UD Osher – OLLIudel.edu/~diyinvst/SC2_Spring20_Class2.pdf · Technical analysis is the study of market action primarily through the use of charts for the purpose of forecasting

How to read a Stock chart

UD Osher – OLLISpring 2020

Rajeev A. VaidyaGuy Werner

February 20 Rajeev Vaidya 1

Class website

Class website http://udel.edu/~diyinvst Class documents posted each week before class. Stay on

the website till the end of the semester. No printed handouts in class


http://udel.edu/%7Ediyinvst

Disclaimer in plain language

Opinions are like noses, everyone has one !

You are going to see Guy’s and mine in this course !!

We are simply sharing our perspective.

This is not investment advice or recommendation.

Guy and I are not a financial advisors.

This course is for educational purposes only.

Form your own opinion, make your own investment decisions.

Disclaimer – in plain language:



Combining Technical Analysis and Fundamental Analysis to make Investment Decisions

Today’s Class

Technical analysis is the study of market action primarily through the use of charts for the purpose of forecasting future price trends.

John J Murphy

Fundamental Analysis? – Macroeconomic, Market, Industry and Enterprise information that drives demand and supply – purpose estimate enterprise value


Questions

Company A – Makes accessories for home desktop computers. Company B – Makes plug in device for the back of a TV that

eliminates the need for cable.

Grocery store with two loaves of bread Brand 1 – Half baked in Country x, Frozen, shipped to the

US, thawed and baked – on the shelf Brand 2 – Local bakery, baked yesterday, packaged – on

the shelf

Company A makes plastic tableware for picnics. Company B makes generic drugs Company C makes pacemakers

Company A1, B1 and C1 – make Company A, B and C’s products 10% cheaper.

Rajeev Vaidya 6February 20

• Which company is in a growth market?

• Which one do you want? Why?

• Which company has the biggest threat from competition?

• Which company will need to lower its price to compete?

Indicators of Quality

A bad stock is not worth owning at any price!!

First Investment Decision: QualityIs this a good company to own?

Good growth market. Demonstrated sales, earnings & cash flow growth. Good Moat – Pricing power. Competitive advantage vs. peers. Reasonable debt. High profit margins. High return on Invested Capital and Equity. Does it pay a dividend – what is the yield and has the dividend grown consistently Good Management Team.

Typically we are looking for leaders in an industry group. It is very important to understand a company relative to its peers in an

industry


Investment thesis

The industry leader XYZ is a good investment because: Reason 1 Reason 2 Reason 3

Risks to this investment are Risk 1 Risk 2

Come back to re-examine this thesis frequently


Price vs. Value

I want to sell my car for $30,000 – Want to buy it?

The store wants to sell a loaf of sliced white bread for $6 – Want to buy it?

Rajeev Vaidya 9February 20

Four key Questions & Two ways to answer

1. Is the stock undervalued?2. If so, what could the price rise to?3. Where could I exit and minimize losses, if my analysis is wrong?4. Can the price get to the future projection?

Fundamental Analysis Technical Analysis


Class structure Minimum essential Powerpoint presentation More looking at charts together to understand concepts More discussion

Let’s go ride the bicycle

Less charts & lecture – more live action & discussion

=


p/e ratio dividend yields p/book value p/cash flow ratio p/sales ratio

Fundamental AnalysisPrice vs. Value? Future Potential?

Measures of value Benchmarks of value

vs. history vs. industry

peers vs. market

Sources of information• Value Line sheet• CFRA report• Ford Equity Report

• What is the right range for these valuation ratios?• Based on current Sales, EPS, Cash flow, what

should the stock be valued at?• At today’s price is the stock undervalued or over

valued compared to its history?• How do the valuation ratios compare to the market

and to its peers in the industry?

What will the future value be for:• Sales, EPS, Cash flow

Based on that what could the future value be?

Future High Future AveragePrice projection EPS Hi P/E ratio

Projected EPS sales growth EPS growth

P/E ratio history Expected high P/E

= X

Sources of information• Value Line sheet – future price projection• CFRA report – 12 month price target• Analyst reports• MorningStar


Fundamental AnalysisValue: Is this a good price to buy at?

Priceabovevalue

Pricebelowvalue

HighQuality

Company

Not

The buying decision

BuyWaitto Buy

WalkShort ?

Fundamental analysis – Value vs. Price today


Appreciation Potential

How does the potential future value compare to today price?

Technical Analysis Has the market supported the growth hypothesis in the past? Uptrend? – Short, Intermediate, Long

Is the stock near a support level? Support levels

Offer downside protection Offer a place where prices will slow down in a decline If penetrated by a downtrend can signify further downside.

Support levels are a good marker for Rethinking a buy decision Stop orders

Resistance levels above today’s price. Can the stock reach the calculated / project future price without hitting resistance? Should you buy some now and buy more after the next resistance level is exceeded

successfully?

Chart patterns – do they suggest a potential upward move? By how much?


Price

Planned Exit Price

Estimated High Price

Current Price

Upside = Projected Hi - Current

Downside = Current - Exit

U/D Ratio =UpsideDownside

Buy with Good Upside Downside Ratio


Buy with good projected returnsPrice

Estimated Low Price

Estimated High Price

Current Price

% gain = Hi price

Current priceX 100 - 100

Investments can generate returns in two ways: Dividends Capital gains - Stock price appreciation

Time is a factor – Capital gains per year (CAGR) Total return per year = CAP Gains CAGR +

dividend yield 15% per year – doubles money in 5 years Total return should be more than projected

market average – source Value Line


Disciplined buying

This is a good investment because …….

This is a good price / entry point to buy because …….

Investment thesis: Entry Point:

If I am right, I will make gains by selling the stock @ …….

If I am wrong, I will limit losses by exiting the position @….

Exit Rules:

I can buy XXX shares for my portfolio

Position Size:


Next Classes


Class 3 – Fed 26th

Uses of Charts in Investments Decisions based on Investment Objectives

Class 4 – March 4th

First Open Mike – Tid-Bit corner – get ready How do you use charts in your investment decisions What has worked for you and what has not?

Thanks !!

Happy Investing !!

My EMail [email protected]

Class website http://udel.edu/~diyinvst


Documents

UD Osher – OLLIudel.edu/~diyinvst/SC2_Spring20_Class2.pdf · Technical analysis is the study of market action primarily through the use of charts for the purpose of forecasting