The Appeal of Common Stocks( Equity)

Residual Owners: stockholders of a firm are the owners, who are entitled to dividend income and a prorated share of the firms earnings only after all the firms other obligations have been met Stocks allow investors to tailor investments to meet individual needs and preferences. Stocks may provide a steady stream of current income through dividends. Stocks may increase in value over time through capital gains.

Par Value: the stated, or face, value of a stock Mainly an accounting term and not very useful to investors Book Value: the amount of stockholders equity The difference between the companys assets minus the companys liabilities and preferred stock Market Value: the current price of the stock in the stock market (Equity) Market Capitalization: the overall current value of the company in the stock market Total number of shares outstanding multiplied by the market value per share

Investment Value: the amount that investors believe the stock should be trading for, or what they think its worth Probably the most important measure for a stockholder

Assoc Prof. Dr. Pornanong Budsaratragoon

Common Stock Ratios

Earnings Per Share: the amount of annual earnings available to common stockholders, stated on a per-share basis Earnings are important to stock price Earnings help determine dividend payouts

EPS !

Net profit  Preferred dividends after taxes Number of shares of common stock outstanding

Dividend Yield: a measure to relate dividends to share price on a percentage basis

Indicates the rate of current income earned on the investment dollar Convenient method to compare income return to other investment alternatives
Dividend yield ! Annual dividends received per share Current market price of the stock

Dividend Payout Ratio: the portion of earnings per share (EPS) that a firm pays out as dividends
Companies are not required to pay dividends Some companies have high EPS, but reinvest all money back into company
Dividend payout ratio !

Dividends per share Earnings per share

Assoc Prof. Dr. Pornanong Budsaratragoon

Common Stock Ratios

Price/Equity Ratio (P/E): shows Price-to-Book Ratio (P/B): how the stock market is pricing compares stock price to book value the companys common stock to see how aggressively the stock One of most widely used is being priced ratios in common stock selection Often used in stock valuation Market price of common stock models Price-to-book-value !
Book value per share

P/E !

Market price of common stock EPS

Higher ratio: stock is fully-priced or overpriced Lower ratio: stock may be fairly priced or underpriced

Higher ratio: more expensive Lower ratio: less expensive

Assoc Prof. Dr. Pornanong Budsaratragoon

Sometimes You Win, Sometimes You Lose

Assoc Prof. Dr. Pornanong Budsaratragoon

Types of Stock
Blue Chip Stocks: financially strong, high-quality stocks with long and stable records of earnings and dividends
Companies are leaders in their industries Relatively lower risk due to financial stability of company Popular with investing public looking for steady growth potential, perhaps dividend income Provide shelter during unsettled markets Examples: Wal-Mart, Proctor & Gamble, Microsoft, United Parcel Service, Pfizer and 3M Company

Income Stocks: stocks with long and sustained records of paying higher-than average dividends
Good for investors looking for relatively safe and high level of current income Dividends tend to increase over time (unlike interest payments on bonds) Some companies pay high dividends because they offer limited growth potential More subject to interest rate risk Examples: Verizon, Conagra Foods, Pitney Bowes, R.R. Donnelley, Bank of America and AmSouth Bancorp

Assoc Prof. Dr. Pornanong Budsaratragoon

Example of Blue Chip Stocks

Assoc Prof. Dr. Pornanong Budsaratragoon

Updated : the old list

Stock Symbol 2010 Close Price H1 2011 Close Price Target Price 2011 H1 Performance (%) Upside Potential (%) SCC BKI PTTEP BANPU ADVANC TPC SCCC LH MINT BGH KBANK TVO INTUCH (SHIN) BBL STANLY DCC SE-ED

341 249 168 792 85 30.75 234 6.45 11.8 46.5 125.5 32.5 29.25 147 181 66 10.6

353 250 171 716 104 29.75 214 5.75 11.4 52.75 123 24.9 32.75 158 166.5 46.75 10 N.A.

