GI Beginners’ Series: Class III November 30, 2007

Agenda Review of P/E Fundamental Analysis  Revenue Growth, Book Value  ROE, Debt/Equity Ratio  PEG Ratio Types of Orders  Limit vs. Market  Stop Order  Bid vs. Ask

Price-to-Earnings Ratio How much, per $ of earnings, investors are willing to pay for each share P/E Ratio  Based on latest earnings report Forward P/E Ratio  Based on forecasted earnings

Price-to-Earnings Ratio Implications Growth Stock  High P/E Ratio Forward P/E > P/E  Lower earnings forecasted Forward P/E < P/E  Higher earnings forecasted

Fundamental Analysis Focus on Financial Statements Use ratios to determine true value of a firm Measures are relative to the firm’s industry Champion Fundamentalists:  Warren Buffet  Peter Lynch  Benjamin Graham

Fundamental Analysis P/E Ratio Revenue Growth from Period to Period  Indicates expansion or contraction of business Book Value aka Shareholders’ Equity  Equals Firm’s Assets minus its Liabilities  Stock Price > BV per share (generally)  Lower Stock Price relative to BV  better value

Fundamental Analysis Return on Equity  Net Income divided by Book Value  Indicates how well firm is able to generate profits from shareholders’ equity Debt/Equity Ratio  Total Debt divided by Book Value  Indicates how much of the firm is financed by debt  Take Corporate Finance (BUS 320) for further examination of the dynamics of debt

Fundamental Analysis Price/Earnings Growth Ratio (PEG)  P/E Ratio divided by Expected Growth  Used to dig deeper into P/E Ratio  PEG < 1  Firm is “cheap”  PEG > 1  Firm is “overvalued” Example: Firm ABC  Price=$100 EPS=$10 Expected Growth=12%  P/E = 10  PEG = 10/12 = 0.83

Beta Represents the relationship between an index and an individual stock Calculated using regression Typical Index: S&P 500 Can be positive, negative, or zero Not a perfect predictor of stock price changes

Beta Implications High Beta ( |Beta| > 1 )  Volatile stock  Risky Low Beta ( |Beta| < 1 )  Conservative stock  Safe Zero Beta  No direct relationship between Index and Stock Negative Beta  Stock moves in opposite direction of Index

Beta Example Stock ABC: Beta = 1.3 S&P 500: Up 1.0% for the day ABC likely to increase by 1.3% that day Stock XYZ: Beta = -0.6 S&P 500: Down 2.3% for the day XYZ likely to increase by 1.38% that day

Types of Orders Market vs. Limit Order  Market Order: Execute trade immediately  Limit Order: Execute trade as long as price is within range Buying: Limit Price = Maximum Price to be paid Selling: Limit Price = Minimum Price to be received Stop Order  Trade becomes active once Stop level is reached  Typically used to prevent losses  Can also be used on the buy-side

Class IV Technical Analysis Stock Screener Trading Strategies  Diversification  Margin