Fundamental analysis Main analysis of assets nThree different approaches: qFundamental analysis (USA: 85 %; GB: 75 %) nanalysis of date (accounting, economic, global, etc.) qTechnical analysis (USA: 13 %; GB: 13%) nAnalysis of charts qPsychological analysis (least then 5 %) nAnalysis of psychological factors n Main analysis of assets nMain objective of these three analysis qWhich security is nUnderestimate nOverestimate nCorrectly estimate? qOver- and underestimate securities their nintrinsic value (value determined by analysis) is different from spot market value. qNext objective is finding answers to questions: nWhy is particular security over-, under- or correctly estimate. nAnd why we can expect decline or increase of particular security price. Fundamental analysis nAnalysis base on usage of qCompany data (expected and historical profits, dividend payments, etc.) and qbasic economic, political, social, geographic factors. nThree levels qEconomy (market) fundamental analysis qIndustry fundamental analysis qCompany fundamental analysis (analysis of particular securities) nMain objective the most exact answer to question: qWhich stock is over-, under- or correctly estimate. q Fundamental analysis nFundamental analysis is basic tool for investment strategy called Stock-Picking: qLooking for underestimate stocks, purchase of them because it is expected rise of their prices in the future. nSources of fundamental analysis qAccounting and statistic date qPrognoses of further development of particular ncompany nindustry neconomy qKey question: efficiency of the market n q Form of effectiveness nI Weak form of effectiveness nII Semi-strong form of effectiveness nIII Strong form of effectiveness Theory of effective market nIn effective market security prices reflect all information that are known and are significant. nIn this market do not exist over- or underestimate securities. nIn effective market any analysis of securities works. nAccording to speed of capital market reaction exist three levels of effective market. Weak form of effectiveness nPrices of securities absorb immediately all historical information nIn this case there is no reason for prediction of future security prices from historical development. nThere is not expected any future reaction related with historical information. nTechnical analysis is usable only if it based on current market date. nChanges in security prices in weak effective market are independent and random as well information that they immediately reacted. Semi-strong form of effectiveness nPrices of securities absorb immediately all historical and current information. nOnly insider information are not absorbed by security prices and it is only way how to gain higher revenue in this market. Strong form of effectiveness nPrices of securities absorb immediately all historical, current and other information. nPrice of security in this effective market represents objective value. n Anomaly breaks effectiveness of market nThe January Effect qStocks of small companies qIn January especially in first two weeks over average growth in prices of these companies. nReasons qA general increase in stock prices during the month of January. qThis rally is generally attributed to an increase in buying, which follows the drop in price that typically happens in December when investors, seeking to create tax losses to offset capital gains, prompt a sell-off. Anomaly breaks effectiveness of market nThe Day of the Week Effect qRefers to the tendency of stocks to exhibit relatively large returns on Fridays compared to those on Mondays. qThis is a particularly puzzling anomaly because, as Monday returns span three days, if anything, one would expect returns on a Monday to be higher than returns for other days of the week due to the longer period and the greater risk. qThis effect is explained as a reaction to important negative information announced on Friday or psychological motions of investors. n Anomaly breaks effectiveness of market nThe Neglected Firms Effect qNeglected firms are usually the smaller firms that analysts tend to ignore. qThe abnormally high return exhibited by neglected firms may also be due to the lower liquidity or higher risks associated with the stock. nAccording to mentioned abnormal events we can say that capital market are ineffective. n Economy (market) fundamental analysis nThe objective: qIdentify, investigate and evaluate of whole economy factors that have an influence to value of particular security. qFor description of situation and development in particular market are used nMacroeconomics aggregates qInterest rate, inflation rate, GDP, movements of capital, monetary aggregates, etc. nHistorical analysis of particular global aggregates and capital market were founded out relations that can be used as a initial point for prognosis of future development. Main relations between aggregates nNegative relation between development of interest rate and stock exchange rate. qCorrelation rate about -0,85 qIf interest rates rise up the exchange rates decline and vice versa. qSeveral explication: nCompetitive relations between bonds and securities qIn phase of rising interest rate there is decline in expected revenue from securities and growth of expected revenues from bonds. qInvestors move from security to bond market. qIn stock market – decline of demand and subsequently decline in stock prices qIn bond market – increase of demand and subsequently increase of prices and vice versa. nThe highest growth of bond price is at the end of economic cycle nThe significant decline of bond price is typical for the economic bottom. q Main relations between aggregates nNegative relation between inflation rate and stock exchange