V. STOCKS

I. Fundamental Analysis (Continued)

4. Basic Ratiosi. Earnings per Share = total earnings

outstanding shares

Tracks profitability regardless of firm size

ii. Price/Earnings Ratio (P/E Ratio) =current share priceearnings per share

Provides a rough estimate of market opinion of current and future corporate operations

I. Fundamental Analysis (Continued)

iii. Return on Assets = EBITDA assets

Measures efficiency of use of firm assets

iv. Return on Equity = EBITDA common

stock equity

Measures efficiency of the use of shareholder capital

I. Fundamental Analysis (Continued)

v. Return on Invested Capital (ROIC) = EBITD common and preferred stock equity & long term debt

Measures efficiency of the use of the entire corporate capital structure

vi. Debt/Equity Ratio = total debt market

capitalization

Measures the leverage in a company and thus its vulnerability to interest rate changes

I. Fundamental Analysis (Continued)

vii. Current Ratio = Current Assets Current Liabilities

A measure of liquidity, whether a company has sufficient assets to pay current debts

I. Fundamental Analysis (Continued)

5. Issues Regarding Outstanding Sharesa. Float – the number of shares outstanding

(available for purchase)b. Stock repurchase (buy back) program –

where a company purchases its own shares on the open market – reduces float (reduces supply of shares), decreasing number of shares outstanding, increasing earnings per share, and increasing share price

I. Fundamental Analysis (Continued)

6. Choosing Stocks Based Upon Fundamentals

a. Stock Market Selection Methodsi. Dogs of the Dow – buy highest yielding Dow

stocks at the beginning of the year, selling best of stocks after 12 months

ii. Relative Strength from Investors Business Daily – compares stocks with the overall market – See:

I. Fundamental Analysis (Continued)

iii. S&P Star Quality Rankings – stocks are ranked by anticipated performance based upon fundamentals http://www2.standardandpoors.com/spf/pdf/index/SP_Citigroup_Global_STARS_Methodology_Web.pdf?vregion=us&vlang=en

iv. Value Line Value Line - The Most Trusted Name in Investment Research

I. Fundamental Analysis (Continued)

b. Diversification – Selecting stocks that respond to the market in different ways – stocks should not all be positively correlated (prices moving in the same direction), in the same industry, or with the same market cap

i. Large Cap = market capitalization in excess of $5,000,000,000

ii. Midcap = market capitalization from $1,000,000,000 to $5,000,000,000

iii. Small Cap = market capitalization of less than 1,000,000,000

I. Fundamental Analysis (Continued)

c. Growth versus Value Stocksi. Growth Stock – High P/E ratio, earnings

expected to grow at an above average rate

ii. Value Stocks – Low P/E ratio, searching for “bargains” – stocks that are out of favor or in industries out of favor with investors but with good fundamentals

iii. Value Trap – Low P/E ratio stock that is a bad investment – P/E is low for a reason

I. Fundamental Analysis (Continued)

d. Cyclical Stocks – Rise and fall with the economy in general – ex. Transports

e. Defensive Stocks – Product demand exists in all phases of the business cycle – consumer staples, drugs, etc.

f. Domestic versus International – If markets are performing poorly in one country, stocks from another country could be performing well

I. Fundamental Analysis (Continued)

g. Data Sourcesi. Financial press and Internet sites – provide readily

available information, but may not be in depth or timely

ii. Professional research – can have greater “depth,” can reveal more obscure information, but can be biased and expensive

iii. Companies – can provide fairly detailed information, but biased towards the company

iv. SEC filings – very detailed and thorough, must be accurate, but difficult to read and not timely

I. Fundamental Analysis (Continued)

7. Other Approachesa. “Buy what you know” – Purchase shares

of companies that you do business with and are impressed by

b. Consensus information – Agreement among analysts or researchers regarding whether a stock is a good value

J. Technical Analysis

1. 50 Day Moving Average – provides guidance regarding long term stock price movement trends (200 day = very long term)

a. Positive Momentum – Above the moving average

b. Negative Momentum – Below the moving average AVAV: Technical Analysis for AEROVIRONMENT, INC. - Yahoo! Finance

2. 5 - 20 Day Moving Average – Shows very short term trend

J. Technical Analysis (Continued)

3. Support – Stock “Bottom,” price below which shares have historically not traded

4. Resistance – Stock “Top,” the price that the stock tends to “bounce off of,” a stop to further price advances

5. Volume – Shares traded per day, indicates whether a price movement is “real” (ex. – stock trading higher on high volume shows interest in stock during price advances, stock price increasing on low volume is “drifting”

J. Technical Analysis (Continued)

6. Bollinger Bands – One standard deviation above and below the stock price, based upon 20 day moving average – a measure of stock price volatility http://us.rd.yahoo.com/finance/chart/overlay/bollinger/*http:/finance.yahoo.com/q/ta?s=CSX&t=1y&l=on&z=m&q=l&p=b&a=&c=

a. Sharp price changes tend to occur after the bands tighten, indicating a “break out” from a less volatile pattern

b. Prices moving outside the bands indicate a continuing trendc. Trend reversal is indicated by bottoms or tops outside the

band, followed by bottoms and tops inside the bandd. A move originating at one band tends to move all the way to

the other band

J. Technical Analysis (Continued)

7. Stock Chart Types – In all types, y axis indicates price, x axis is time

a. Lineb. Bar (High, Low, Close)c. Candlesticks – White = stock up, Black =

stock downd. Point and figure

8. Chart Scalinga. Arithmetic – Even scale of price movementsb. Logarithmic – Scale by percentage change,

works best for highly volatile stocks