Well, I hope you are feeling better. I understand you have an interest in Internet Smarts? Well, first let me tell you that we have talked to thousand of investors about this stock and we feel it is going through the roof."

Putting on my foolscap, I began asking questions. Tough questions. Math questions.

I wanted to forego the talk about the company's business. I knew more than I needed to know from reading information on the company's website and from the latest PC magazine I received in the mail. I just wanted to get to the bottom line: the company's earnings.

"So, Smile, what are the companies trailing earnings?" I knew I had struck a cord when her tone immediately retreated from that of a confident and proud woman to that of a clueless valley-girl cheerleader. "Uhm, well, like, I don't know, can I, like, call you back? My partner, like, is the one with the numbers."

In a matter of minutes I had Dial on the line. "The company's trailing annual earnings are $0.35 per share," she said. When queried for a current analyst estimate and stock quote, she spouted, "Analysts are looking for the company to earn $0.80 a share three years from now. Let me type this quote into my Blumworth 5000 instachurner. . . the stock is trading at $30 right now." When I asked her what the trailing Price-to-Earnings ratio was on the stock, it became apparent that she was the twin with the left-brain math skills. She instantly replied, "The stock is trading at a trailing PE ratio of 85.7, and based on the estimate I gave you, a forward PE of 37.5. That means that the earnings are more than doubling, yet you have a stock with a PE of only 85. Great growth at a great price if you ask me!"

Just then, a second female voice came on the line out of nowhere. It was the equally charming Ms. Motli Fool. "Hello!" she said. "Don't mean to interrupt here, but if a company has earnings going from $.35 to $.80 over three years, what does that mean the absolute and annual growth rates are? They are two widely different things, you know!"

Dial, being the one good with math, and, for once in her life telling the truth, replied:

1) 128.5% absolute, 31.7% annual

2) 128.5 % absolute, 50.5% annual

3) 156.3% absolute, 31.7% annual

4) 37.5% absolute, 128.5% annual

Enter your selection in the field to the lower right, and get immediate feedback on the answer!

Dial replied:

1) 128.5% absolute, 31.7% annual

Ms. Motli, the master facilitator, then said, "That's great Dial! You know your stuff! Hey, Paul, how did she get these answers?"

"Well, to get the absolute growth rate you first take the difference between the two estimate numbers by subtracting the smaller number from the larger. The absolute earnings growth is $0.45. We know this is positive growth because the number farther out is larger than the trailing, $0.35, number.

We then take $0.45 and divide it by the current trailing earnings of $0.35 to get an absolute growth of 1.285, or 128.5%."

Motli said, "Exactly. Now the annual growth rate is a little trickier, how did you get your answer of 31.7% annual growth?"

Dial interjected, "You can't do it in your head, that's for sure!"

"I agree!" said I. "You need to have a scientific calculator to figure this one out. You first have to take the absolute growth and add one. In this case we add one to 1.285. This will give you 2.285, which is also the number you get if you divide $.80 by $.35. You then take this number of 2.285 and take it to the root of the number of total years this is growing by. Since we are multiplying our earnings over three years, we take the third, or cube root, of 2.285. The cube root of 2.285 is 1.317, meaning our earnings are growing by 1.317 each year, or 31.7% annual growth."

Ms. Motli then commented, "While the company's earnings do indeed look to double, the amount of time it is taking them to double is less than inspiring. For a company with a trailing PE nearly triple the annual growth rate, this stock's valuation looks to be a little thick. Moral of the story is make sure to look at the growth rate and not just the absolute growth. Even accounts paying 1% interest will eventually double!"

--click---

"Uhm, Dial? You still there?" Guess she has some more cold calls to make!

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