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V. STOCKS I. Fundamental Analysis (Continued)

V. STOCKS I. Fundamental Analysis (Continued)






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    V. STOCKS I. Fundamental Analysis (Continued) V. STOCKS I. Fundamental Analysis (Continued) Presentation Transcript

    • V. STOCKS
    • I. Fundamental Analysis (Continued)
        • Components of the Income Statement
          • Total Revenue = gross receipts, total received from operations
          • Cost of Revenue = cost of goods sold, direct costs for components of the product
          • Gross Profit = revenues less cost of revenues
          • Operating Expense = costs related to production of product or services
          • Operating Income or Loss = profits generated by sales, net of cost of goods sold and operating expense
          • Earnings Before Interest, Taxes, Depreciation, and Amortization = income generated by operations before accounting adjustments
          • Operating Free Cash Flow = calculated by subtracting all cash expenses from all sources of operating revenue
    • I. Fundamental Analysis (Continued)
      • Balance Sheet
        • A “snapshot” of corporate assets and liabilities at a particular time
        • Components of the Balance Sheet
          • Current Assets – items owned by a corporation that can be readily turned into cash
          • Current Liabilities – short term debt
          • Common Stock & Retained Earnings – accumulated profits allocated to shareholders
          • Treasury Stock – a negative number indicates a stock buy back – increases per share earnings and potentially stock price
    • I. Fundamental Analysis (Continued)
      • Statement of Cash Flows
        • Measures cash generated or consumed by a corporation
        • Components
          • Cash flows provided by or used in operations – shows whether core operations are generating or consuming cash
          • Cash flows provided by or used in capital expenditures – shows whether a firm is investing in its business
          • Cash flows provided by or used in financing – can show a company’s ability to raise capital or whether capital is being used by financing activities (stock buy backs, paying off debt)
          • Change in cash and cash equivalents – total effect – whether the corporation is generating or consuming cash (firm’s liquidity)
    • I. Fundamental Analysis (Continued)
      • Sample Statements: e10vq , e10vq
    • I. Fundamental Analysis (Continued)
      • Basic Ratios
        • i. Earnings per Share = total earnings
        • outstanding shares
        • Tracks profitability regardless of firm size
        • Price/Earnings Ratio (P/E Ratio) =
              • current share price
              • earnings per share
          • Provides a rough estimate of market opinion of current and future corporate operations
    • I. Fundamental Analysis (Continued)
        • iii. Return on Assets = earnings
        • assets
        • Measures efficiency of use of firm assets
        • iv. Return on Equity = earnings
              • common stock equity
          • Measures efficiency of the use of shareholder capital
    • I. Fundamental Analysis (Continued)
        • v. Return on Invested Capital (ROIC)
        • = EBITD
        • common and preferred stock equity & long term debt
        • Measures efficiency of the use of the entire corporate capital structure
        • vi. Debt/Equity Ratio = total debt
              • market capitalization
          • Measures the leverage in a company and thus
          • its vulnerability to interest rate changes
    • I. Fundamental Analysis (Continued)
        • vii. Current Ratio = Current Assets
        • Current Liabilities
        • A measure of liquidity, whether a company
        • has sufficient assets to pay current debts
    • I. Fundamental Analysis (Continued)
      • Issues Regarding Outstanding Shares
        • Float – the number of shares outstanding (available for purchase)
        • Stock repurchase (buy back) program – where a company purchases its own shares on the open market – reduces float (reduces supply of shares), decreasing number of shares outstanding, increasing earnings per share, and increasing share price
    • I. Fundamental Analysis (Continued)
      • Choosing Stocks Based Upon Fundamentals
        • Stock Market Selection Methods
          • Dogs of the Dow – buy highest yielding Dow stocks at the beginning of the year, selling best of stocks after 12 months
          • Relative Strength from Investors Business Daily – compares stocks with the overall market Investors.com : HELP
    • I. Fundamental Analysis (Continued)
              • S&P Star Quality Rankings – stocks are ranked by anticipated performance based upon fundamentals http://www2.standardandpoors.com/spf/pdf/index/SP_Citigroup_Global_STARS_Methodology_Web.pdf?vregion= us&vlang =en
              • Value Line Value Line - The Most Trusted Name in Investment Research
    • I. Fundamental Analysis (Continued)
      • Diversification – Selecting stocks that respond to the market in different ways – stocks should not all be positively correlated (prices moving in the same direction), in the same industry, or with the same market cap
        • Large Cap = market capitalization in excess of $5,000,000,000
        • Midcap = market capitalization from $1,000,000,000 to $5,000,000,000
        • Small Cap = market capitalization of less than 1,000,000,000
    • I. Fundamental Analysis (Continued)
      • Growth versus Value Stocks
        • Growth Stock – High P/E ratio, earnings expected to grow at an above average rate
        • Value Stocks – Low P/E ratio, searching for “bargains” – stocks that are out of favor or in industries out of favor with investors but with good fundamentals
        • Value Trap – Low P/E ratio stock that is a bad investment – P/E is low for a reason
    • I. Fundamental Analysis (Continued)
      • Cyclical Stocks – Rise and fall with the economy in general – ex. Transports
