1. How to Pick a Stock

2. It’s Important to Remember… There is no one formula for stock picking! It is more art than science! You should, however, do some basic research and be able to justify your picks.

3. An Introduction to Fundamental Analysis http://www.investopedia.com/video/play/understanding- fundamental-analysis/

4. Finding “Value Stocks” This principle believes that you should look for a stock that is currently undervalued. Make sure the company has “good fundamentals” How? Look at: Price/Earnings Ratio Price/Book Ratio Debt/Equity Ratio

5. Price/Earnings Ratio http://www.investopedia.com/video/play/how-do-i-calculate- priceearnings-ratio/

6. Price /Earnings Ratio Take the Current Stock Price and Divide by the company’s earnings per share (EPS). The lower the P/E ratio – the more likely the stock is to be undervalued (and hence a good buy!)

7. What is the Price/Book ratio? A ratio that compares the company’s stock price and it’s tangible assets (or book value) It can help to determine if a stock is undervalued. To calculate, divide the stock price by the “book value” of their tangible assets. If P/B is lower – that is better!

8. An Example Loblaws vs. Metro Loblaws @ $44.45Metro @ $66.00 Which would you choose?

9. Debt vs. Equity What is Debt? When a company raises money through bank loans. The company will have to pay interest on these. What is Equity? When a company raises money by issuing stocks in the stock market. No interest is charged on these.

10. The Debt/Equity Ratio

11. The Current Ratio regarded as a test of liquidity for a company expresses the 'working capital' relationship of current assets available to meet the company's current obligations Ratio Analysis – Financial Securities (IDC4U1) – Slide 11 of 15 Total Current Assets Total Current Liabilities

12. The Quick Ratio Note: quick assets = total current assets minus inventory Sometimes a company could be carrying heavy inventory as part of its current assets, which might be obsolete or slow moving Thus, eliminating inventory from current assets and then doing the liquidity test is measured by this ratio The ratio is regarded as an key test of liquidity for a company Ratio Analysis – Financial Securities (IDC4U1) – Slide 12 of 15 Total Quick Assets Total Current Liabilities

13. The Return on Sales OR Profit Margin (%) Ratio Determines a company’s ability to withstand competition and adverse conditions (like rising costs, falling prices or declining sales in the future) Measures the percentage of profits earned per dollar of sales Indicates how efficiently the company makes money Ratio Analysis – Financial Securities (IDC4U1) – Slide 13 of 15 Net Income Revenue X 100

14. The Return on Assets Ratio Determines its ability to utilize the assets employed in the company efficiently and effectively to earn a good return (profit) Measures the percentage of profits earned per dollar of asset Indicates how efficiently the company in generates profits on its assets. Ratio Analysis – Financial Securities (IDC4U1) – Slide 14 of 15 Net Income Total Assets X 100

15. The Accounts Payable to Sales (%) Ratio Indicates how much of their supplier’s money a company uses in order to fund its sales. A higher ratio means that the company is using its suppliers as a source of cheap financing. The working capital of such companies could be funded by their suppliers. Ratio Analysis – Financial Securities (IDC4U1) – Slide 15 of 15 Accounts Payables Annual Sales/Revenue X 100

16. Price/Earnings to Growth (PEG) Ratio An important indicator of a stock’s potential value It’s favoured over the P/E ratio as it accounts for growth A lower PEG means a company’s stock is undervalued Value investors look for a value less than 2 Ratio Analysis – Financial Securities (IDC4U1) – Slide 16 of 15 Price/Earnings Ratio Annual Earnings Per Share (EPS) Growth

17. The Stock Market Simulation Create an account (register) on the investopedia website: www.investopedia.com You must invest in stocks that are traded on the TMX. You will have a budget of $100,000 to invest. You must choose a minimum of 8 different companies, a maximum of 20. Trading begins on Wednesday/Thursday this week. The simulations are called RCI IDC4U1 Section 1 and RCI IDC4U1 Section 2 Groups of maximum 3 students Trades are allowed at any time, but subject to a $19.99 fee! Good Luck – may the best traders win!