401.45 240 207 891.83 113.13 23.11 252.5 7.14 15.29 55.49 157.81 31.53 43.9 200.98 196.86 59.22

3.52% 0.40% 1.79% -9.60% 22.35% -3.25% -8.55% -10.85% -3.39% 13.44% -1.99% -23.38% 11.97% 7.48% -8.01% -29.17% -5.66% N.A.

13.73% -4.00% 21.05% 24.56% 8.78% -22.32% 17.99% 24.17% 34.12% 5.19% 28.30% 26.63% 34.05% 27.20% 18.23% 26.67%

Assoc Prof. Dr. Pornanong Budsaratragoon

Symbol SVI UPF URBNPF MGE ADVANC LEE MJD NIPPON <SP> LUXF CTARAF KYE

SET Top 10 Dividend Yield 2010 Dividend Yield (%)

27.12 20.07 17.98 15.77 13.27 11.11 10.58 10.33 10 9.94 9.88
MAI Top 10 Dividend Yield 2010 Dividend Yield (%)

Symbol SALEE MBAX LVT TRT UBIS 2S JUBILE QLT GFM BOL

11.44 10.99 10.37 8.96 8.22 8.01 7.76 7.02 6.9 6.66

Assoc Prof. Dr. Pornanong Budsaratragoon

2552
ZMICO TISCOB<SP> CSL AI TMT PSL UP UPOIC JTS SFP

SET
28.67 23.08 22.98 19.95 19.05 17.02 15.82 15.38 14.6 14.29 DM GFM SIMAT LVT CHUO TRT UEC TAPAC L&E AGE

2552
10.71 10.55 9.35 8.94 8.48 8.02 7.91 7.69 7.57 7.52

Mai

Assoc Prof. Dr. Pornanong Budsaratragoon

SET Ranking 2010 Symbol Close % Change Market Capital (Baht) P/E (Times) P/BV (Times) Dividend Yield (%) 3.4 63.46 6,369,812,854.60 9.18 2.59 27.12 SVI 74.75 22.54 560,625,000.00 7.09 1.6 20.07 UPF 5.15 -31.79 370,800,000.00 0.58 17.98 URBNPF N/A 6.34 -43.39 1,141,200,000.00 3.1 15.77 MGE N/A 85 -1.73 252,456,471,815.00 13.39 4.76 13.27 ADVANC 3.24 -14.29 2,381,562,000.00 9.84 1.2 11.11 LEE 2.82 -8.44 1,985,443,560.00 7.22 0.81 10.58 MJD NIPPON <SP> LUXF CTARAF KYE SPACK EPCO BCP PRECHA SSF SIRI SPF GL PSL GOLDPF QHOP PFFUND

24.2 6.5 8.6 215 4.06 1.99 18.6 1.25 6 5.55 9.7 24.6 18.2 8.2 8.15 9.8

5.22 295,240,000.00 -23.53 1,277,250,000.00 8.86 2,752,000,000.00 0.47 4,730,000,000.00 26.87 1,218,000,000.00 23.6 1,025,666,299.99 24.83 21,888,907,018.80 -13.19 420,000,000.00 -13.67 1,619,994,000.00 29.67 8,273,016,990.60 16.17 9,215,000,000.00 -1.6 1,387,858,101.60 -3.19 18,919,274,920.00 7.89 1,689,200,000.00 14.79 1,559,095,000.00 -2.97 509,600,000.00

N/A N/A N/A

7.18 9.07 8.06 7.81 5.46 14.06 5.81

N/A

5.58 16.64
N/A N/A N/A

1.06 0.64 0.77 1.45 1.68 1.5 0.85 0.71 1.12 0.81 0.88 1.36 1.13 0.72 0.78 0.93

10.33 10 9.94 9.88 9.85 9.8 9.62 9.6 9.33 9.26 9.18 9.07 9.07 9.06 8.76 8.57

Assoc Prof. Dr. Pornanong Budsaratragoon

Symbol ZMICO QHPF INTUCH CFRESH JCT FUTUREPF PTSEC <SP> SENA MNRF PRANDA KEST CHOTI STPI FANCY CSL GYT CPL MNIT2 TMT PT SIRIPF <SP> MNIT BAT-3K JMART TPA

