Vce Summmer Internship Program ( - Stock Market)

 

 

VCE SUMMMER INTERNSHIP PROGRAM

 

EQUITY RESEARCH (STOCK MARKET)

NAME:- ANNU COURSE:-BBA

 

Module-1 : Basics of Equity Research, Understanding the Stock Market, Career Options in Stock Market, Stock Market as Earning Source, Process Flow of Starting.

1. What is fundamental analysis? Why is fundamental analysis relevant for investing? How to use PE/PB charts to identify fundamental opportunities? •

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fundamental analysis Fundamental analysis is a method of evaluating the intrinsic value of an asset and analysing the factors that could influence its price in the future. This form of analysis is based on external events and influences, as well as financial statements and industry trends.Fundamental analysis is one of two major methods of market analysis, with the other being technical analysis. While technical traders will derive all the information they need to trade from charts, fundamental traders look at factors outside of the price movements of the asset itself.

 

 Why is fundamental analysis relevant for investing?

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Importance of Fundamental Analysis The bedrock of investment, fundamental analysis helps you in better making an investing decision. Fundamental analysis of stocks helps you determine their fair value. Also, with stock fundamental analysis, you can evaluate the health and performance of any organisation through crucial numbers and major economic indicators.Fundamental securities analysis helps you to predict future price movement and gauge whether a stock is undervalued or overvalued. At the same time, it helps you analyse a company’s strength and its ability to beat its competitors.Fundamental analysis of stocks also helps in understanding the business model of a firm and the working of management, essential for making a prudent investment decision.

 

How to use PE/PB charts to identify fundamental opportunitie opportunities? s? •

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Working With PE and PB Ratios Calculate the price to earnings (PE) ratio and the price to book (PB) ratio. The PE ratio is calculated by dividing the stock price by the earnings per share. You You can find earnings per share on the income statement contained within the annual report. Assume earnings per share is $2. The PE ratio is 5x ($10 divided by 2). The PB ratio is calculated by dividing share price by stockholders' equity, equity, which can be found on the balance sheet included in the report. It's essentially an estimate of what the company would be worth if it were liquidated immediately. Assume stockholders' equity per share is $5. The PB is 2x ($10 divided by 5).

Deriving Value Based on PE Ratios Find the average PE ratio of other firms in the same industry, either by computing them through the same process or searching online for this figure. Assume the average is 5x. Multiply the company's price per share by the industry PE ratio. The calculation is 5 multiplied by $10 or $50. This tells you that XYZ company is undervalued and that the price should be around $50. Determine the value based on the PB ratio. Calculate the average PB ratio for other companies in the same industry. If the average PB ratio for XYZ's industry is six, then XYZ should be trading at a price of $12 (2 multiplied by 6). This tells you that the company is also undervalued according to the PB multiplier.

 

How to do Financial Statement Analysis Analysis on stocks ? Elaborate key points on the following

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Open thestatements company’son most recent financial Publicly traded stocks provide as 10financial a quarterly basis tostatements. the Securities and Exchange Exc hange Commission Q and 10-K filings. These filings are available at the SEC's website and can be searched by using a stock’s ticker symbol. These records are also available at the “Investors” or “Investor “ Investor Relations” section of the company website. •

Locate the income statement in the filing and check for trends in top-line sales, major expenses and bottom line income. Growing sales s ales and earnings are excellent, but declining sales, declining earnings and increasing expenses suggest the company is struggling. Review footnotes for nonrecurring items and determine for yourself if similar s imilar losses or gains are likely in the future.

 

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 Analyze the balance sheet. Notice whether the company paid down or increased its debt or if any items declined substantially in value. Y You ou should also note how much book value is assigned to intangible assets and goodwill. If these are large numbers, double-check the footnotes to make sure they could be useful to the firm in the future.  Analyze the cash flow statement. statement. For operating cash flows, consider whether each past past source or use of cash could be repeated in the future. Unsustainable sources and uses of cash should not be used to make futureoperations c ash flow and cash projections. Calculate free cash investors by summing cash flows from capital expenditures (an itemflow in to investing cash flows). Investors should be attracted to firms with the potential to produce positive free cash flows. Consider investing and financing cash flows as well. Verify whether the firm needed to cover investing and operating cash flows by borrowing or issuing shares, and try to determine if it will do it again in the future.

 

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 Adjust historical accounting values to make them reflect ref lect today's economic reality. Items listed as nonrecurring items or those likely to continue should be added back to net income. Adjust balance sheet items to reflect their economic values if they are different from their accounting values.

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Calculate or look up valuation ratios. Valuation ratios reveal how dear a stock is to investors and include the price-to-book ratio, price-to-earnings ratio and price-to-sales ratio. These ratios divide the market capitalization of a company by the book value (equity listed on the balance sheet), earnings (net income on the income statement) and sales (the top line of the income statement).

