FINA 34780 Chapter 13

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Chapter 13

Fundamental and Technical Analysis

FINA 34780: Investments 2

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n!a!e in analysis t" : Identi#y !r"$th sect"rs Identi#y undervalued%"vervalued securities &r"duce relia'le research rep"rts (n"$ $hat in#"rmati"n t" l"") at and $hat t" i!n"re

*nderstand analysis t": +e a 'etter c"nsumer "# #inancial in#"rmati"n *nderstand the meth"ds and c"nclusi"ns "# analysts *nderstand the limitati"ns "# analysis

Intr"ducti"n

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1, C"mpare and c"ntrast #undamental and technicalanalysis- and evaluate the three mar)et the"riese.plainin! st"c) mar)et 'ehavi"r

2, /escri'e h"$ the #"ur macr"ec"n"mic #act"rsa##ect invest"r e.pectati"ns and the price "#securities

3, Analy e h"$ industries are classi#ied and e.plainh"$ classi#icati"ns impact a c"mpany s st"c)valuati"n

earnin! ' ectives

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4, Calculate and interpret the intrinsic value "# ast"c) usin! the dividend disc"unt m"del 5//6, /e#ine technical analysis and descri'e the t""ls

used in technical analysis

earnin! ' ectives

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Fundamental Analysis F"cus is "n industries and c"mpanies 6acr" #act"rs- industry c"nditi"ns- c"mpany #inancial

c"nditi"ns- mana!ement per#"rmance- etc,

&urp"se is t" evaluate the actual %e.pected pr"#ita'ility%cash #l"$s "# an issuer

Technical Analysis 9tudy "# hist"rical st"c) prices and st"c) mar)et 'ehavi"r "") #"r recurrin! patterns &rice m"vement- tradin! v"lume- hi!hs and l"$s "ver

time

6eth"ds "# Analysis LO1

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##icient 6ar)et yp"thesis Invest"rs react ;uic)ly t" ne$ in#"rmati"n There#"re prices #ully re#lect all availa'le in#"rmati"n Thus- #undamental and technical analysis is n"t $"rth

the e##"rt

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9tudies int" all three mar)et the"ries have mi.edresults N" evidence that:

Ne$ in#"rmati"n is availa'le t" every"ne at the same time Invest"rs react immediately t" all in#"rmati"n in the same

$ay Invest"rs ma)e accurate #"recasts and c"rrect decisi"ns

vidence LO1

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4 'r"ad cate!"riesA, Fiscal &"licy

- ?"vernment spendin!- ta.es- and de't

- &"licy may 'e 'r"ad 'ased "r tar!eted+, 6"netary &"licy

- Interest rates and m"ney supply- @ield curve analysis

Fundamental 6acr" Analysis LO2

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C, Fl"$ "# Funds- Fallin! interest rates tend t" impr"ve the appeal "# st"c)s "ver

'"nds- and vice versa- Typically- $hen st"c)s rise- '"nd prices tend t" dr"p

/, In#lati"n i!h levels lead t" hi!her interest rates- l"$er c"rp"rate pr"#its and

l"$er & multiples

Fundamental 6acr" Analysis LO2

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Classi#y industry 'y 4 di##erent characteristics1, &r"duct%9ervice

- c"n"my is divided int" 10 ma "r sect"rs- Industries are $ithin the sect"rs- and su' industries are

$ithin industries

- stimate !r"$th pr"spects #"r the industry versus theec"n"my

2, 9ta!e "# ?r"$th

Fundamental Industry Analysis LO3

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EmergingGrowth

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mer!in! ?r"$th = usually ne!ative cash #l"$ #r"m"perati"ns and Net "ss

ittle m"re than a !""d st"ry at this sta!e ?r"$ thr"u!h de't

?r"$th = sales%earnin!s e.pandin! at a #aster ratethan m"st industries

?r"$ thr"u!h retained earnin!s

6aturity = !r"$th cl"ser t" "verall ec"n"mic !r"$th &rice c"mpetiti"n increases /ividends 'ec"me imp"rtant

/ecline = n"ne t" ne!ative !r"$th

Ne$spapers- '"") st"res- vide" rental- TB Net$"r)s


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3, C"mpetitive #"rces- &"rter s #"rces m"del- ase "# entry- /e!ree "# c"mpetiti"n 5#ra!mented "r c"ns"lidated

- Threat "# 9u'stitute pr"ducts- /e!ree "# +uyer p"$er - /e!ree "# 9eller p"$er

4, 9t"c) Characteristics- Cyclical 5c"mm"dity 'ased- industrial- c"nsumercyclical d" very $ell in e.pansi"ns- d" very p""rlyin c"ntracti"ns


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- /e#ensive = d"n t d" as $ell in e.pansi"ns 'ut tend t""utper#"rm in c"ntracti"n

- 9peculative = usually emer!in! industries "r th"se$ith rapid inn"vati"n

- +i"tech%techn"l"!y


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/ividend /isc"unt 6"del 9t"c) s current price is the N&B "# all e.pected #uture cash

dividends 3 'asic a$s "# cash

9""ner cash #l"$s are $"rth m"re ar!er cash #l"$s are $"rth m"re 9a#er cash #l"$s are $"rth m"re

& rati" i!h & = !r"$th st"c) "$ & = value st"c) hen interest rates decrease- & rati"s tend t" increase 5multiple

e.pansi"n C"mpanies $ithin the same industry tend t" c"nver!e ar"und

speci#ic & rati"s

Baluati"n 6"dels LO4

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9tudy price- v"lume and time usin! charts "") #"r recurrent patterns Feel it $"r)s 'ecause technicians 'elieve:

All in#"rmati"n sh"$s up in prices- s" n" need t" #ind thein#"rmati"n- ust $atch the tape

&rices m"ve in trends and tend t" persist #"r relatively l"n! peri"ds"# time

The #uture repeats the past 5"r at least rhymes

Technical versus Fundamental 9tudy price m"vements versus study the cause "# price

m"vements Tries t" identi#y $hen t" 'uy "r sell versus $hat t" 'uy "r sell

Technical Analysis LO5

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1, Chart analysis Bery use#ul #"r supp"rt%resistance levels Identi#y re!ular patterns

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T""ls "# Technical Analysis LO5

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C"ntinuati"n &atterns

+rea) "uts "n v"lumesi!nal c"ntinuati"n "# thetrend


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hen the nec)line is 'r")en #r"m a'"ve it indicates animminent steep price decline,

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hen the nec)line is 'r")en#r"m 'el"$ it indicates animpendin! price sur!e,

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2, Duantitative Analysis- 6"vin! avera!es 5sl"$ versus #ast

- scillat"rs = used $hen there is n" trend- 6AC/ 512 vs, 2E dma plus dma si!nal line

- Cr"ss"vers are 'uy%sell si!nals


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3, 9entiment = +ull%+ear rati"4, Cycle indicat"rs- lli"t ave = mar)ets ma)e m"ves up and three

m"ves d"$n- Fi'"nacci

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FINA 34780 Chapter 13

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