Close

% Change Market Capital (Baht)

P/E (Times) P/BV (Times) Dividend Yield (%)

1.82 9.4 29.25 4.88 55 12.5 24 2.08 9.8 6.5 15.5 177 27 2.04 5.3 400 33.5 9.95 6.05 1.35 9.9 8 61.75 3.16 62

-5.21 14.63 6.36 29.79 5.77 28.87 42.01 9.47 1.03 34.85 26.02 30.15 92.86 -9.73 72.08 57.48 17.54 -0.5 15.24 12.5 0 -16.67 -3.52 89.22 -1.59

1,517,689,138.42 7,491,800,000.00 93,631,700,243.25 2,169,233,200.00 742,500,000.00 5,916,451,250.00 5,124,000,000.00 1,404,000,000.00 1,053,500,000.00 2,604,344,301.00 8,847,624,750.00 1,327,500,000.00 9,923,744,619.00 958,800,000.00 3,141,541,477.50 2,960,000,000.00 884,399,832.50 999,676,500.00 2,571,250,000.00 191,625,035.85 856,350,000.00 1,104,000,000.00 1,235,000,000.00 948,000,000.00 753,300,000.00

44.82
N/A

13.44 11.96 8.37

N/A

6.92 5.64
N/A

9.32 11.63 7.88 4.57 11.19 9.62 4.59 9.37

N/A

9.92 381.72
N/A N/A

10.74 10.44 15.05

0.73 0.85 3.4 1.58 1.22 1.17 1.39 0.89 0.86 0.95 2.01 0.99 2.49 0.68 3.16 0.94 0.92 0.94 1.47 0.94 0.97 0.73 0.8 1.64 1.28

8.36 8.28 8.21 8.19 8.18 8.17 8.13 8.11 8.11 8.09 8.05 7.91 7.86 7.84 7.65 7.5 7.46 7.45 7.44 7.41 7.35 7.31 7.29 7.28 7.26

Assoc Prof. Dr. Pornanong Budsaratragoon

Dividend Payout Ratio Name/Year BEC WORLD GENERAL ENV.CVT. INTERNET THAILAND IT CITY OHTL PRECIOUS SHIPPING TRINITY WATTHANA ADVANCED INFO SER. MFC-NICHADA THANI PR.FD. UNION PIONEER FABRIC KIM ENG SECS. SIAM COMMERCIAL SAMAGGI UNION PLASTIC CAPITAL NOMURA SECS. SE-EDUCATION KHON KAEN SUGAR EASTERN PRINTING ASIASOFT THAI INDUSTRIAL FD.1 SEAFRESH INDUSTRY CPN RETAIL GW.LH.PR.FD. CP ALL GRAND CANAL LAND SIAM CITY CEMENT THAI POLY ACRYLIC

2006 91.46 50 50 66.67 89.18 25.02 71.43 98.13 99.84 96.94 88.78 88.24 75.3 80.54 74.63 50 0 0 95.43 100 94.2 83.33 67.57 85.21 77.52

2007 92.92 37.5 50 69.39 89.18 56.11 33.78 98.13 99.84 98.68 88 86.75 75.3 83.92 98.25 40.74 0 0 69.83 100 93.76 83.33 69.45 99.64 77.52

2008 93.75 100 50 100 89.18 58.95 0 98.13 99.84 98.68 84.21 0 93.63 87.21 83.33 40 78.85 91.3 69.83 100 87.61 81.08 93.76 79.77 77.52

2009 98.48 100 100 100 94.23 61.43 0 98.13 99.84 98.23 99.21 0 93.63 98.96 98.51 25.86 92.86 96.67 95.89 95.35 87.61 72.07 93.76 85.87 89.29

