1. derstanding-fundamental-analysis/ derstanding-fundamental-analysis
TRANSCRIPT
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http://www.investopedia.com/video/play/understanding-fundamental-analysis/
What is Fundamental Analysis?
Academy #6Fundamental analysis
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“I’ve never bought a stock unless, in my view, it was on sale.” John Neff
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Cornerstone of investing
Analyzing fundamentals
Qualitative and quantitative
Great for proposals
Asking the right questions
What is fundamental analysis?
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Is the company’s revenue growing? Is it actually making a profit? Is the cash flow positive? Is it in a strong-enough position to beat out
its competitors in the future? Is it able to repay its debts? Is management trying to ”cook the books"?
Fundamental questions
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Quantitative
Qualitative
Applications
Risks
Investment Proposal
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Intrinsic Value
Accounting
Valuation methods
Stock screener(s)
Quantitative
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Price on a: Specific time Quantity (supply / demand)
Market price is subjective Opinions differ
What is a stock price?
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The “real” value of a company
But what determines the real value?
Intrinsic value
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Intrinsic value
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Balance sheet
Income statement
Cash flow statement
Financial statements
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Balance sheet
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What a company owns (debit):◦ Short term assets◦ Long term assets◦ Intangible assets
How a company owns it (credit):◦ Equity◦ Short term liabilities◦ Long term liabilities
Balance sheet
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Balance sheet
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Income statement
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Net profit -> Shareholders’ equity
Income statement
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Profit/earnings Accrual accounting Revenue – cash flow Costs – expenses
EBITDA Earnings before interest, taxation,
depreciation and amortization
Income statement
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Cash flow statement
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Cash is king! Cash in and outflow
No influence of bookkeeping tricks
Cash flow statement
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Earnings Per Share (EPS) Dividend yield Price/Earnings (P/E) EV/EBITDA Book to market value Gordon’s growth model
Valuation methods
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Earnings per share (EPS) Earnings divided by shares outstanding
Dividend per share (money now – reinvesting) Shell - Google
Metrics per share
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Value of the company divided by earnings (profit)
Price per share divided by EPS
What determines height of the ratio?
P/E ratio
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Enterprise Value/EBITDA EBITDA – Earnings - Earnings before I tricked that dumb auditor
Book to market value Book value firm / market value firm
Other multiples
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D = dividend g = growth rate r = discount rate
Gordon’s growth model
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Compare P/E ratio with peers Is it higher, lower? Why? Good reason(s)?
Practical implications
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Multiple expansion – contraction◦ Longitudinal: compare ratio’s with previous years◦ EPS growth, dividend growth
◦ Cross-sectional: compare ratio’s with each other◦ EPS growth, dividend per shares growth but P/E
decline -> why?
Practical implications
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Break
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Business model
Markets
Competitive environment
Management
Market opinion
Qualitative
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What does the company do?
Where does it generate money?
Look at key drivers/factors
Don’t invest in a business you don’t understand!
Business model
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Boston Chicken Fixed fee
MC Donald's Franchise system
Example
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Strategy
Value proposition
Cost structure Fixed costs – variable costs Commodities (Air France-KLM)
Patents (Pharmaceutics)
Business model
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What drives success? How are these factors changing?
Characteristics of markets:◦ Spare car parts example◦ Smartphones example◦ Nintendo Wii example
Market
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What can a company do better than it’s competitors? (Michael Porter)◦ Cheaper/better/faster
Google: best search engine Apple: strong brand name Toyota: efficiency advantage Coolblue: fast delivery
Competitive environment
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How competitive is the industry?◦ Airlines◦ Soft drinks
Competitive environment
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Incentives◦ Shareholder alignment
Consistency◦ Skagen funds
Track record
Example: Angela Ahrendts – Apple
Management
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Material events◦ Earnings, public announcements
World events◦ Central bank policies, political and war events
Industry appeal◦ Social media stocks
Example: BP oil spill
Market opinion
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Finding an edge & catalysts
Where to find valuable information?
Let’s do this!
Applications
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Edge: asymmetric information distribution◦ Interpretation
Catalyst: why now◦ Intrinsic value versus market price
Edges & Catalysts
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www.google.com/finance
www.yahoo.com/finance
www.finviz.com
Company website◦ Investor Relations
Valuable information sources
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Which company?
Let’s do this!
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Timing◦ Technical analysis
Efficient market hypothesis◦ No free lunch
Is the market ever going to reflect the intrinsic value?
One can be wrong in calculating intrinsic value
Risks
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Information transfer◦ B&R members◦ Traders
Large cap vs small cap◦ Apple - musclepharm
Stock reflects all available information
Efficient market hypothesis
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Weak form: ◦ past prices can’t lead to outperformance
Semi-strong form:◦ Public information can’t lead to outperformance
Strong form:◦ All information is incorporated in the price of an
asset, even inside information
Efficient market hypothesis
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Questions?