Common stock analysis

1. Common Stocks: Analysis
and Strategy
• Strategies for investing in stocks:
Passive strategy
Active strategy
• Concepts and strategy differences

2. PASSIVE STRATEGY
• Investors who use passive strategies believe that the market price
that occurs is that price reflect the intrinsic value of these shares.
• Natural outcome of a belief in efficient markets
• No active strategy should be able to beat the market on a risk adjusted basis
• Emphasis is on minimizing transaction costs and time spent in
managing the portfolio
• Expected benefits from active trading or analysis less than the costs

3. • The strategy used in the passive portfolio strategy stock includes:
1. Buy-and-hold strategy.
In this strategy the investor buys a certain amount stock and keep holding it for some time
with a composition consisting of many shares or only a few types stock.
2. Index funds
• Strategies follow this index in practice can be described as a purchase mutual fund
instruments or pension funds by investor.
• The investor hopes that the investment performance on a collection of shares in the
instrument mutual funds are already a duplication of market index performance.

4. ACTIVE STRATEGY
• Assumes the investor possesses some advantage relative to other market
participants
• Most investors favor this approach despite evidence about efficient
markets
• Identification of individual stocks as offering superior return-risk tradeoff
• Selections part of a diversified portfolio
• Majority of investment advice geared to selection of stocks (Value Line
Investment Survey)
• Security analyst’s job is to forecast stock returns
• Estimates provided by analysts (expected change in earnings per share, expected
return on equity, and industry outlook)
• Recommendations: Buy, Hold, or Sell

5. ACTIVE STRATEGY
• Three strategies that are usually used by investors in carrying out an
active portfolio strategy stock:
1. Stock selection.
2. Sector rotation.
3. Price momentum strategy.

6. ACTIVE STRATEGY
1. Stock Selection
• Investors actively conduct analysis and selection the best stocks are shares that give
the best risk-return relationship compared other alternative.
• Investors will buy shares whose intrinsic value is over market price (undervalued) and
sell stocks whose intrinsic value is below the price market (overvalued).
2. Sector Rotation
• This strategy is usually carried out by investors who investing in domestic shares only.
• In this case the investor can do two ways:
 Invest in company shares engaged in certain sectors.
 Make modifications or changes to weights portfolio of shares in the industrial sector different.

7. ACTIVE STRATEGY
3. Price Momentum Strategy
• This strategy is based on the fact that at certain times the stock market price
will be reflecting earnings movements or company growth.
• Various techniques for finding momentum right:
1. Make a map (chart) of stock price movements.
2. Use a computer to determine the time the most appropriate for buying or selling
stock.

8. Approaches to Stock Selection
1. Technical analysis
2. Fundamental Analysis
3. Economy/Market Analysis
4. Industry Analysis
5. Company Analysis

9. Technical analysis
• Refers to the method of forecasting changes in security prices
• Prices assumed to move in trends that persist
• Changes in trends result from changes in supply and demand conditions
• Old strategy that can be traced back to the late nineteenth century.
• Not concerned with the underlying economic variables that affect a
company or the market
- The causes for the demand and supply conditions are not important
• Technicians use graphs and charts of price changes, volume of trading over
time, and other indicators

10. Fundamental Analysis
• Assumes that any security (and the market as a whole) has an intrinsic value as
estimated by an investor
• Intrinsic value compared to the current market price of the security
• Profits made by acting before the market consensus reflects the correct
information
• Classic common stock selection strategies involve growth stocks and value stocks
• Growth stocks carry investor expectations of above-average future growth in earnings and
above-average valuations as a result of high price/earnings ratio
• Value stocks feature cheap assets and strong balance sheets
• Framework for Fundamental Analysis (Top-down approach)
• First, analyze the overall economy and conditions in security markets
• Second, analyze the industry within which a particular company operates
• Finally, analyze the company, which involves the factors affecting the valuation models

11. Economy/Market Analysis
• Assess the state of the economy and the outlook for variables such as
corporate profits and interest rates.
• The status of economic activity has a major impact on overall stock
prices
• Investors cannot go against market trends
• If markets move strongly, most stocks are carried along

12. Industry Analysis
• An industry factor is the second component, after overall market
movements, affecting the variability of stock returns
• The degree of response to market movements can vary significantly across
industries
• The business cycle affects industries differently

13. Company Analysis
• Security analysts typically assigned specific industries but reports deal
with individual companies
• Close relationship between earnings per share and share prices
• Dividends are closely tied to earnings, but not necessarily the current
earnings
• Earnings are key to fundamental analysis