2010 100 100 100 100 100 100 100 99.86 99.84 99.3 99.21 99.01 99.01 98.96 98.51 98.04 97.92 96.78 95.89 95.35 94.89 94.59 93.76 93.7 93.46

Assoc Prof. Dr. Pornanong Budsaratragoon

Dividend Payout Ratio Name/Year PATUM RICE MILL & GRNY. UNITED PALM OIL IND. MCOT DHIPAYA INSURANCE SUB SRI THAI SHIN EASTERN COML.LEASING KGHSG.TRDG.FRZ.FOOD SIAM MAKRO FANCY WOOD INDUSTRIES LAGUNA RESORTS & HOTELS MAJOR CINEPLEX GROUP MFC ASSET MANAGEMENT KGI SECURITIES MINOR INTERNATIONAL S & P SYNDICATE BANGSAPHAN BARMILL PATO CHEMICAL IND. DYNASTY CERAMIC LAND AND HOUSES THAITHEPAROS MODERNFORM GROUP CHIANGMAI FRZ.FOODS THAI OPTICAL GROUP VIBHAVADI MEDICAL

2006 98.81 62.63 73.06 68.97 90.48 90.59 49.02 59.9 59.65 0 19.03 84.78 82.19 77.78 31.72 77.52 86.96 91.12 69.78 82.05 95.94 69.93 80.88 45.83 74.83

2007 58.14 93.9 79.63 69.83 92 90.59 0 58.65 97.58 0 26.42 73.94 72.92 70.59 28.46 85.71 86.96 82.9 70.42 100 82.11 80 100 58.82 84.51

2008 92.59 97.75 89.39 60.44 81.08 90.59 82.64 59.91 93.12 0 33.23 90.14 72.92 83.33 40.68 100 86.96 93.05 76.69 75 83.97 70.65 80.49 73.53 80

2009 92.59 94.34 89.11 65.57 31.91 90.59 86.58 63.69 90.41 88.89 62.5 89.74 84.16 83.33 53.69 89.29 80 84.82 85.25 87.18 84.59 80.21 90.91 89.29 84.21

2010 92.59 92.11 91.79 91.62 90.91 90.59 90.36 90.08 89.29 88.89 88.44 87.91 87.5 86.84 86.57 85.75 85.71 85.5 85.25 85 84.59 84.23 83.33 83.33 83.33

Assoc Prof. Dr. Pornanong Budsaratragoon

Types of Stock (contd)

Growth Stocks: stocks that experience high Tech Stocks: stocks representing the Speculative Stocks: stocks that rates of growth in operations and earnings offer potential for substantial price technology sector of the market appreciation, usually due to some Have sustained rate of growth in Range from speculative stocks of special situation such as a new earnings above general market small companies that have never product Investors expect higher price shown a profit to blue chip stocks of Companies lack sustained appreciation due to increasing earnings large companies that are growth Riskier investment because price may track record of business and fall if earnings growth cannot be oriented financial success maintained Earnings may be uncertain or Potential for attractive returns May include blue chip stocks as well as highly unstable speculative stocks Considerable risk and volatility Potential for substantial price Typically pay little or no dividends appreciation Difficult to put value on due to erratic or no earnings Stock price subject to wide swings up and down in value Cyclical Stocks: stocks whose earnings and overall market performance are closely linked to the general state of the economy Stock price tends to move up and down with the business cycle Tend to do well when economy is growing, especially in early stages of economic recovery Tend to do poorly in slowing economy Best for investors willing to move in and out of market as economy changes Defensive Stocks: stocks that tend to hold their value, and even do well, when the economy starts to falter Stock price remains stable or increases when general economy is slowing Products are staples that people use in good times and bad times, such as electricity, beverages, foods and drugs Gold stocks are a form of defensive stock Best for aggressive investors looking for parking place during slow economy

Assoc Prof. Dr. Pornanong Budsaratragoon

14

Types of Stock
Small-Cap Stocks: small companies with a small number of market capitalizations
Provide opportunity for above-average returns (or losses) Usually do not have a financial track record Earnings tend to grow in spurts and can have dramatic impact on stock price Usually not widelytraded; liquidity is issue Initial Public Offerings (IPOs)

