1.  Fundamental Analysis By Martin Brenner

2. What is Fundamental Analysis?  A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial, and other qualitative and quantitative factors.  Major analysis for Value Investing  Evaluating whether the security is underpriced or overpriced then trading based on that evaluation.  The market overreacts to news which can lead to deals that investors can exploit.  In the long run, the price will follow the intrinsic value.  Typically used to value stocks, but can be used to value other securities like bonds.

3. Questions to Ask  Is the company growing?  Is it making a profit?  Can it beat out its competitors?  Can it pay its debts?  Is the management adequate?  Is the stock a good investment

4. Who Uses Fundamental Analysis?  Almost everyone.  Value investors include pretty much anyone who buys a stock thinking that it is cheap and the price will go up.  Fundamental Investors

5. Critics of Fundamental Analysis  Technical Analysts  Believers in the Efficient Market Hypothesis

6. Financial Statements  Income Statements  Balance Sheet  Statements of Retained Earnings  Cash Flow Statement

7. Balance Sheet  Assets = Liabilities + Shareholders’ Equity  Shows all available assets and liabilities along with the equity the company has access to.  Important figures:  Cash – liquid asset the company can use to pay liabilities (high)  Inventory – unsold product the company has available (low)  Accounts Receivable – outstanding bills (low)

8. Income Statement  Revenues  Expenses  Cost of good sold  Selling, general, and administrative expenses – marketing, bills., R&D…  Earnings per share

9. Cash Flow  Net cash (or cash equivalents) moving into and out of a business.  Positive cash flow => more money into a business => more liquid assets  Split into three groups  Operating – money spent or received from day-to-day operations.  Investing – money spent on investment or obtained from the sale of an asset.  Financing – money given out or taken in loans  Shown on the Statement of Cash Flows

10. The Fundamentals  Qualitative – Less tangible factors that have an impact on the intrinsic value of a company  10K Form  Quantitative – The numbers that are used to determine is a company is currently profitable or a good investment  Financial Statements (10K form/Annual Report)

11. Qualitative Factors  Business Model  Vemma Verve  Competition  Moat  Management  Steve Jobs  Regulation  Drug companies/FDA

12. Qualitative Factors  Market Share  Customers  Industry Growth

13. Quantitative Factors  Revenue  Net Income  Expenses  Cash Flow  Debt Load  Margin  Free Cash Flow  EBITDA (?)

14. Revenue  The money a company actually receives.  “The Top Line” of an income statement.  Price of Good X # of Good sold.

15. Net Income  Net income = Revenue – Expenses – Taxes = Total Earnings = Profit  “The Bottom Line”

16. Profit Margin  Net Income / Revenue = (Revenue – Costs) / Revenue  Low profit margins show that a company struggles to keep costs low  Management Quality

17. Debt Load  Total debt on the books of a company.  Debt Load/Total Assets = Debt Ratio  Lower is usually better.

18. Book Value  Total Assets – Intangible Assets – Liabilities  Liquidation  Compare to market price  Value of company if liquidated

19. Earnings Per Share  Indicator of profitability  Portion of profit translated to the common stock  = (Net Income – Preferred Dividend) / Average # of outstanding shares

20. EBITDA  Earnings Before Interest, Taxes, Depreciation, and Amortization  Revenue – Expenses (not including taxes, interest, depreciation, or amortization  Net income with I,T,D,A added back onto it  Evaluates profitability

21. Price-to-Earnings Ratio (P/E)  Share Price / Per-Share Earnings (EPS)  Trailing P/E vs. Forward P/E  Dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings  Effects of Debt  Averages:  Dow P/E: 15.5  S&P P/E: 21.63  Low P/E => undervalued company (or low expectations for growth)  High P/E => high expectations for growth (or overvalued)

22. Price-to-Book Ratio (P/B)  = Stock Price / Total Assets – Intangible Assets  Market Price / Book Value  Low P/B (below 1) could mean an undervalued stock or that something is very wrong fundamentally with the company

23. Current Ratio  Can a company pay off its short term liabilities with its short term assets?  =Current Assets / Current Liabilities  Average of 1.5-3  Balance Sheet

24. Quick Ratio  Similar to Current Ratio, but does not include inventory  (Current Assets – Inventory) / Current Liabilities

25. Debt to Equity Ratio  = Total Liabilities / Shareholders’ Equity  Measures “quality” of liabilities  Debt used to finance assets relative to value of its stock  Higher = Aggressive = Risky  Increased volatility

26. Return on Equity  = Net Income / Shareholders’ Equity  How much profit company’s make through shareholders’ investments  How efficiently does a company generate profits.  5%-20% average depending on industry

27. Return on Investment  Profit from an investment  Total return – cost of investment = ROI  Compare ROI’s amongst your portfolio to find out which are most valuable.

28. Discounted Cash Flow  Method of evaluating a company’s intrinsic value using estimates of its future profits  If you can accurately estimate how much a company is going to be worth, you can discount that value to get the current intrinsic value.  http://www.investopedia.com/university/dcf/?rp=i http://www.investopedia.com/university/dcf/?rp=i

29. Earnings Power Value (EPV)  Sustainability of current earnings  = Adjusted Earnings / Cost of Capital  You determine adjusted earnings by taking operating earnings and normalizing for taxation, non-recurring charges, economic depreciation, cash/debt, etc.  Compare EPV to Reproduction Cost to determine whether management creates value and the company has a competitive advantage  Reproduction Cost – cost another company would have to pay to have identical fundamentals.  http://www.stockopedia.com/content/how-does-the-earnings- power-valuation-technique-epv-work-60553/ http://www.stockopedia.com/content/how-does-the-earnings- power-valuation-technique-epv-work-60553/

30. Examples: