Fundamental Analysis, Lesson 5.2-5.3 PDF

The Fundamental Analysis Lesson 5.2 Learning Outcome Explain the basic premise in the fundamental analysis. Understand the techniques in fundamental analysis How can we use fundamental analysis in making stock investments? Fundamental analysis is the study of the...

The Fundamental Analysis Lesson 5.2 Learning Outcome Explain the basic premise in the fundamental analysis. Understand the techniques in fundamental analysis How can we use fundamental analysis in making stock investments? Fundamental analysis is the study of the financial affairs of a business for the purpose of understanding the company that issued the common stock. rests on the belief that the value of a stock is influenced by the performance of the company that issued the stock. If a company’s prospects look strong, the market price of its stock is likely to reflect that and be bid up. However, the value of a security depends not only on the return it promises but also on its risk exposure. Performing fundamental analysis 1. It begins with a historical analysis of the financial strength of a firm: the company analysis phase. 2. Using the insights obtained, along with economic and industry analyses, an investor can then formulate expectations about the growth and profitability of a company Company analysis This phase is the most demanding and time- consuming. During this phase the investor studies the: financial statements of the firm to learn its strengths and weaknesses, identify any underlying trends and developments, evaluate operating efficiencies, and; gain a general understanding of the nature and operating characteristics of the firm. Company analysis In company analysis, the following points are of particular interest: The competitive position of the company The types of assets owned by the company and the growth rate of sales Profit margins and the dynamics of company earnings The composition and liquidity of corporate resources (the company’s asset mix) The company’s capital structure (its financing mix)  To be an intelligent investor you should have at least a basic understanding of financial reports and financial statement analysis, for ultimately you will be drawing your own conclusions about a company and its stock. Financial Statements a vital part of company analysis enable investors to develop an opinion about the operating results and financial condition of a firm Investors use three financial statements in company analysis: the balance sheet, the income statement the statement of cash flows. The Balance Sheet is a statement of what a company owns and what it owes at a specific time. lists a company’s assets, liabilities, and stockholders’ equity. assets represent the resources of the company (the things the company owns). liabilities are debts owed to various creditors that have lent money to the firm. Stockholders’ equity is the difference between a firm’s assets and its liabilities, and as such it represents the claim held by the firm’s stockholders. The Income Statement provides a financial summary of the operating results of the firm over a period of time such as a quarter or year. It shows the revenues generated during the period, the costs and expenses incurred, and the company’s profits (the difference between revenues and costs). The Statement of Cash Flows provides a summary of the firm’s cash flow and other events that caused changes in its cash position. This statement essentially brings together items from both the balance sheet and the income statement to show how the company obtained its cash and how it used this valuable liquid resource Financial Ratios ratios provide a different perspective on the financial affairs of the firm—particularly with regard to the balance sheet and income statement—and thus expand the information content of the company’s financial statements. Ratio analysis is the study of the relationships between various financial statement accounts. Investors use financial ratios to evaluate the financial condition and operating results of the company and to compare those results to historical or industry standards.  When using historical standards, investors compare the company’s ratios from one year to the next. When using industry standards, investors compare a particular company’s ratios to those of other companies in the same line of business. Financial ratios 1. liquidity, 2. activity, 3. leverage, 4. profitability 5. common-stock, or market, measures. Liquidity Ratios focus on the firm’s ability to meet its day-to-day operating expenses and satisfy its short-term obligations as they come due. Current Ratio measures a company’s ability to meet its short-term liabilities with its short-term assets is one of the best measures of a company’s financial health. Liquidity Ratios Quick Ratio is similar to the current ratio but it excludes inventory in the numerator Liquidity Ratios Net Working Capital technically not a ratio, net working capital is often viewed as such. net working capital is an absolute measure, which indicates the dollar amount of equity in the working capital position of the firm. Activity Ratios Activity ratios (also called efficiency ratios) compare company sales to various asset categories in order to measure how well the company is using its assets. high or increasing ratio values indicate that a firm is managing its assets efficiently Activity Ratios Accounts Receivable Turnover captures the relationship between a firm’s receivables balance and its sales. determining the optimal approach to collecting from customers represents a balance between collecting faster (and therefore taking advantage of the time value of money) and using more generous credit terms to attract customers. Activity Ratios Inventory Turnover In most cases, firms would rather sell their products quickly than hold them in stock as inventory. a firm cannot make a profit