Mid-Cap Stocks: medium-sized companies with an average number of market capitalizations

Provide opportunity for greater capital appreciation than Large-Cap stocks, but less price volatility than Small-Cap stocks Usually have long-term track records for profits and stock valuation Baby Blues offer same characteristics of Blue Chip stocks except size

Large-Cap Stocks: large companies usually include in SET50

Number of companies is smaller, but account for 80% to 90% of the total market value Bigger is not necessarily better Tend to lag behind small-cap and midcap stocks, but typically have less volatility

Assoc Prof. Dr. Pornanong Budsaratragoon

15

What is Security Analysis?

(Intrinsic value)

(
Assoc Prof. Dr. Pornanong Budsaratragoon

)
16

< = >

Assoc Prof. Dr. Pornanong Budsaratragoon

17

 Present Value of Dividends (DDM) Present Value of Operating Cash Flow Present Value of Free Cash Flow
g

Price/Earnings Ratio (PE) Price/Cash flow ratio (P/CF) Price/Book Value Ratio (P/BV) Price/Sales Ratio (P/S)

P!
t !1

CFt
t

(1  k )^

P P ! * E1 E
18

Assoc Prof. Dr. Pornanong Budsaratragoon

Top Down Approach to Traditional Security Analysis

Step 1: Economic Analysis
State of overall economy

Step 2: Industry Analysis

Outlook for specific industry Level of competition in industry

Step 3: Fundamental Analysis

Financial condition of specific company Historical behavior of specific companys stock

Assoc Prof. Dr. Pornanong Budsaratragoon

19

Why is a Three-Step Valuation Approach

1. General economic influences Decide how to allocate investment funds among countries, and within countries to bonds, stocks, and cash 2. Industry influences Determine which industries will prosper and which industries will suffer on a global basis and within countries 3. Company analysis Determine which companies in the selected industries will prosper and which stocks are undervalued

Does the Three-Step Process Work?

Studies indicate that most changes in an individual firms earnings can be attributed to changes in aggregate corporate earnings and changes in the firms industry Studies have found a relationship between aggregate stock prices and various economic series such as employment, income, or production

Assoc Prof. Dr. Pornanong Budsaratragoon

20

Efficient Market Hypothesis

Efficient Market: the concept that the market is so efficient in processing new information that securities trade very close to or at their correct values at all times Efficient market advocates believe:
Securities are rarely substantially mispriced in the marketplace No security analysis is capable of finding mispriced securities more frequently than using random chance

Assoc Prof. Dr. Pornanong Budsaratragoon

21

Levels of Efficient Markets

Weak Form
Past data on stock prices are of no use in predicting future stock price changes Everything is random Should simply use a buy-and-hold strategy

Semi-strong Form
Abnormally large profits cannot be consistently earned using public information Any price anomalies are quickly found out and the stock market adjusts

Strong Form
There is no information, public or private, that allows investors to consistently earn abnormally high profits

Assoc Prof. Dr. Pornanong Budsaratragoon

22

Market Anomalies
Calendar Effects
Stocks returns may be closely tied to the time of year or time of week Questionable if really provide opportunity Examples: January effect, weekend effect

Small-Firm Effect
Size of a firm impacts stock returns Small firms may offer higher returns than larger firms, even after adjusting for risk

Earnings Announcements
Stock price adjustments may continue after earnings adjustments have been announced Unusually good quarterly earnings reports may signal buying opportunity

P/E Effect
Uses P/E ratio to value stocks Low P/E stocks may outperform high P/E stocks, even after adjusting for risk

Assoc Prof. Dr. Pornanong Budsaratragoon

23

Who Needs Security Analysis in an Efficient Market?