rate. qThe growth of inflation rate is followed by decline of stock prices. nPositive relation between development of stock exchange rates and real economic output. qBUT on short and medium time-term (3 - 9 months): securities fulfill function of leading indicator in relation to real economic output. Main relations between aggregates nWhy Leading Indicator? qInvestors make decision a business on the basis of principle of expectation. qAll indicators that are observed by investors have an expected character and also fulfill function of Leading Indicator to economic output (expected profit and expected profit margin). nIn long-time period (decades) there is continues growth of economic output and subsequent growth of stock prices. This is motivated by growing level of living and economic level. Main relations between aggregates nRelation between money supply and stock exchange rate. qAlso leading indicator the growth of the money supply is followed by growth of stock exchange rate. nRelation between state budget and stock markets qGovernment support of income part of budget (higher taxation) and negative impact in stock markets (limited resources for dividends, reinvesting, etc.) nRelations between stock exchange rate and qMovements of capital qCurrency exchange rate qPolitical or economical shocks nPolitical shocks qUnexpected demissions of government qScandals related with political members (demission of Nixon in 1974) qTerroristical attacs qWars, etc q Main group of factors nAll factors that are used in fundamental analysis can be divided into three main groups qLeading factors – to prognoses of economic development, move in advance to economic development. qCoincident factors nGive an evidence about running of economic cycle. They confirm particular development trend or change. qLagging factors nWith delay confirm past development of economic cycle. nCan be used for analysis of mutual relations Leading factors Coincident factors Lagging factors Monetary supply Total value of wage for employees and non-agriculture workers Average duration of unemployment Exchange rates Income-transfer payments Wage to unit of output Changes of material prices Total value of industry production Change in consumer price index New buildings permissions Sales for goods Order of new machinery and equipment Order of resources Average number of worker hours per week Changes in number of credits Development of cash-flow Industry fundamental analysis (FA) nMain objective qIdentification of sector characteristic factors, lines or specifics of sector where particular company makes a business. qThe object is nexplored, analyzed and predicted development of these specific sector factors and nfind out the impact of these factors in instinctive value of company stock. nImportant sectors factor are the following qLife cycle of industry qMarket structure of sector (monopoly, oligopoly, etc.) qRole of regulatory body q Life Cycle of Industry nIt is a cycle of particular evolutionary phases from rise to expire of industry. nIn particular phases are different developments of qProfits qRevenues or qSecurity exchange rates Life Cycle of Industry nThree main phases qPioneer phase qPhase of development qPhase of stabilization n q q Life Cycle of Industry nPioneer phase qIt starts of life cycle of industry qCharacteristics nStrong rise of demand about company products nThe demand is fueled by fact that qit is new or updated product attractive for consumer nCompany is able to gets high (often above an average) profit nThis profit is a lure for competitors qA lot of new companies entrance during this phase in the market but because of strong competition do not all of them survive and expire in the short time period. nPosition of particular subject is weak, profits, revenues, instinctive value and exchange rates of stocks fluctuates very strongly. Life Cycle of Industry nInvestment in industry in pioneer phases promise high revenue but are related with high risk. qAt the end of the 1970’s pioneer phase of personal computers. qIn the 1990’s pioneer phase of cell phones. Life Cycle of Industry nPhase of development qGeneral stabilization of industry. qCompanies that survival pioneer phases build their market position, growth and expand. qDeclining in fluctuation of revenues, profits and exchange rate. qHigh level of competition in industry, it has impact in prices that are decreasing. qLevel of competition can be negatively affected by government intervention. qDemand about production is relatively high and profits, revenues and exchange rates are still rising but slower than in the pioneer phase. qRisk related with investment in this companies is lower but also revenues form investments are lower. q Life Cycle of Industry nPhase of stabilization qFinal phases of live cycle. qHigh stability in development of prices, revenues or exchange stock rates. qDominant role played by established, strong and stable companies. qAverage profit rate in this industry is declining and some companies leave of industry. qNext development of particular industry by two ways: nContinued decline in demand, product prices, or nImportant revolutionary innovation that bring resuscitation of industry and subsequent passing of pioneer, development and stabilization phases. nIn order the company was able to implement resuscitation is important to have qCapital, new technology and capacity to produce new product with the most lowest costs, etc. Sensitivity of industry to economy cycle nAccording to sensitivity of profits, revenues and exchange rates to economic cycle can be all industries divided into 3 branches. qCyclic industry nDevelopment of profit, revenues and security exchange rates imitates development of economic