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Calculate other financial ratios. Liquidity ratios reveal whether a company is capable of paying its creditors. The current ratio is calculated by dividing current assets by current liabilities. The quick ratio is calculated by dividing current assets minus inventory by current liabilities. Current ratios under 1.5 and quick ratios under 1 are cause for concern and might indicate that a firm could have trouble paying creditors.

 

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Make comparisons. Financial ratios can be compared between peer firms that use the same accounting conventions and operate in the same s ame industry industry.. They can also be used to compare a stock's current valuation and performance against its historical valuation and performance.

 

2. Elaborate key points on the following

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  Annual Report  An annual report is a document published by the company for its it s various stakeholders, internal and external to describe the company’s performance, financial information, and disclosures related to its operations. These reports have become legal and regulatory requirements over the years. US companies have been mandated to publish such reports by the Securities and Exchange Commission (SEC) since the early 1930s.

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 ANALYSIS  ANAL YSIS OF BALANCE BALANCE SHEET  ANALYSIS OF BALANCE SHEET’  ANALYSIS SHEET’ is a book that covers theoretical theoretical and practical aspects of financial statemen statementt analysis. It is being used by MBA students, students of banking, on-the-job bankers and other professional including Chartered Accountants. Accountants. The book provides techniques of analysis of financial statement including Ratio analysis, funds flow and cash flow analysis and break-even point analysis. To make the contents more useful many case studies, with proper explanation, have been provided. The book is part of Central Libraries and Training Centre libraries of many banks.

 

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cash flow Analys The cash flow Analysis refers to the examination or analysis of the different inflows of the cash to the company and the outflow of the cash from the company during the period under consideration from the different activities which include operating activities, investing activities and financing activities.

profit and loss statement  A profit and loss statement (P&L), or income statement or statement of operations, is a financial f inancial report that provides a summary of a company’s revenues, expenses, and profits/losses over a given period of time. The P&L statement shows a company’s ability to generate sales, manage expenses, and create profits. It is prepared based on accounting principles that include revenue recognition, matching, and accruals, which makes it different from the cash flow statement.

 

3. Understanding following approach and suggest some stocks which follows the approach

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Understanding the Benjamin Method The Benjamin Method of investing is the brainchild of Benjamin Graham, a British-American investor, economist, and author. He came to prominence in 1934, with the publication of his textbook Security  Analysis, which he co-wrote with David Dodd. Security Analysis is a foundational book for the investment industry today, and the teachings of Benjamin Graham heavily influenced famous investors like Warren Buffett. Benjamin Graham taught Warren Buffett while Buffett was studying at Columbia University, and Buffett has written that Graham’s books and teachings “became the bedrock upon which all of my investment and business decisions have been built.” His famous book, The Intelligent Investor, has gained recognition as the foundational f oundational work in value investing.

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Benjamin Graham’s method of value investing stresses that there are two types of investors: long-term and short-term investors. Short term investors are speculators who bet on fluctuations in the price of an asset, while long-term, value investors should think of themselves as the owner of a company. If you are the owner of a company, you shouldn’t care what the market thinks about its worth, as long as you have solid evidence that the business is or will be sufficiently profitable.

 

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Buffett's Methodology Warren Buffett finds low-priced value by asking himself some questions when he evaluates the relationship between a stock's level of excellence and its price.7  Keep in mind these are not the only things he analyzes, but rather, a brief summary of what he looks for in his investment approach. 1. Company Performance Sometimes return on equity (ROE) is referred to as stockholder's return on investment. It reveals the rate at which shareholders earn income on their shares. Buffett always looks at ROE to see whether a company has consistently performed well compared to other companies in the same industry.8  ROE is calculated as follows: ROE = Net Income ÷ Shareholder's Equity Looking at the ROE in just the last year isn't enough. The investor should view the ROE from the past five to 10 years to analyze historical performance.

 

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2. Company Debt The debt-to-equity ratio (D/E) is another key characteristic Buffett considers carefully. Buffett prefers to see a small amount of debt so that earnings growth is being generated from shareholders' equity as opposed to borrowed money.9 money.9 The D/E ratio is calculated as follows:

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Debt-to-Equity Ratio = Total Total Liabilities ÷ Shareholders' Equity

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This ratio shows the proportion of equity and debt the company uses to finance its assets, and the higher the ratio, the more debt—rather than equity—is financing the company. A high debt level compared to equity can result in volatile earnings and large interest expenses. For a more stringent test, investors sometimes use only long-term debt instead of total liabilities in the calculation above.

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3. Profit Margins  A company's profitability depends not only on having a good profit margin, but also on consistently increasing it. This margin is calculated by dividing net income by net sales. For a good indication of historical profit margins, investors should look back at least five years. A high-profit margin indicates the company is executing its business well, but increasing margins mean management has been extremely efficient and successful at controlling expenses.

 

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4. Is the Company Public?

