F Chapter 17 FUNDAMENTAL ANALYSIS vs TECHNICAL ANALYSIS 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Fundamental Analysis versus Technical Analysis the practice of evaluating the information contained in financial statements, industry reports, and economic factors to determine the intrinsic value of a firm 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Fundamental Analysis versus Technical Analysis Intrinsic value the “true” or economic, value of a firm 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Fundamental Analysis versus Technical Analysis Fundamentalists analysts who utilize fundamental analysis in an attempt to forecast future stock price movements 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Fundamental Analysis versus Technical Analysis examination of supply and demand for securities to determine trends in price movements of stocks or financial instruments 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Fundamental Analysis versus Technical Analysis Technicians the term given to analysts who examine stocks and financial markets using technical analysis 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Economic Analysis Forecasting business cycles to determine when to expect changes in the business cycle, or the direction in which aggregate economic activity is moving 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Economic Analysis Business cycle the movement in aggregate economic activity as measured by the gross domestic product (GDP) 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Economic Analysis Expansion increasing economic activity 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Economic Analysis Contraction decreasing economic activity 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Economic Analysis Gross Domestic Product (GDP) a measure of all of the goods and services produced in the economy during a specified time period 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Economic Analysis Recession two consecutive quarters of economic contraction, or decline, in the GDP 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Recessions and Stock Price Movements 1975 - 2005 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Economic Analysis Economic indicators Leading economic indicators economic measures that tend to move prior to, or precede, movements in the business cycle 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Economic indicators Lagging economic indicators economic measures that tend to move after, or follow, movements in the general economy (business cycles) 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Economic indicators Coincident indicators economic measures that tend to mirror, or move at the same time as, business cycles 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Business Cycle Indicators 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Business Cycles - Monetary Policy and Fiscal Policy the means by which the Federal Reserve influences economic conditions by managing the nation’s money supply 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Business Cycles - Monetary Policy and Fiscal Policy Government spending, which is primarily supported by the government’s ability to tax individuals and businesses 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Business Cycles - Monetary Policy and Fiscal Policy Deficit spending situation that occurs when the government spends more than it collects in taxes 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Industry Analysis Cyclical industries industries that tend to be directly related to business cycles such that they perform best during expansions and worst during contractions 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Industry Analysis Defensive, or countercyclical, industries industries that tend to perform best when the economy is in a contraction or recession, but are generally the poorest performers in expanding economies 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Industry Analysis Industry life cycle the various phases of an industry with respect to its growth in sales and its competitive conditions 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Industry Life Cycle Industry Sales Mature Expansion (Growth) Life-Cycle Stages Introductory Expansion (Growth) Mature 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Evaluating the Firm’s Financial Position Financial statement analysis comparison to other similar firms forecast direction for future predict earnings and dividends risk evaluation 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Stock Valuation Techniques Dividend discount models (DDM) a model that utilizes the discounted cash flow principle to value common stock value is represented by the present value of the dividends expected to be received from investing in the stock 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Stock Valuation Techniques Dividend discount models (DDM) 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Stock Valuation Techniques Valuation using P/E ratios ratio computed by dividing the current market price per share, P0, by the earnings per share, EPS0 used to estimate the value of a stock; P0 ≈ (P/E) x EPS0 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Stock Valuation Techniques Evaluation using the economic value added (EVA) approach method used to evaluate if the earnings generated by a firm are sufficient to compensate the suppliers of funds - both the bondholders and the stockholders 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Stock Valuation Techniques Evaluation using the economic value added (EVA) approach 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Economic Value Added (EVA) Changing the capital structure can change value because the WACC is affected Increasing the efficiency of the firm through reductions in operating expenses or increases in revenue will increase operating income and thus increase value 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Technical Analysis Bar chart Charting - using charts and graphs a graph that indicates the high, low, and closing price movements for a stock during a specified period 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Technical Analysis Charting - using charts and graphs Trend line a line that indicates the direction of the stock price movements it is drawn so that it touches either the high prices or the low prices for some of the trading days 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Technical Analysis Charting - using charts and graphs Trend line penetration the point at which the trading line crosses the trend line 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Trend Line Penetration 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Technical Analysis Measures and indicators used by technical analysts The Dow Theory a technique used to predict reversals in market patterns by examining the movements of the Dow Jones Industrial Average and the Dow Jones Transportation Average 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Measures and indicators used by technical analysts Moving averages stock price averages for a fixed time frame, say 100 days, computed for a particular period of time 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Measures and indicators used by technical analysts Technical indicators measures used by technical analysts to forecast future movements in stock prices 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Measures and indicators used by technical analysts Market breadth indicators measure the trading volume and the range of trading that takes place in the market 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Measures and indicators used by technical analysts Advance/decline line a graph that depicts the results computing the difference between the number of advancing stocks and the number of declining stocks over some time period 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Measures and indicators used by technical analysts Sentiment indicators technical indicators that are used to monitor the “mood” or psychology of the market 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Stock Selection Criteria Growth stocks stocks of firms that have many positive net present value opportunities in general, these firms exhibit sales and earnings growth that significantly exceed the industry averages 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Stock Selection Criteria Value stocks stocks of firms that are mispriced, especially those that are undervalued $1.99 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Investment Professionals’ Advice Be disciplined with your investment approach Know the company in which you invest Choose firms that are in strong financial positions Stay with the investment until it no longer satisfies your investment goals 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Investment Selection in Efficient Markets Abnormal returns returns that exceed the returns earned by investments with similar risks Weak form efficiency current market prices reflect all historical information, including any information that might be provided by examining past price movements and trading volume data 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Investment Selection in Efficient Markets Semistrong form efficiency current market prices reflect all publicly available information, including information contained in historical data and information contained in current financial statements Strong form efficiency current market prices reflect all information, whether it is public or private 7/30/2018 Dr.P.S DoMS, SAPM, IV unit

Investment Selection in Efficient Markets Even if we accept that abnormal returns cannot be earned on a consistent basis, we still need to evaluate the investments we select to ensure the risk position is appropriate and that our investment goals are being met 7/30/2018 Dr.P.S DoMS, SAPM, IV unit