Fundamental analysis of investment management

1. Fundamental analysis

2. Fundamental analysis
 Cornerstone of investment.
 Top to bottom study.
 Fundamental analysis is a stock valuation method
that uses financial and economic analysis to
predict the movement of stock prices. The
fundamental information that is analyzed can
include a company's financial reports, and non-
financial information such as estimates of the
growth of demand for products sold by the
company, industry comparisons, and economy-
wide changes, changes in government policies
etc.

3. Intrinsic value…
 To a fundamentalist, the market price of a stock tends to
move towards it's “real value” or “intrinsic value”. If the
“intrinsic/real value” of a stock is above the current market
price, the investor would purchase the stock because he
knows that the stock price would rise and move towards its
“intrinsic or real value”
If the intrinsic value of a stock was below the market price,
the investor would sell the stock because he knows that
the stock price is going to fall and come closer to its
intrinsic value.
All this seems simple. Now the next obvious question is
how do you find out what the intrinsic value of a company
is? Once you know this, you will be able to compare this
price to the market price of the company and decide
whether you want to buy it (or sell it if you already own that
stock).

4. Big unknowns
 Your estimate of IV( intrinsic value) is not correct.
 How long it will take to come to an intrinsic value.

5. Factors to be studied
 The various fundamental factors can be grouped
into two categories: quantitative and qualitative.
The financial meaning of these terms isn’t all that
different from their regular definitions. Here is how
the MSN Encarta dictionary defines the terms:
 Quantitative – capable of being measured or
expressed in numerical terms.
 Qualitative – related to or based on the quality
or character of something, often as opposed to its
size or quantity.

6. Top to bottom analysis
ECONOMY
ANALYSIS
INDUSTRY
ANALYSIS
COMPANY
ANALYSIS

7. ECONOMY ANALYSIS
 Types of economy on the basis of control.
Private.
Social.
Mixed.
 Types of economy on the basis of exposure to the
world.
Open economy.
Closed economy.

8. Current state of economy.
 Agriculture economy.
 Industrial performance.
 Infrastructure.
 Service sector.
 Corporate performance.
 External demand.

9. Economic indicators.
 Leading indicators: A measurable economic factor that changes before the
economy starts to follow a particular pattern or trend. Leading indicators are used
to predict changes in the economy, but are not always accurate.
 Coincident Indicator An economic factor that varies directly and simultaneously
with the business cycle, thus indicating the current state of the economy.
 Lagging Indicator
1. A measurable economic factor that changes after the economy has already
begun to follow a particular pattern or trend.
2. A technical indicator that trails the price action of an underlying asset, and is
used by traders to generate transaction signals or to confirm the strength of a
given trend. Since these indicators lag the price of the asset, a significant move
will generally occur before the indicator is able to provide a signal.

10. Macroeconomic indicators
 Interest rate announcements.
 Gross domestic product.
 Consumer price index.
 Employment indicators.
 Retail sales.
 Balance of payments.
 Govt. fiscal and monetary policy.

11. INDUSTRY ANALYSIS
What is an industry?
 Group of productive organizations that produce or supply goods,
services, or sources of income. In economics, industries are
customarily classified as primary, secondary, and tertiary;
secondary industries are further classified as heavy and light.
Primary industry includes agriculture, forestry, fishing, mining,
quarrying, and extracting minerals. Secondary or manufacturing
industry processes the raw materials supplied by primary
industries into consumer goods, or further processes goods from
other secondary industries, or builds capital goods used to
manufacture consumer and non consumer goods; secondary
industry also includes energy-producing industries and the
construction industry. Tertiary or service industry includes
banking, finance, insurance, investment, and real estate
services; wholesale, retail, and resale trade; transportation,
information, and communications services; professional,
consulting, legal, and personal services; tourism, hotels,
restaurants, and entertainment; repair and maintenance
services; education and teaching; and health, social welfare,
administrative, police, security, and defense services.

12. What are the industry dominant
economic traits?
 Market size (Small markets don’t attract big fish)
 Scope of competitive rivalry
 Market/industry growth rate (life cycle)
 Fast growth breeds new entry; slowdowns lead to increased
competition.
 Number of rivals and their size
 Number of buyers and their size
 Level of backward and forward integration
 Technological change (rate and scope)
 Level of differentiation between firms’ products
 Opportunities for economies of scale
 Ease of entry and exit
 Capital requirements.

13. What competitive forces are at
work in the industry and how
strong are they?
 Porter’s Five Forces. Forces influencing industry
and competitive advantage:
 Competitive Intensity (Rivalry Among Sellers)
 Barriers to Entry (Potential for New Entrants)
 Bargaining Power of Suppliers
 Bargaining Power of Customers
 Threat of Substitute Products

14. What are the forces of change in the
industry and what impact will they
have?
 The most dominant forces the cause the industry to change are
called driving forces
 Task 1 - identify the driving forces
 Task 2 - assessing their impact on the industry (few are
important, generally)
Common Driving Forces
 Changes in long term industry growth rate
 Changes in who buy the products and for what reason
 Product innovation
 Technological change
 Marketing innovation
 Increasing globalization
 Regulatory changes
 Changing societal concerns, attitudes and lifestyles

15. How attractive is the industry ?
 Growth potential
 Driving forces
 Entry/exit
 Stability of demand
 Competitive forces
 Risk and uncertainty
 Competition and its impact on the industry’s
future

16. INDUSTRY LIFE CYCLE

17. INDUSTRY LIFE CYCLE
THE PIONEERING STAGE.
THE EXPANSION STAGE.
THE STAGNATION STAGE.

18. INVESTMENT CLASSIFICATION OF
INDUSTRY
 SELECTION OF AN EXPANDING INDUSTRY.
Expanding sector of an economy, or one growing
faster than the overall economy; opposite of
mature industry. Also called sunrise industry.