GI Beginners’ Series: Class III

November 30, 2007

Agenda

Review of P/E Fundamental Analysis

Revenue Growth, Book Value ROE, Debt/Equity Ratio PEG Ratio

Types of Orders Limit vs. Market Stop Order Bid vs. Ask

Price-to-Earnings Ratio

How much, per $ of earnings, investors are willing to pay for each share

P/E Ratio Based on latest earnings report

Forward P/E Ratio Based on forecasted earnings

Price-to-Earnings Ratio

Implications

Growth Stock High P/E Ratio

Forward P/E > P/E Lower earnings forecasted

Forward P/E < P/E Higher earnings forecasted

Fundamental Analysis

Focus on Financial Statements

Use ratios to determine true value of a firm

Measures are relative to the firm’s industry

Champion Fundamentalists: Warren Buffet Peter Lynch Benjamin Graham

Fundamental Analysis

P/E Ratio

Revenue Growth from Period to Period Indicates expansion or contraction of business

Book Value aka Shareholders’ Equity Equals Firm’s Assets minus its Liabilities Stock Price > BV per share (generally) Lower Stock Price relative to BV better value

Fundamental Analysis

Return on Equity Net Income divided by Book Value Indicates how well firm is able to generate profits

from shareholders’ equity

Debt/Equity Ratio Total Debt divided by Book Value Indicates how much of the firm is financed by debt Take Corporate Finance (BUS 320) for further

examination of the dynamics of debt

Fundamental Analysis

Price/Earnings Growth Ratio (PEG) P/E Ratio divided by Expected Growth Used to dig deeper into P/E Ratio PEG < 1 Firm is “cheap” PEG > 1 Firm is “overvalued”

Example: Firm ABC Price=$100 EPS=$10 Expected Growth=12% P/E = 10 PEG = 10/12 = 0.83

Beta

Represents the relationship between an index and an individual stock

Calculated using regressionTypical Index: S&P 500Can be positive, negative, or zeroNot a perfect predictor of stock price changes

BetaImplications High Beta ( |Beta| > 1 )

Volatile stock Risky Low Beta ( |Beta| < 1 )

Conservative stock Safe Zero Beta

No direct relationship between Index and Stock Negative Beta

Stock moves in opposite direction of Index

Beta

Example

Stock ABC: Beta = 1.3

S&P 500: Up 1.0% for the day

ABC likely to increase by 1.3% that day

Stock XYZ: Beta = -0.6

S&P 500: Down 2.3% for the day

XYZ likely to increase by 1.38% that day

Types of Orders

Market vs. Limit Order Market Order: Execute trade immediately Limit Order: Execute trade as long as price is

within range Buying: Limit Price = Maximum Price to be paid Selling: Limit Price = Minimum Price to be received

Stop Order Trade becomes active once Stop level is reached Typically used to prevent losses Can also be used on the buy-side

Class IV

Technical Analysis

Stock Screener

Trading Strategies Diversification Margin