Lecture Notes: Analysis of Publicly Traded Securities

Methods of Analysis

Fundamental Analysis

• Assess prospects from short to long-run for industries and companies.
• Levels:
  • Economic analysis: impact of recession/expansion.
  • Industry analysis: structural changes, technological innovations.
  • Company analysis: direct impact on profitability.

Technical Analysis

• Study of historical stock prices to identify patterns.
• Focus on investor emotions and psychology through chart trends.

Market Theories

Efficient Market Hypothesis (EMH)

• Stock prices reflect all available information.
• Suggests no value in fundamental or technical analysis.
• Contradiction: if no one analyzes, markets can't be efficient.

Random Walk Theory

• Past price changes contain no useful information.
• Suggests technical analysis is useless.

Rational Expectations Hypothesis

• Past mistakes can be avoided; recurring patterns hold no information.
• Agrees with the inefficacy of technical analysis.

Macroeconomic Analysis

Fiscal Policy

• Government actions: taxation, spending, regulation, debt.
• Tax rates impact disposable income and business investment.
• Spending affects GDP growth and job creation.
• Regulations can guide or hinder economic behavior.

Monetary Policy

• Bank of Canada's role: inflation and interest rates.
• Long-term interest rates affect equity competition.
• Bond market as a predictor for interest rates and inflation.

Flow of Funds

• Investor confidence influences money flow between stock and bond markets.
• Interest rate differentials attract foreign investment.

Inflation Impact

• Reduces purchasing power, affects interest rates.
• Raises government revenue indirectly.

Industry Analysis

Industry Structure

• Influences profitability and growth prospects.
• Industry life cycle: emerging, growth, maturity, decline.
• Porter's Five Forces: competition, entry barriers, supplier/buyer power, substitutes.

Stock Characteristics

• Cyclical vs Defensive vs Speculative
• Cyclical: high variability with economic cycles.
• Defensive: stable across cycles (e.g., utilities).

Technical Analysis in Detail

Assumptions

• All influences are reflected in price.
• Prices move in persistent trends.
• Future repeats the past.

Tools and Patterns

• Charts: open-high-low-close, trends.
• Patterns: support and resistance lines, head and shoulders.

Company Analysis

Focus on Financial Statements

• Determining investment quality.
• Income Statement: revenue trends, cost efficiency, profit impact.
• Balance Sheet: capital structure, leverage.

Qualitative Factors

• Management effectiveness, brand reputation.
• Liquidity of shares, continuous monitoring.

Accounting Policies

• Influence on financial reporting.
• Importance of notes to financial statements.

Trend and Ratio Analysis

Trend Analysis

• Comparing earnings internally and externally over time.

Ratio Analysis

Categories

• Liquidity Ratios: current ratio, quick ratio.
• Risk Analysis Ratios: asset coverage, debt-equity, cash flow to debt.
• Performance Ratios: profit margins, return on equity, inventory turnover.
• Value Ratios: dividend payout, yield, book value per share, EPS.

Importance of Context

• Historical trends and industry standards for meaningful analysis.