      • Defensive Stocks – Product demand exists in all phases of the business cycle – consumer staples, drugs, etc.
      • Domestic versus International – If markets are performing poorly in one country, stocks from another country could be performing well
    • I. Fundamental Analysis (Continued)
      • Data Sources
        • Financial press and Internet sites – provide readily available information, but may not be in depth or timely
        • Professional research – can have greater “depth,” can reveal more obscure information, but can be biased and expensive
        • Companies – can provide fairly detailed information, but biased towards the company
        • SEC filings – very detailed and thorough, must be accurate, but difficult to read and not timely
    • I. Fundamental Analysis (Continued)
      • Other Approaches
        • “Buy what you know” – Purchase shares of companies that you do business with and are impressed by
        • Consensus information – Agreement among analysts or researchers regarding whether a stock is a good value
    • J. Technical Analysis
      • 50 Day Moving Average – provides guidance regarding long term stock price movement trends (200 day = very long term)
        • Positive Momentum – Above the moving average
        • Negative Momentum – Below the moving average AVAV: Technical Analysis for AEROVIRONMENT, INC. - Yahoo! Finance
      • 5 - 20 Day Moving Average – Shows very short term trend
    • J. Technical Analysis (Continued)
      • Support – Stock “Bottom,” price below which shares have historically not traded
      • Resistance – Stock “Top,” the price that the stock tends to “bounce off of,” a stop to further price advances
      • Volume – Shares traded per day, indicates whether a price movement is “real” (ex. – stock trading higher on high volume shows interest in stock during price advances, stock price increasing on low volume is “drifting”
    • J. Technical Analysis (Continued)
      • Bollinger Bands – One standard deviation above and below the stock price, based upon 20 day moving average – a measure of stock price volatility http:// us.rd.yahoo.com/finance/chart/overlay/bollinger /*http:/ finance.yahoo.com/q/ta?s = CSX&t =1y&l= on&z = m&q = l&p = b&a =&c=
        • Sharp price changes tend to occur after the bands tighten, indicating a “break out” from a less volatile pattern
        • Prices moving outside the bands indicate a continuing trend
        • Trend reversal is indicated by bottoms or tops outside the band, followed by bottoms and tops inside the band
        • A move originating at one band tends to move all the way to the other band
    • J. Technical Analysis (Continued)
      • Stock Chart Types – In all types, y axis indicates price, x axis is time
        • Line
        • Bar (High, Low, Close)
        • Candlesticks – White = stock up, Black = stock down
        • Point and figure
      • Chart Scaling
        • Arithmetic – Even scale of price movements
        • Logarithmic – Scale by percentage change, works best for highly volatile stocks
    • K. Reading Corporate Annual Reports
      • Highlights – Contains basic information presented in a manner favorable to the corporation
        • Highlights statistics of which the firm is most proud
        • Generally includes total sales and net income
        • http://www.fanniemae.com/ir/pdf/annualreport/2007/2007_annual_report.pdf
    • K. Reading Corporate Annual Reports (Continued)
      • Letter to Shareholders – Review of the year just past and potential highlights of the year to come
        • Is a statement of management’s intentions
        • Can be checked with previous years’ statements to develop a sense of management’s credibility
      • Review of Operations – Provides an overview of a company’s products, services, facilities, and future direction
    • K. Reading Corporate Annual Reports (Continued)
      • Financial Statements
        • Report of the Independent Auditor – Can be at either the beginning or the end of the financial statements http://library.corporate-ir.net/library/11/112/112348/items/276539/TYC_AR.pdf (p. 98)
          • “ Clean” or unqualified opinion – statements present fairly the corporation’s financial position
          • “ Qualified” or “Modified” opinion – specific problems exist which must be addressed before the auditor can claim a fair and accurate presentation of the corporation’s financial position (page 122) http://www.ford.com/doc/2007_ar.pdf
    • K. Reading Corporate Annual Reports (Continued)
        • Disclaimer of Opinion – A true opinion is not possible because of inability to fairly value assets, liabilities, etc.
        • Adverse Opinion – The firm’s financial statements are inacurate.
      • Report by Management – certification of accuracy of report pursuant to Sarbanes – Oxley
    • K. Reading Corporate Annual Reports (Continued)
      • Balance Sheet
        • Current Assets
          • Cash and Cash Equivalents – Cash and marketable securities with less than 3 months maturity when purchased
          • Accounts and Notes Receivable – Customer balances owed to the company
          • Inventories – Finished goods, work in process, and raw materials – LCM is most conservative, but can also be carried at FIFO & LIFO – LIFO cushion is used in an inflationary environment, undervalued inventory reduces assets
          • Prepaid Expenses – Payments in advance for rent, insurance, subscriptions, utilities, etc. – listed as an asset that depreciates over time
    • K. Reading Corporate Annual Reports (Continued)
      • Net Fixed Assets – Includes plant, property, and equipment – also known as capital or long term assets – carried at cost with accumulated depreciation, except for land, which does not depreciate
      • Other Assets
        • Miscellaneous – Life insurance policies on key executives, notes receivable after more than one year, long term prepaid expenses, and minority stock ownership in other companies