10. Fundamental and Technical Analysis

Question 1

Fundamental Analysis

Answer 1

Concerned with the calculation of estimated (intrinsic) value of an investment by examining variables such as current and future earnings, interest rates, expected inflation, and other risk variables

Question 2

Fundamental Analysis three-level process

Answer 2

1. Economy/market analysis: macroeconomic factors such as tax rate, government expenditure, money supply, consumer sentiments, potential GDP. Also international climate
2. Sector/Industry analysis: identify promising sectors within the economy, business cycle, business life-cycle
3. Company analysis: financial data such as ROE, profit margin, DuPont etc

Question 3

Technical Analysis

Answer 3

Methodology of forecasting fluctuations in the prices of securities whether individually or market as an aggregate

• Based on historical market data
• Emphasis on market timing (contrarian, bull, bear etc)
• Concentrates more on short-term movements

Question 4

Additional Question WAH: Reasons that the retail auto parts industry as a whole is in the STABILISATION PHASE

Answer 4

• Major customer base (18-29yr-olds) is declining
• Number of households with income less than $35000 not expanding
• Number of cars 5-15ys (end market) has recorded low annual growth
• Automotive aftermarket industry retail sales is growing

Question 5

Additional Question WAH: Reasons to support conclusion that Wigwam Auto + major competitors are in the growth stage

Answer 5

1. Sales growth of retail auto parts companies with 100 or more stores is growing rapidly at increasing rate
2. Market share of auto parts stores with 100 or more stores has been increasing but still only 19% (more growth)
3. Average spending margins for retail auto parts companies with 100 or more stores are high and rising

Question 6

Explain the reasoning behind a support level

Answer 6

A price range where considerable demand is expected.
-This occurs after a stock has increase in price followed by a brief period of profit-taking at which time some investors who did not get in on the first round decide to take the opportunity to get in

Question 7

Explain the reasoning behind a resistance level

Answer 7

A price range where large supply is expected

• This occurs after a stock has declined and when it experiences a recovery, some investors who missed selling at a price peak take the opportunity to sell
• A price break through a resistance level is considered very bullish because the excess supply is gone