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Buffett typically considers only companies that have been around for at least 10 years.10

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 As result, most of the technology companies that have had their initial public offering (IPOs) in the  pastadecade wouldn't get on Buffett's radar. He's said he doesn't understand the mechanics behind many of today's technology companies, and only invests in a business that he fully understands.11   Value investing requires identifying companies that have stood the test of time, but are currently undervalued. Never underestimate the value of historical performance. This demonstrates the company's ability (or inability) to increase shareholder value. Do keep in mind, however, that a stock's past performance does not guarantee future performance. The value investor's job is to determine how well the company can perform as it did in the past. Determining this is inherently tricky. But evidently, Buffett is very good at it. One important point to remember about public companies is that the Securities and Exchange Commission (SEC) requires that they file regular financial statements. 12These documents can help you analyze important company data—including current and past performance—so you can make important investment decisions.

 

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5. Commodity Reliance You might initially think of this question as a radical approach to narrowing down a company. company. Buffett, however, sees this question as an important one. He tends to shy away (but not always) from companies whose products are indistinguishable from those of competitors, and those that rely solely on a commodity such as oil and gas. If the company does not offer anything different from another firm within the same industry, Buffett sees little that sets the company apart. Any characteristic that is hard to replicate is what Buffett calls a company's economic moat, or competitive advantage.13  The wider the moat, the tougher it is for a competitor to gain market share.

6. Is it Cheap? This is the kicker. Finding companies that meet the other five criteria is one thing, but determining whether they are undervalued is the most difficult part of value investing. And it's Buffett's most important skill.To check this, an investor must determine a company's intrinsic value by analyzing a number of business fundamentals including earnings, revenues, and assets. And a company's intrinsic value is usually higher (and more complicated) than its liquidation value, which is what a company would be worth if it were broken up and sold today. The liquidation value doesn't include intangibles such as the value of a brand name, which is not directly stated on the financial statements.

 

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Peter Lynch’s approch Peter Lynch’s story has the hallmark of a Wall Street fairytale. It’s the sort of rags to riches story that inspires — although he wants exactly a pauper to begin with. What is really interesting about Peter Lynch’s Lynch’s tale is the fact that it has a beginning, a middle, and an end.It’s quaint. It’s simple to break apart, and more importantly, importantly, its underlying parable is easy to understand. You You don’t have to be a rocket scientist to comprehend Peter Lynch’s approach to investing. Today, we will tell you a bit about this yuppy portfolio manager who took the investment world by storm. How he selects his stocks, what his principles are and how you can emulate him.

 

4. Understand following types of stocks and suggest some s ome stocks of each type •

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 Multibagger stock Stocks that give returns that are several times their costs are called multibaggers. These are essentially stocks that are undervalued and have strong fundamentals, thus presenting themselves as great investment options. Multibagger stock companies are strong on corporate governance and have businesses that are scalable within a short span of time. Magic formula stocks Magic formula investing refers to a rules-based, disciplined investing strategy that teaches people a relatively simple and easy-to-understand method for value investing. ... Put simply, it works by ranking stocks based on their price and returns on capital. wide moat stocks In investing terms, the word “moat” mostly refers to a competitive advantage. To say that a company has a “wide moat” is to say that it has a unique edge over other companies in its industry. In a broader sense, it can be used to describe something in the company's business that can protect it for the long term.

 

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Defensive stock  A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the t he state of the overall stock market. Well-established companies, such as Procter & Gamble, Johnson & Johnson, Philip Morris International, and Coca-Cola, are considered defensive stocks.

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value stock  A value stock refers to shares of a company that appears to t o trade at a lower price relative to its fundamentals, such as dividends, earnings, or sales, making it appealing to value investors. Momentum Stocks Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period. ... Once the reason for tax selling is eliminated, the stock's price tends to recover.

 

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Bull Cartel Stocks  A bull market is a period of time in financial markets when the price of an asset or security rises continuously. The commonly accepted definition of a bull market is when stock prices rise by 20% after two declines of 20% each.

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Bull Cartel Stocks  A bear is an investor who is pessimistic about the markets and expects prices to t o decline in the near- to medium term. A bearish investor may take short positions in the market to profit off of declining prices. Low PE and High EPS stocks n short, the P/E ratio shows what the market is willing to pay today for a stock based on its past or future earnings. A high P/E could mean that a stock's price is high relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative to earnings.

 

5. Understand and Explain following discounting methodology

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CAGR

The compound annual growth rate (CAGR) is the annualized average rate of revenue growth between two given years, assuming growth takes place at an exponentially compounded rate.

CAPM The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital.

CRP Country Risk Premium (CRP) is the additional return or premium demanded by investors to compensate them for the higher risk associated with investing in a foreign country, compared with investing in the domestic market.

 

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WACC The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All sources of capital, including common stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation.

• Buffett & Munger Approach for Discounting •

Business valuation is an art, not a science, because the worth of a business is hugely dependant on who is doing the valuing. There are many different ways to value a company