Stock Analyst Program 2010 Driss Kaitouni [email protected] Jamie Tucker [email protected] Honours in Investment Management, Wharton Exchange Fall 2009 March 8, 2010
Stock Analyst Program 2010
Driss [email protected]
Jamie [email protected] in Investment Management, Wharton Exchange Fall 2009
March 8, 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
Stock Analyst Program 2010
Date Topic Date Topic
Jan 29 Overview, Valuation, Resources to Start Mar 8 Options, ETFs, and Forex Demonstration
Feb 5 What is Price Action?Multiples Analysis
Mar 12 Accounting 101
Feb 12 Stock Screening & Strategy/Money Management Mar 19 TBD
Feb 19 Cancelled: Reading Week Mar 26 Cancelled
Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations
Agenda
Research Report Overview
Options
ETFs
Live Forex Demonstration
How To Start…
Next Topic Discussion (Accounting)
Stock Analyst Program 2010
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
Stock Analyst Program 2010
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%
Stock Analyst Program 2010
Options
Options
Payoff Basics
•Gives its owner the right (not obligation) to buy (call option – bullish on the stock) or sell (put option – bearish on the stock) an asset (the underlying)
• At a specified price (the strike price)• On (and perhaps before) a given date (the expiration date)• Is affected by the underlying stock’s price, it’s historical and perceived volatility, time to expiration, interest rates• Is traded in lots of 100 – 1 option contract is at the scale of 100 shares
Stock Analyst Program 2009
Options
Lingo Basics
• The price of an option is defined primarily by the price of the stock (the underlying)
• In most liquid stocks, options are traded for every month up to 2 years
• The two parties involved in a on option transaction: writer (seller) and the buyer of the option. An option isn’t issued, it is just created when one party wants to write one and finds another party to buy it or vice versa. The buyer transfers cash (the option price) to the writer who keeps the cash and bears the risk of having to pay the buyer a premium at expiration if the stock price closes above the strike (call) or below it (put)
Stock Analyst Program 2010
•Option premium = time & implied volatility value
•Intrinsic value + time value = option price
• Long (buying an option), short (selling an option
• Covered – write an option but own the stock at the same time vs. Naked – write an option without owning the stock so you need cash as collateral in case the trade goes bad
• Credit – the option combination will yield a net credit to your account ie the options you are writing are worth more than the ones you are buying
• Debit – opposite of the above
•Option expiration – 3rd Friday of each month
Options
Factors Usefulness
• Options provide:• A hedging tool to protect net gains/losses when owning the underlying• Leverage to make high returns from small stock price moves
• Take a flexible position on a stock through option combinations
• Combining long/short calls/puts can create positions which will be profitable if the stock price stays within in a range, if volatility increases or decreases, if there is a sharp move of the stock either way...
Stock Analyst Program 2010
Call Put
Stock Price ↑ ↓
Strike Price ↓ ↑
Time to Expiration ↑ ↑
Implied Volatility ↑ ↑
Risk Free Rate ↓ ↑
Dividends ↓ ↑
OptionsStock Analyst Program 2010
Options Chain
Options
Combinations Strategies
Stock Analyst Program 2010
• There are dozens of combinations and each is suitable for unique situations – bullish/bearish market, stagnant market, extremely volatile market...
• Combinations are costly to implement with small accounts because of fees so are used in larger positions
• Example: before a major event (ie earnings announcement) a short butterfly or short call/put ladder position can be implemented because you are betting on a high deviation from market expectations of the company’s performance
• You don’t have to hold an option till expiration - you can use it as short term leverage for directional trading – instead of getting 3 times margin from a broker an option can provide you with 20 times margin. This is very risky and is not exactly the same as normal leverage because when you are long an option, everything else remaining equal, you will lose value every day because of time value erosion
• Option writers have profitable trades much more often than option buyers
• A combination can have several different options embedded so you can scale in or scale out as the stock evolves over time and add/remove legs over time as well
Exchange Traded Funds
What? Types of Canadian ETFs
Stock Analyst Program 2009
• Open-ended index tracking fund
• Managed by asset managers
• Bought and sold through brokers
• Trade on the exchange like any other stock
• Can go long or short
• Lendable & Marginable
• Transparent underlying portfolios available daily
• Real Time indicative NAV
Exchange Traded Funds
• Index ETFs
• Inverse & Leveraged ETFs
• Commodity ETFs
• Currency ETFs
• Actively Managed ETFs
• Exchange Traded Notes (ETNs)
Tactical Uses Strategic Uses
Stock Analyst Program 2010
• Interim Beta : Maintain exposure to given market while searching for specific market opportunity• Cash Management : Able to invest cash rapidly and cost effectively to gain desired market exposures• Derivatives Alternative : Broad opportunity set of Delta 1 exposures with single line cash based settlement • Exposure Management : Easily shift portfolio emphasis by adjusting exposures (e.g. duration, credit)• Thematic : Implement thematic exposures (e.g. dividends, alternatives)
Other uses: • Transparency• Liquidity• Diversification• Cost effective (same exposure to several securities without having to individually pay fees for exposure to each)
• Market Exposure: Implement wide variety of investment strategies using a broad range of market exposures• Directional Views: Establish broad directional market position, use long & short trades to implement market view(s) • Core Satellite: Achieve strategic focus • Rebalancing: Correct drift in a portfolio’s asset allocation or style• Completion: Add uncorrelated instruments and/or asset classes to strategy
Source: Global ETF Research & Implementation Strategy Team, Barclays Global Investors
Exchange Traded Funds
Exchange Traded Funds
Canadian ETF Statistics
Stock Analyst Program 2010
Source: TSX
• Issuers:• BMO• Claymore• Horizons AlphaPro• Horizons BetaPro• iShares
• Unique ETFs:• BMO DJIA Hedged to CAD (ZDJ)• Claymore BRIC (CBQ)• Claymore Oil Sands Sector (CLO)• Horizons AlphaPro Gartman (HAG)• iShares COMEX Gold (IGT)• S&P/TSX 60 Inverse ETF (HIX)• US Dollar Bear Plus ETF (HDD)
Exchange Traded Funds
Prospectus
Stock Analyst Program 2010
Source: www.hapetfs.com
Forex Demonstration
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
Stock Analyst Program 2010
Friday, March 12th Session
Annual Report – Accounting 101
Stock Analyst Program 2010
• We will go over NRG Energy Inc.’s 2008 Annual Report• http://phx.corporate-ir.net/phoenix.zhtml?c=121544&p=irol-irhome
• Please prepare by looking at the table of contents (know what the Annual Report contains), and by looking at the 3 financial statements (Income Statement, Balance Sheet, Statement of Cash Flows)
• This exercise will hopefully make you more comfortable with reading financial reports, and it will set the framework for a DCF analysis (which I will bring for NRG)
Date Topic Date Topic
Jan 29 Overview, Valuation, Resources to Start Mar 5 Options, ETFs, and Forex Demonstration
Feb 5 What is Price Action?Multiples Analysis
Mar 12 Accounting 101
Feb 12 Stock Screening & Strategy/Money Management Mar 19 TBD
Feb 19 Cancelled: Reading Week Mar 26 Cancelled
Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations
Winter 2010 Overview Meeting every Friday at 2pm (will strive for a consistent room to meet)
Stock Analyst Program 2010