CFP - Investments: Stock Valuation and Ratio Analysis Flashcards
(26 cards)
Dividend Discount Model
Provided on formula sheet
Values a company’s stock by discounting the future stream of cash flows
Earnings Per Share (EPS)
Net Income - Preferred Dividends /
Outstanding Common Shares
Price to Earnings Ratio (P/E)
How much an investor is willing to pay for each dollar of earnings
*Useful if stock pays no dividends
Price Per Share / EPS
Or
Price Per Share = P/E x EPS
PEG Ratio
P/E Growth (PEG)
Compares a stock’s P/E Ratio to the company’s 3-5 yr growth rate in earnings
HISTORICAL
1 suggest stock is fairly valued
> 1 suggest stock is fully/overvalued
PEG = Stock’s P/E Ratio /
3-5 Yr Growth Rate in Earnings
What is the Book Value of a Company?
Amount of Stockholder’s Equity in the firm
OR
How much the Company’s shareholders would receive if the firm was liquidated
If stock price > book value, may equal overvalued
Dividend Payout Ratio
Relationship between the amount of earnings paid to shareholders in the form of a dividend, relative to EPS
Common Stock Dividend /
Earnings Per Share
Return on Equity (ROE)
Overall profitability of a company
EPS /
SE/Share
What is Dollar Cost Averaging?
Form of risk reduction
Invest the same dollar amount on a periodic basis
What is Fundamental analysis?
Financial Statement Ratio analysis (liquidity, activity, profitability, common stock)
Economic data (inflation, interest rates, GDP)
What is Technical Analysis?
The process of charting and plotting a stock’s trading volume and price movements
Analysis of trading volume and price movements predict future direction before fundamental analysis will
Resistance / Support levels
Believe supply and demand drive a stock price.
What is meant by “Short Interest”?
The number of shares sold “short” gives insight into the future demand for a stock.
Stock that was sold short eventually needs to be repurchased.
High short interest = “pent-up” demand
Odd Lot trading
< 100 shares
small investors
Dow Theory signals what?
The end to a bull or bear market
Breadth of the Market
Measures the number of stocks that increase in value versus the numbers of stocks that decline in value
Advance Decline Line
The advance decline line is the difference between the number of stocks that closed up versus the number of stocks that decrease in value
What is the Efficient Market Hypothesis?
Investors cannot consistently achieve above average market returns
Prices reflect all information that is available and change VERY QUICKLY to new information
Advocate “buy and hold”
What is the Random Walk Theory?
Theory states that prices of stocks are unpredictable nut not arbitrary
Impossible to consistently achieve above-average market returns
Prices are in equilibrium
Changes in price are generated by changing needs of investors
Efficient Market Hypothesis: WEAK FORM
Historical info does not help investors achieve above market returns
REJECTS technical analysis
FUNDAMENTAL ANALYSIS = above-average returns
Efficient Market Hypothesis: SEMI-STRONG FORM
The semi-strong theory asserts that both historical and public information will not help investor achieve above-market returns
ONLY INSIDE INFORMATION
NO technical or fundamental analysis
Efficient Market Hypothesis: STRONG FORM
Info does NOT help investors, INSIDE info does NOT help either
Stocks reflect all information and react immediately
Mutual Funds go along with the Strong Form
January Effect anomaly
January tends to be a better month because of tax loss selling in NOV and DEC followed by investors getting back into the market in JAN
Small Firm effect anomaly
Small Caps tends to outperform large caps
Value Line effect
(1) outperform
P/E effect
Stocks with a low P/E tend to outperform stocks with a high P/E