on an item that it has produced until the item sells. A turnover ratio that high indicates that the firm is doing an excellent job managing its inventory Activity Ratios Total Asset Turnover indicates how efficiently a firm uses its assets to support sales. A high total asset turnover figure suggests that corporate resources are being well managed and that the firm is able to realize a high level of sales (and, ultimately, profits) from its asset investments. Leverage ratios Leverage ratios (sometimes called solvency ratios) look at the firm’s financial structure. They indicate the amount of debt being used to support the resources and operations of the company. The amount of indebtedness within the financial structure and the ability of the firm to service its debt are major concerns to potential investors. Leverage ratios Debt-Equity Ratio measures the relative amount of funds provided by lenders and owners. a low or declining debt-equity ratio indicates lower risk exposure, as that would suggest the firm has a more reasonable debt load. Leverage ratios Times Interest Earned called a coverage ratio measures the ability of the firm to meet (“cover”) its fixed interest payments The ability of the company to meet its interest payments (which, with bonds, are fixed As a rule, a ratio eight to nine contractual obligations) in a times earnings is considered timely fashion is an strong. important consideration in evaluating risk exposure. Profitability Ratios Profitability is a relative measure of success. Each of the various profitability measures relates the returns (profits) of a company to its sales, assets, or equity. Net profit margin Indicates the rate of profit being earned from sales and other revenues for every dollar of revenue that the company generated, it earned a profit of a little more than seven cents. Profitability Ratios Return on Assets return on assets (ROA) looks at the amount of resources needed to support operations. reveals management’s effectiveness in generating profits from the assets it has available, the most important measure of return As a rule, you’d like to see a company maintain as high an ROA as possible. The higher the ROA, the more profitable the company. Profitability Ratios Return on Equity A measure of the overall profitability of the firm is closely watched by investors because of its direct link to the profits, growth, and dividends of the company Return on equity or return on investment (ROI), measures the return to the firm’s stockholders an outstanding measure of by relating profits to shareholder performance and suggests equity that the company is doing its ROE shows the annual profit best to maximize earned by the firm as a shareholder value percentage of the equity that stockholders have invested in the firm  Common-Stock Ratios common-stock ratios (sometimes called valuation ratios) that convert key bits of information about the company to a per-share basis. Also called market ratios, they tell the investor exactly what portion of total profits, dividends, and equity is allocated to each share of stock. Price-to-Earnings Ratio an extension of the earnings per share ratio, is used to determine how the market is pricing the company’s common stock. The price to-earnings (P/E) ratio relates the company’s earnings per share (EPS) to the market price of its stock. When this multiple gets too high, it may be a signal that the stock is becoming overvalued (and may be due for a fall). Common-Stock Ratios Book Value per Share a measure that deals with stockholders’ equity book value is simply another term for equity (or net worth). It represents the difference between total assets and total liabilities. Presumably, a stock should sell for more than its book value. If not, it could be an indication that something is seriously wrong with the company’s outlook and profitability.  A convenient way to relate the book value of a company to the market price of its stock is to compute the price- to-book-value ratio. Widely used by investors, this ratio shows how aggressively the stock is being priced Most stocks have a price-to-book-value ratio of more than 1.0—which simply indicates that the stock is selling for more than its book value. Interpreting Financial Ratios You need to look at the historical ratio trends for the company. It may also help you to look at the ratios for the industry. You need to benchmark or compare your firm to two or three major competitors. You need to assess whether the financial information that you have gathered is telling you a good or bad story and decide accordingly whether to buy the stock or not. Technical Analysis and Peso cost averaging Lesson 5.3 Learning Outcome Understand and familiarize the methods in technical analysis Use graphs/charts in deciding when to buy and sell stocks. How do we know if it’s time to buy or sell our stocks? Technical Analysis is the practice of searching the historical record of stock prices and returns for patterns. If these patterns repeat, investors who know about them and can spot them early may have an opportunity to earn better-than-average returns. The need for timing Technical Analysis the study of PRICE movement of any type of security pictured into a graph or chart, for the purpose of determining the probable future trend Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 The Study of Price o Price discount everything (i.e. market price tells you everything you need to know about a stock’s expectations) o Prices move in trends o History repeats itself (i.e. people tend to react in similar fashion to certain kinds of stimuli, grooming repetitive patterns of price activity) Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Looking at Prices thru Graphs Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 The Role of Volume Volume – measures the number of shares or value of those shares traded in a day ✓ can