Fundamental analysis is still important because:
All of the people doing fundamental analysis is the reason the market is efficient Financial markets may not be perfectly efficient Pricing errors are inevitable

Assoc Prof. Dr. Pornanong Budsaratragoon

24

Step 1: Economic Analysis

A study of general economic conditions that is used in the valuation of common stock. Stock prices are heavily influenced by the state of the economy and by economic events. Economy Company Profits Stock Prices

Assoc Prof. Dr. Pornanong Budsaratragoon

25

Business Cycle
Phase Initial recovery Economy Inflation still declining F &M policy Stimulatory fiscal policy Confidence Starts to rebound Capital Market Short rate low/declining bond yields bottoming/stock prices strongly rise Short rate moving/ bond yields stable to up slightly/stock prices trending upwards Short rate and bond yields rising//stock prices topping out, often volatile Short rate peaking/ bond yields topping out and starting to decline/stock prices decline Short rate declining/ bond yields dropping/stock prices bottoming and then start to rise

Early upswing

Healthy economic growth: Inflation remains low

Increasing

Late upswing

Inflation gradually picks up

Policy becomes restrictive

Boom

Slowdown

Inflation continues to accelerate; Inventory correction begins

Drops

Recession

Production declines; Inflation peaks

Weak

Assoc Prof. Dr. Pornanong Budsaratragoon

26

(Important Economic Series) (Government Policy)

product : GDP) (Gross domestic (Government

policy) policy) side policy)

(Fiscal (Monetary (Supply

spending : G)

rate)

/ ( Public debt) (Unemployment (Inflation rate) (Interest rate) (Money supply : M) (Sentiment ) (Credit rating) 27

Assoc Prof. Dr. Pornanong Budsaratragoon

(Growth in industrial production)

term structure) (Oil price index) (Exchange rate) ( Stock price index)

( Change in

Assoc Prof. Dr. Pornanong Budsaratragoon

28

(Cyclical Indicator Approach to Forecasting ( Leading the Economy) (Coincident (Lagging

Indicators) Indicators) Indicator )

economy

global

Assoc Prof. Dr. Pornanong Budsaratragoon

29

Assoc Prof. Dr. Pornanong Budsaratragoon

100

110

120

130

140

80 .. 2536 . . 2536 . . 2536 . . 2537 . . 2537 .. 2538 .. 2538 .. 2538 .. 2539 .. 2539 .. 2540 .. 2540 .. 2541 . . 2541 . . 2541 . . 2542 . . 2542 .. 2543 .. 2543 .. 2543 .. 2544 .. 2544 .. 2545 .. 2545 .. 2546 . . 2546 . . 2546 . . 2547 . . 2547 .. 2548 .. 2548 .. 2548 .. 2549 .. 2549 .. 2550 .. 2550 .. 2551 . . 2551 . . 2551 . . 2552 . . 2552 .. 2553 .. 2553 .. 2553 .. 2554

90

Assoc Prof. Dr. Pornanong Budsaratragoon

100

105

110

115

120

125

90 .. 2536 .. 2536 . . 2536 .. 2537 .. 2537 . . 2537 .. 2538 .. 2538 . . 2538 .. 2539 .. 2539 . . 2539 .. 2540 .. 2540 . . 2540 .. 2541 .. 2541 . . 2541 .. 2542 .. 2542 . . 2542 .. 2543 .. 2543 . . 2543 .. 2544 .. 2544 . . 2544 .. 2545 .. 2545 . . 2545 .. 2546 .. 2546 . . 2546 .. 2547 .. 2547 . . 2547 .. 2548 .. 2548 . . 2548 .. 2549 .. 2549 . . 2549 .. 2550 .. 2550 . . 2550 .. 2551 .. 2551 . . 2551 .. 2552 .. 2552 . . 2552 .. 2553 .. 2553 . . 2553 .. 2554 .. 2554

95

(Demand)

(Supply) -

Defensive Industry

Cyclical Industry

Assoc Prof. Dr. Pornanong Budsaratragoon

32

A Crisis comes once every 5-10 years

Dot.Com Crisis Asia Crisis Sub Prime Crisis 9/11 Sovereign Debt Crisis

S&L Crisis

S&L Crisis

??? Crisis

1980

1990

1997

2000

2006

2008 2009 2010

2xxx

Bubbles always begin with lots of cash looking for better returns and always end in tears. The simple way to keep the money machine moving to the goal of better return is to lower lending standard.

