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http://www.investopedia.com/video/play/understanding-fundamental-analysis/

What is Fundamental Analysis?

Academy #6Fundamental analysis

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“I’ve never bought a stock unless, in my view, it was on sale.”  John Neff

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Cornerstone of investing

Analyzing fundamentals

Qualitative and quantitative

Great for proposals

Asking the right questions

What is fundamental analysis?

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Is the company’s revenue growing? Is it actually making a profit? Is the cash flow positive? Is it in a strong-enough position to beat out

its competitors in the future? Is it able to repay its debts? Is management trying to ”cook the books"?

Fundamental questions

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Quantitative

Qualitative

Applications

Risks

Investment Proposal

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Intrinsic Value

Accounting

Valuation methods

Stock screener(s)

Quantitative

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Price on a: Specific time Quantity (supply / demand)

Market price is subjective Opinions differ

What is a stock price?

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The “real” value of a company

But what determines the real value?

Intrinsic value

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Intrinsic value

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Balance sheet

Income statement

Cash flow statement

Financial statements

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Balance sheet

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What a company owns (debit):◦ Short term assets◦ Long term assets◦ Intangible assets

How a company owns it (credit):◦ Equity◦ Short term liabilities◦ Long term liabilities

Balance sheet

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Balance sheet

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Income statement

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Net profit -> Shareholders’ equity

Income statement

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Profit/earnings Accrual accounting Revenue – cash flow Costs – expenses

EBITDA Earnings before interest, taxation,

depreciation and amortization

Income statement

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Cash flow statement

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Cash is king! Cash in and outflow

No influence of bookkeeping tricks

Cash flow statement

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Earnings Per Share (EPS) Dividend yield Price/Earnings (P/E) EV/EBITDA Book to market value Gordon’s growth model

Valuation methods

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Earnings per share (EPS) Earnings divided by shares outstanding

Dividend per share (money now – reinvesting) Shell - Google

Metrics per share

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Value of the company divided by earnings (profit)

Price per share divided by EPS

What determines height of the ratio?

P/E ratio

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Enterprise Value/EBITDA EBITDA – Earnings - Earnings before I tricked that dumb auditor

Book to market value Book value firm / market value firm

Other multiples

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D = dividend g = growth rate r = discount rate

Gordon’s growth model

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Compare P/E ratio with peers Is it higher, lower? Why? Good reason(s)?

Practical implications

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Multiple expansion – contraction◦ Longitudinal: compare ratio’s with previous years◦ EPS growth, dividend growth

◦ Cross-sectional: compare ratio’s with each other◦ EPS growth, dividend per shares growth but P/E

decline -> why?

Practical implications

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Break

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Business model

Markets

Competitive environment

Management

Market opinion

Qualitative

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What does the company do?

Where does it generate money?

Look at key drivers/factors

Don’t invest in a business you don’t understand!

Business model

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Boston Chicken Fixed fee

MC Donald's Franchise system

Example

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Strategy

Value proposition

Cost structure Fixed costs – variable costs Commodities (Air France-KLM)

Patents (Pharmaceutics)

Business model

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What drives success? How are these factors changing?

Characteristics of markets:◦ Spare car parts example◦ Smartphones example◦ Nintendo Wii example

Market

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What can a company do better than it’s competitors? (Michael Porter)◦ Cheaper/better/faster

Google: best search engine Apple: strong brand name Toyota: efficiency advantage Coolblue: fast delivery

Competitive environment

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How competitive is the industry?◦ Airlines◦ Soft drinks

Competitive environment

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Incentives◦ Shareholder alignment

Consistency◦ Skagen funds

Track record

Example: Angela Ahrendts – Apple

Management

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Material events◦ Earnings, public announcements

World events◦ Central bank policies, political and war events

Industry appeal◦ Social media stocks

Example: BP oil spill

Market opinion

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Finding an edge & catalysts

Where to find valuable information?

Let’s do this!

Applications

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Edge: asymmetric information distribution◦ Interpretation

Catalyst: why now◦ Intrinsic value versus market price

Edges & Catalysts

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www.google.com/finance

www.yahoo.com/finance

www.finviz.com

Company website◦ Investor Relations

Valuable information sources

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Which company?

Let’s do this!

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Timing◦ Technical analysis

Efficient market hypothesis◦ No free lunch

Is the market ever going to reflect the intrinsic value?

One can be wrong in calculating intrinsic value

Risks

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Information transfer◦ B&R members◦ Traders

Large cap vs small cap◦ Apple - musclepharm

Stock reflects all available information

Efficient market hypothesis

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Weak form: ◦ past prices can’t lead to outperformance

Semi-strong form:◦ Public information can’t lead to outperformance

Strong form:◦ All information is incorporated in the price of an

asset, even inside information

Efficient market hypothesis

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Questions?