cycle. nThe higher profit these industries get in conjuncture the lowest in recession. nTypical industries with non-essential goods (luxury goods) their consumption can be postponed in the future when economic situation will be more favorable. nExamples: building industry, car industry, hotels, clothing industry, etc. q q q n Sensitivity of industry to economy cycle qNeutral industry nIn these industries there is no possible to identify relation between their profits and economic development. nNeutral industries produce essential goods. nExamples: food industry, beverage industry, newspapers, pharmaceutical industry, etc. qAnti-cycle industry nThese industries get the higher revenues in the time of recession. Typical examples are industries that offer cheaper substitutes of expensive goods of cyclical industry. nExamples in the in the 1970’s qCable television as a alternative of expensive travelling qIn the half of the 1990’s video-tape library alternative to cinema Sensitivity of stocks to economy cycle nAlso stocks can be divided according to their exchange rate movements in particular part of economic cycle. qCycling stocks nThe most volatile nThe higher revenue at the beginning or in the first half of conjuncture nThe higher decline at the beginning or in the middle of recession. qAggressive stocks that rise up or decrease more then the market as a whole. nExamples qStocks of §companies producing goods of long-term consumptions §mining companies §energetic companies, etc q Sensitivity of industry to economy cycle nDefensive stocks qFor these stocks it typical that the higher revenues get in last phase of conjuncture. qBut reaction of these stocks is much less intensive than in cyclical stocks nThe changes in stock prices are in lower range than changes of whole economy qExamples, companies produce nSome goods of long term consumption nInitial goods nPetroleum companies q Sensitivity of industry to economy cycle nGrowth stocks qStocks that get above-average profits and revenues. qHigh level of intrinsic value of these stocks qThese securities are combination of growth and defensive characteristics qAbove-average profits only for limited time because of ncompetitors, nlimited demand or ndating of product. qStock are marketed as growth stocks are only for limited time qExamples nIn the history qPharmaceutical industry qColor receiver qComputer industry, etc. Company fundamental analysis nAnalysis of particular stocks nMain objective qfind out intrinsic value of particular stock nIntrinsic value is compared with spot price and stocks are categorized as a qUnderestimate qCorrectly estimate qOr overestimate nAccording this is formulated investment recommendation – buy, sell, hold. Company fundamental analysis nIntrinsic value – key factor of fundamental analysis nIntrinsic value qright value for which stock should be traded in the market. nIntrinsic value reflects qall important company characteristics (company size, its life cycle, mindedness, profitability, etc.) qPerspectives of company in the future qAll industry or global factors Company fundamental analysis nSpot market price does not respond with intrinsic value. qSometime is over and sometime is under intrinsic value. The exchange rate volatile about intrinsic value. qIn the stock market is running continual valuation process. qAnalytics and Investors are trying to identify over- and underestimate stocks. qAs a result they change demand about particulate stock and help to elimination of difference between spot value and intrinsic value. qDecisive influence to limitation of this difference is by actions of professional investors called “smart money”. Company fundamental analysis Company fundamental analysis nDifference between spot value and intrinsic value is determined by qPsychological factors qTechnical factors qEfficiency of market nMarket with lower level of efficiency qDifference wider, because reaction of spot exchange rate to new information is slower. qWith rising efficiency the difference is narrower. Methods of setting intrinsic value nModels basic on future revenues that can get investors qDividend discount models qProfit models qCash flow models nModels basic on information from accounting reports qBook models nThe most sophisticates and accurate models are qFirst three above mentioned Dividend discount model nThe most sophisticate method nBase on presumption that intrinsic value is given by current value of all future incomes from particular stock. nAll future incomes are given by qdividend payments qAnd under particular conditions by sale rate of stock nWith dividends these models operate always nWith sale rate only if is expected of early sale of stock nThere are two main group of models qDividend discount model with infinite time of holding qDividend discount model with ultimate time of holding Profit models nPrice/Earnings ration n How much must investor pay for one unit of profit generated by company nAdvantages qEasy and quick qComparison of several securities according to investor attractively qDefinition of successful investment strategy qAnalysis of actual attractiveness of stock and comparison with history nDisadvantages nNot usable if company in loss qDepends on accounting methodology qProblems with comparison of different industries or countries nP/E is influenced by global or specific factors for particular economy qFrom 1985 – 1989 qP/E ration in Japan 37.9 to 70.9 qP/E ration in USA 8 to 19 qP/E ration in UK 10 to 18 n Profit models nP/BV ratio nPrice of stock/Book value nHow much must investor pay for one unit of shareholders’ capital of particular company n nP/S ratio nPrice of stock/Sales nHow much must investor pay for one unit of sales Thank you for your attention