Assoc Prof. Dr. Pornanong Budsaratragoon

33

Other Key Economic Measures

Economic Measure
Index of Leading Indicators Personal Income Retail Sales Money Supply Consumer Prices/ Producer Prices Employment Housing Starts

What It Tracks
Predicts direction of GDP Consumer buying habits Consumer attitudes Growth of economy & inflation Inflation Business Production Availability & cost of money

Assoc Prof. Dr. Pornanong Budsaratragoon

34

Other Key Economic Variables

Economic Variable
Inflation

Change
Increase Decrease

Stock Market Effect

Corporate Profits

Increase Decrease

Unemployment

Increase Decrease

Federal Budget

Surplus Deficit

Assoc Prof. Dr. Pornanong Budsaratragoon

35

Other Key EconomicVariables (contd)

Economic Variable Change
Currency value Strong Weak Interest Rates Increasing Decreasing Moderate Growth Rapid Growth
Assoc Prof. Dr. Pornanong Budsaratragoon 36

Stock Market Effect

investments / trade investments / trade

Money Supply

Sources for Economic Outlook

Wall Street Journal / Fortune, Business Week, Forbes / &W Government Publications Brokerage firm/commercial bank reports , Nations ,M

Assoc Prof. Dr. Pornanong Budsaratragoon

37

How Do We Use the Economic Outlook?

Use it to identify areas for additional research
What industries will benefit? What industries will be hurt?

Stock prices usually change before the actual forecasted changes become apparent in the economy. Stock price trends are another leading indicator often used to help predict the direction of the economy itself.

Use it to evaluate individual companies

Will sales/profits go up or down?

Assoc Prof. Dr. Pornanong Budsaratragoon

38

Example of Forecasting Market Models

Use the relative values of assets and markets to identify if a market is over or under value :Fed model ratio = S&P earnings yield/Treasury yield If Fed model ratio>1, equities are undervalued :The Yardeni model >0; markets is under price E1/ P0 = Yb - d(LTEG) E1/ P0 Expected market earning yield Yb Yield on A-rated bonds d Weighting factor(0.10) LTEG 5 year growth forecast
Assoc Prof. Dr. Pornanong Budsaratragoon 39

Step 2: Industry Analysis

Evaluate the competitive position of a particular industry in relation to other industries Looking for new opportunities & growth potential Identify companies within the industry that look promising Looking for strong market positions, pricing leadership, economies of scale, etc.

Issues that Affect an Industry

What is the nature of the industry? Is the industry regulated? What role does labor play in the industry? How important are technological developments? Which economic forces have the most impact on the industry (e.g., interest rates, foreign trade)? What are the important financial and operating considerations (e.g., access to capital)?

Assoc Prof. Dr. Pornanong Budsaratragoon

40

Growth Cycle Stages and Investments

Growth Cycle reflects the vitality of an industry or a company over time. Initial development: industry is new and risks are very high Rapid expansion: product acceptance is growing and investors become very interested Mature growth: expansion comes from growth in the economy and returns are more predictable Stability or decline: demand for product is diminishing and investors avoid this stage
Assoc Prof. Dr. Pornanong Budsaratragoon 41

Assoc Prof. Dr. Pornanong Budsaratragoon

42

Step 3: Fundamental Analysis

Evaluate the financial condition and operating results of a specific company
Competitive position Composition and growth in sales Profit margins and dynamics of earnings Asset mix (i.e. cash balance, inventory, accounts receivable, fixed assets) Financing mix ( i.e. debt, stock)

The value of a stock is influenced by the financial performance of the company that issued the stock.
Assoc Prof. Dr. Pornanong Budsaratragoon 43