The Stock Market and the Business Cycle

1
The Stock Market and the Business Cycle
Exhibit 14.2
ECONOMIC
CYCLE
2
The Stock Market and the Business Cycle
Exhibit 14.2
peak
ECONOMIC
CYCLE
trough
3
The Stock Market and the Business Cycle
Exhibit 14.2
Basic Industries Excel
Consumer Staples Excel
peak
Consumer Durables Excel
ECONOMIC
CYCLE
Capital Goods Excel
trough
Financial Stocks Excel
4
Structural Economic Changes and Alternative
Industries

• Social Influences
• Demographics
• Lifestyles
• Technology
• Politics and regulations
• Economic reasoning, Fairness, Regulatory changes
  affect industries, Taxation
• Globalizationand its effects on international
  politics and commerce

5
Theme Investing

• Based on identifying emerging trends, such as
• Technology
• Aging population
• Freer trade and developing-country growth
• Identification of themes provides insight into
  industry analysis

6
Evaluating the Industry Life Cycle

• Five Stage Model
• Pioneering development
• Rapidly accelerating industry growth
• Mature industry growth
• Stabilization and market maturity
• Deceleration of growth and decline

7
Life Cycle for an Industry
8
Analysis of Industry Competition

• Competition and Expected Industry Returns
• Porters concept of competitive strategy is
  described as the search by a firm for a favorable
  competitive position in an industry
• To create a profitable competitive strategy, a
  firm must first examine the basic competitive
  structure of its industry
• The potential profitability of a firm is heavily
  influenced by the profitability of its industry
  

9
Competitive Structure of an Industry

• Porters Competitive Forces
• Rivalry among existing competitors
• Threat of new entrants
• Threat of substitute products
• Bargaining power of buyers
• Bargaining power of suppliers

10
Forces Driving Industry Competition
11

• Threat of new entrants
• Potential substitutes
• Bargaining power of suppliers
• Bargaining power of buyers

12
Firm Competitive Strategies-Merck

• Current rivalry
• Moderate and Growing
• Consolidation Trend
• Joint Venture Trend
• Generics Competition

13
Firm Competitive Strategies-Merck

• Suppliers Bargaining Power
• Low
• Numerous suppliers available

14
Firm Competitive Strategies-Merck

• Threat of Substitutes
• Moderate and Growing
• Low Elasticity of Demand
• Increasing Generics Market
• Imports from Canada

15
Firm Competitive Strategies-Merck

• Threat of New Entrants
• Low
• High Barriers
• Long Patent Protection
• High RD Requirements

16
Firm Competitive Strategies-Merck

• Buyers Bargaining Power
• Moderate and Growing
• Still somewhat fragmented
• Growing power of HMOs
• Influence of Pharmacy Benefit Firms
• Role of Government Medicare/Medicaid

17
Favorable Attributes of Firms

• 1. Firms product is not faddish
• 2. Company has competitive advantage over rivals
• 3. Industry or product has potential for market
  stability
• 4. Firm can benefit from cost reductions
• 5. Firm is buying back its own shares or managers
  (insiders) are buying

18
Intra-Industry Analysis

• Directly compare two firms in the same industry
• An alternative use of T to determine a reasonable
  P/E ratio
• Factors to consider
• A major difference in the risk involved
• Inaccurate growth estimates
• Stock with a low P/E relative to its growth rate
  is undervalued
• Stock with high P/E and a low growth rate is
  overvalued