V. STOCKS
I. Fundamental Analysis (Continued)
4. Basic Ratios
i. Earnings per Share =
total earnings
outstanding shares
Tracks profitability regardless of firm size
ii. 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
=
EBITDA
assets
Measures efficiency of use of firm assets
iv. Return on Equity
=
EBITDA
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)
5. Issues Regarding Outstanding Shares
a. Float – the number of shares outstanding
(available for purchase)
b. 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)
6. Choosing Stocks Based Upon
Fundamentals
a. Stock Market Selection Methods
i.
Dogs of the Dow – buy highest yielding Dow
stocks at the beginning of the year, selling best
of stocks after 12 months
ii. Relative Strength from Investors Business Daily
– compares stocks with the overall market –
See:
I. Fundamental Analysis (Continued)
iii. 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_Methodol
ogy_Web.pdf?vregion=us&vlang=en
iv. Value Line Value Line - The Most Trusted
Name in Investment Research
I. Fundamental Analysis (Continued)
b. 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
i.
Large Cap = market capitalization in excess of
$5,000,000,000
ii. Midcap = market capitalization from
$1,000,000,000 to $5,000,000,000
iii. Small Cap = market capitalization of less than
1,000,000,000
I. Fundamental Analysis (Continued)
c. Growth versus Value Stocks
i. Growth Stock – High P/E ratio, earnings
expected to grow at an above average
rate
ii. 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
iii. Value Trap – Low P/E ratio stock that is
a bad investment – P/E is low for a
reason
I. Fundamental Analysis (Continued)
d. Cyclical Stocks – Rise and fall with
the economy in general – ex.
Transports
e. Defensive Stocks – Product demand
exists in all phases of the business
cycle – consumer staples, drugs, etc.
f. Domestic versus International – If
markets are performing poorly in one
country, stocks from another country
could be performing well
I. Fundamental Analysis (Continued)
g. Data Sources
i.
Financial press and Internet sites – provide readily
available information, but may not be in depth or
timely
ii. Professional research – can have greater “depth,”
can reveal more obscure information, but can be
biased and expensive
iii. Companies – can provide fairly detailed
information, but biased towards the company
iv. SEC filings – very detailed and thorough, must be
accurate, but difficult to read and not timely
I. Fundamental Analysis (Continued)
7. Other Approaches
a. “Buy what you know” – Purchase shares
of companies that you do business with
and are impressed by
b. Consensus information – Agreement
among analysts or researchers regarding
whether a stock is a good value
J. Technical Analysis
1. 50 Day Moving Average – provides
guidance regarding long term stock
price movement trends (200 day =
very long term)
a. Positive Momentum – Above the moving
average
b. Negative Momentum – Below the moving
average AVAV: Technical Analysis for
AEROVIRONMENT, INC. - Yahoo! Finance
2. 5 - 20 Day Moving Average – Shows
very short term trend
J. Technical Analysis (Continued)
3. Support – Stock “Bottom,” price below which
shares have historically not traded
4. Resistance – Stock “Top,” the price that the
stock tends to “bounce off of,” a stop to
further price advances
5. 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)
6.
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.y
ahoo.com/q/ta?s=CSX&t=1y&l=on&z=m&q=l&p=b&a=&c=
a.
b.
c.
d.
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)
7. Stock Chart Types – In all types, y axis
indicates price, x axis is time
a. Line
b. Bar (High, Low, Close)
c. Candlesticks – White = stock up, Black =
stock down
d. Point and figure
8. Chart Scaling
a. Arithmetic – Even scale of price movements
b. Logarithmic – Scale by percentage change,
works best for highly volatile stocks