Chapter 11: Common Stock Analysis

Major approaches to valuating common stock:

o Discounted cash fow techniques
Attempts to estimate the value of
In-class Notes:
Investment strategies
Passive:
o Markets are ecient
o !e aim to "e average market #S$P %&&'
(&) of mutual fun* managers cannot "eat their
"enchmarks+
Aim to keep costs lo, $ minimi-e the time spent on
stock selection
.eep ta/es *o,n "y not tra*ing
0y hol*ing your securities you may gain 1-1) of
e/tra return+
Minimi-e portfolio *rag
o No mispricing
o All 2C2344M34C2 are useless+
o Passive strategy is a 5*o-nothing6 strategy
Active:
o 7echnical
o 2un*amental
4C2
P38
89A
:elative 9alue
o Active people think that they have an e*ge
;ou nee* "oth strategies "ecause they "alance each other out
Allocation is the most crucial thing #<&)' vs+ ,hich securities to
invest in
o It is more important to analy-e if you are going to get =&3>&
"et,een stocks an* "on*s? or %&3%& for e/ample+
Secon* most crucial thing is to actually choose ,hich securities to
pick+
7hree ,ays of passive strategies:
0uy: @ol* in*ivi*ual stocks
o Still some,hat active "ecause you *o the research an* select
the stocks
o .eep your transaction costs *o,n
o 2igure out if you ,ant to reinvest *ivi*en*s
o :e"alance ,hich is risk control+
o No fun*amental analysis
o Ao, turnover
Bse in*e/ #mutual' fun*s
o A*vantages:
8/change tra*e* fun*s
o A*vantages: Ao,er ta/es? cheaper
Active strategies:
Assumes you have superior kno,le*ge or skill
0eneCts are greater than the costs
o @ave to "e a cost "eneCt analysis
;ou can select in*ivi*ual stocks using:
o 44M? 2C2 #8Duity an* *e"t'? 89A? P30
Active strategies:
o Ero,th investment:
2ocuses on 8PS gro,th
7esla
o 9alue investment:
Cheap stocks
Ao, P30 an* P38? high *ivi*en*
Aong-term contrarian approach
Security Analyst:
Fo" is to forecast earnings per share? stock returns #not really goo*
at it'
Eoo* at un*erstan*ing in*ustries
7,o types of analysts:
o Sell-si*e:
7he typical !all Street analyst
!ork for a "rokerage Crm #Morgan Stanley'
0roa*ly markete*? pu"lic research
o 0uy-si*e
7he portfolio manager? he*ge funs managers?
en*o,ments
Private research
Sell-si*e analyst recommen*ations:
Sell G-1&)
@ol* 1&-1%)
0uy >%)
Sector rotation analysis #1& sectors':
Chicken ,ay of picking stocks
Consumer 4iscretion sector
Consumer Surplus
@ealth Care
7echnology Sector
o 0uy via sectors etfs? you put a percentage of your money in
*iHerent sectors+