Feb 5 2010 Sap

Stock Analyst Program 2010

Driss [email protected]

Jamie [email protected] in Investment Management, Wharton Exchange Fall 2009

February 5, 2010

Winter 2010 Overview Meeting every Friday at 2pm (will strive for a consistent room to meet) We will start with introductory material and finish with an open discussion


Date Topic Date Topic

Jan 29 Overview, Valuation, Resources to Start Mar 5 More Applied Valuation

Feb 5 What is Price Action?Multiples Analysis

Mar 12 Applied Technical Analysis (equities, commodities, FX)

Feb 12 Stock Screening & Strategy/Money Management Mar 19 TBD

Feb 19 Cancelled: Reading Week Mar 26 TBD

Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations

Agenda

Research Report Overview

Multiples Analysis

How To Start…

Discussion


Research Report Overview

Research Report Composition The key to writing a coherent SAP research report is understanding and articulating an investment time horizon

- Refer to previous reports on the MIC website: Resources > SAP References


Evaluation Criteria (1)

1. Choice of industry articulated relative to other industries that would be affected by the general economy in a similar way. For example, the drug delivery industry and the drug manufacturing industry are affected by the same external economic conditions; thus it should be clear as to why one versus the other.

2. This would include use of ratios specific to industry, dcf valuation, comps, precedents, etc... This would also include quantifiable identification of relevant catalysts and earnings growth potential specific to the company.

Research Report Evaluation

Industry Analysis 30% Presentation/Research Paper 10%Identification of key metrics and ratios /10% Organization /3.3%Identification of key trends /10% Flow /3.3%Choice and rationale for industry (1) /10% Content /3.3%

Stock Analysis 40% Technical Analysis 20%

Quality of valuation & depth of research (2) /20% Clear investment horizon /5%Investment rationale /20% Entry & exit strategies /15%

Total 100%


Price Action

Price Action

Level II Quotes


Price Action

Cliffs


Price Action

Cliffs


Price Action

Gravity & physics


•Positive relation between time length of range and strength of move following it• Volatility = return vs Stagnating prices = opportunity cost of capital

•~30% of time prices move in a trend•~60% of the time prices move in a counter-trend (range)•~10% of the time prices move in breakout

Multiples Analysis

Multiples Analysis

P/E


Multiples Analysis

•Rationale? Belief that earnings are chief driver of value. •English language terms: how much investors are willing to pay per dollar of earnings

• Or, a reflection of the market’s optimism concerning a firm’s growth prospects

•Problems• 1) Management discretion• 2) If earnings negative• 3) Non-recurring items

•Factors:

P/E


Source: Prof. J. Scott (FSA)

Higher P/E Lower P/E

Firm risk Low High

Earnings growth High Low

Earnings quality High Low

Multiples Analysis

•Not useful by itself; must compare to market, industry, the past

•Good industry resource: http://biz.yahoo.com/p/industries.html

P/E


Source: BCA, Tigran Karapetian

40

30

20

10

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

40

30

20

10

ADJUSTED S&P 500 P/E RATIO*

*CALCULATED BY ROBERT SHILLER: SMOOTHED AND ADJUSTED FOR INFLATION

TigranKPE,PESPAVG

Multiples Analysis

EV/EBITDA


Multiples Analysis

P/B


Multiples Analysis

• Hard to find comparable peer firms – subjectivity…

• Dependence on accounting policies –differ by jurisdiction (US GAAP vs. rest of world)

• Cyclicality of earnings, timing of year end

• Discriminates against firms with negative equity

• Hard to conduct sensitivity analysis

• Nonetheless, a great way to start your analysis!

Issues


How to Start…

How to Start…

• Macroeconomy• David Rosenberg, Chief Economist & Strategist, Gluskin Sheff

• Go to GluskinSheff.com to sign up for morning newsletters (often bearish)• SeekingAlpha.com > The Macro View (can e-mail subscribe)• Economist.com > Business and Finance

• Industry Analysis [VPN required]• http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ >

NetAdvantage > Industry Reports• Or, > Mergent Online > Industry Reports

• Bloomberg terminal: RSE <go> > Search by Industry• SeekingAlpha.com > Stocks & Sectors

• Company Analysis• Finviz.com > Screener• Google.com/finance > Screener• http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ >

ValueLine [old school, but great info in one page]• Bloomberg terminal: ‘ticker’ <go> > Fundamentals & Estimates > ANR

Important Resources


How to Start…

• DCF Starting point• Bloomberg terminal: 3) Fundamentals & Estimates > FA• Company 10-K and 10-Q filings (available at edgar.com)• Analyst reports (Thomson Investext)

• Often have DCF analysis built into reports• http://research.thomsonib.com/gaportal/login.asp [VPN necessary]

• Multiples starting point• Bloomberg terminal: 3) Fundamentals & Estimates > RV• Finviz.com > Screener• http://biz.yahoo.com/p/industries.html

Important Resources


Date Topic Date Topic

Jan 29 Overview, Valuation, Resources to Start Mar 5 More Applied Valuation

Feb 5 What is Price Action?Multiples Analysis

Mar 12 Applied Technical Analysis (equities, commodities, FX)

Feb 12 Stock Screening & Strategy/Money Management Mar 19 TBD

Feb 19 Cancelled: Reading Week Mar 26 TBD

Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations

Research Report Composition Meeting every Friday at 2pm (will strive for a consistent room to meet)


Feb 5 2010 Sap

Business

quotes stock analyst

breakout stock analyst

issues stock analyst

dcf analysis

multiples analysis hard

multiples analysis rationale

sensitivity analysis

finance industry analysis