V. STOCKS

I. Fundamental Analysis (Continued) 4.Basic Ratios i. Earnings per Share = total earnings outstanding shares Tracks profitability regardless of firm size ii.Price/Earnings Ratio (P/E Ratio) = current share price earnings 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 Shares a.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 Methods i.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: See:

I. Fundamental Analysis (Continued) iii.S&P Star Quality Rankings – stocks are ranked by anticipated performance based upon fundamentals index/SP_Citigroup_Global_STARS_Methodol ogy_Web.pdf?vregion=us&vlang=en index/SP_Citigroup_Global_STARS_Methodol ogy_Web.pdf?vregion=us&vlang=en iv.Value Line Value Line - The Most Trusted Name in Investment ResearchValue 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 Stocks i.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 Sources i.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 Approaches a.“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! FinanceAVAV: Technical Analysis for AEROVIRONMENT, INC. - Yahoo! Finance 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 ahoo.com/q/ta?s=CSX&t=1y&l=on&z=m&q=l&p=b&a=&c= ahoo.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 trend c.Trend reversal is indicated by bottoms or tops outside the band, followed by bottoms and tops inside the band d.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.Line b.Bar (High, Low, Close) c.Candlesticks – White = stock up, Black = stock down d.Point and figure 8.Chart Scaling a.Arithmetic – Even scale of price movements b.Logarithmic – Scale by percentage change, works best for highly volatile stocks