Escolar Documentos
Profissional Documentos
Cultura Documentos
Security Valuation
&
EIC Analysis
(Part 2)
Lecture Presentation Software
to accompany
peak
trough
Consumer
Consumer peak Staples Excel
Durables
Excel
Capital
trough Goods Excel
Financial
Stocks Excel
• Inflation
• Interest rates
• International economics
• Consumer sentiment
– All give clues about when to rotate
portfolio
Copyright © 2000 by Harcourt, Inc. All rights reserved
Structural Economic Changes
and Alternative Industries
• Social Influences
– Demographics
– Lifestyles
• Technology
• Politics and regulations
– Economic reasoning
– Fairness
– Regulatory changes affect numerous industries
– Regulations affect international commerce
Copyright © 2000 by Harcourt, Inc. All rights reserved
Theme Investing
• Based on identifying emerging trends, such as:
– Technology
– Aging population
– Freer trade and developing-country growth
• Identification of themes provides insight into
industry analysis
• Find a story to describe your vision of the future,
then invest in companies whose businesses are
consistent with that story
– Peter Lynch question – what is the story for your stock?
Copyright © 2000 by Harcourt, Inc. All rights reserved
Earnings and Valuation
• Valuation of company will depend upon its
earnings
• Earnings of company are dependent upon (and a
subset of) the earnings of the industry
• Level of earnings for the industry are a function
of:
– Industry sales
– Degree of competition within industry (impacts profit
margins – ability of company to realize profits from
sales)
• Pioneering development
• Rapidly accelerating industry
growth
• Mature industry growth
• Stabilization and market maturity
• Deceleration of growth and decline
1. Slow growers
2. Stalwart
3. Fast growers
4. Cyclicals
5. Turnarounds
6. Asset plays
Copyright © 2000 by Harcourt, Inc. All rights reserved
Company and Common Stock Valuation
ROE
Rk
G
rk
Copyright © 2000 by Harcourt, Inc. All rights reserved
Growth Duration
• Evaluate the high P/E ratio by relating P/E ratio to
the firm’s rate and duration of growth
• P/E is function of
– expected rate of growth of earnings per share
– stock’s required rate of return
– firm’s dividend-payout ratio
• Use the ratio of P/E’s, related to growth and
dividend rates, to infer the market’s implied
growth duration:
Pg (0)/E g (0) 1 G g Dg
ln T ln
PB 0 / E B (0) 1 G B DB
P/E g
ln
T P/E B
1 G g Dg
ln
1 G B DB
Copyright © 2000 by Harcourt, Inc. All rights reserved
Growth Duration
T
1 G g Dg
P/E g P/E B
1 G B DB