confirm suspicions about trend forcefulness ✓ expands along with a trend ✓ drown away when trends are weak and failing Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Volume and Prices 1. Identifying and following trends Support & Resistance Concept Support is a price point underneath a market that shows heaviness in buying sufficient enough to prevent prices from falling down Support occurs where a downtrend is expected to pause, due to a concentration of demand Resistance is a price point above a market that shows heaviness in selling sufficient enough to prevent prices from rising up Resistance occurs where an uptrend is expected to pause temporarily, due to a concentration of supply Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Constructing Support & Resistance Lines Support - connecting 2 or more major lows Resistance – connecting 2 or more major highs Support & Resistance o Buying is most ideal either at the bounce of SUPPORT, or at the breakout of an area pattern RESISTANCE o Selling is most ideal either at the bounce off RESISTANCE, or at the breakdown of an area pattern SUPPORT Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Trends are durable swings in market condition; they show the general direction of a security price over times Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Trendlines are guidelines that follow a trend that connect several areas of support or resistance to project buying or selling action over time security price over times Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Trendlines Buy closer to pullbacks to support of an up trendline or a breach of a down trend line Hold as long as your trendlines do not break Sell when your up trendline breaks Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Trendlines Buy closer to pullbacks to support of an up trendline or a breach of a down trend line Hold as long as your trendlines do not break Sell when your up trendline breaks Establishing Investment Horizon Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Market Self-Correction Action ”prices must move gradually over time… any exaggeration of this must be paid for by an adjustment made in time or in price” Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Market Self-Correction Action Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Market Self-Correction Action correction in price consolidation in time Using Technical Indicators A technical indicator is a study of price data derived from various statistical formula plotted onto a graph three basic functions: ✓ to alert ✓ to confirm ✓ to predict Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Most popular indicators: ✓ Moving averages (MAs) ✓ Moving Average Convergence Divergence (MACD) ✓ Relative Strength Index (RSI) Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Moving Averages ✓ a price-average line plotted onto a chart in direct reference to market price Used to: ✓ identify trends in various time frames ✓ identify support and resistance ✓ qualify strength of trends Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Moving Averages A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by that same number of periods. Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Moving Averages 65-day = ¼ a year (trending MA) 130-day = ½ a year 260-day = 1 year Can also use 32 & 16 day MAs to decipher faster (shorter) trends Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Moving Averages Use MAs like a trendlines Buy closer to pullbacks into it as long as it does not break Sell when MAs break Crossover of a shorter MA or longer term MA tells you greater trend move coming Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Green – 20 day MA Red – 50 day MA 20 day MA > 50 day MA > 200 day MA – stock is uptrend Violet – 200 day MA Green – 20 day MA Red – 50 day MA 20 day MA < 50 day MA < 200 day MA – stock is downtrend Violet – 200 day MA Green – 20 day MA Red – 50 day MA 50 day MA > 20 day MA > 200 day MA – stock is sideways Violet – 200 day MA Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Moving Average Convergence Divergence (MACD) a momentum tool that uses a crossover system to justify changes in periodic trends 3 basic lines to remember: ✓ MACD line ✓ Signal line ✓ Zero line (separates positive/negative momentum) Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Moving Average Convergence Divergence (MACD) A nine-day EMA of the MACD called the "signal line," is then plotted on top of the MACD line, which can function as a trigger for buy and sell signals. Traders may buy the security when the MACD crosses above its signal line and sell - or short - the security when the MACD crosses below the signal line. Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Moving Average Convergence Divergence (MACD) Buy when: 1) MACD crosses above signal line 2) MACD is positive (above 0-line) Sell when MACD crosses below the signal line Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Red - Signal line Zero line Blue – MACD line Relative Strength Index (RSI) a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset Signals are considered overbought when the indicator is above 70% and oversold when the indicator is below 30%. Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Relative Strength Index (RSI) a momentum-oscillator that swings from overbought and oversold conditions to highlight extreme ends of a price move it can spot out Bullish or Bearish Divergence Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 bullish divergence overbought conditions oversold conditions bearish divergence Using the indicators Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Some Strategies: Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Peso Cost Averaging Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Source: Slides adopted from COL Financial’s Investor Education Seminar Series, 2018 Invest wisely! Thank you!