Investment Strategy II

1
Investment Strategy II
Lecture 7

• Economics 98 / 198 DeCal Fall 2007

2
Announcements

• Homework due next week
• Also, attach trading history to your paper

3
Current Events
4
Lecture Content
5
Last Week

• Introduction to investment strategies
• Qualitative vs. Quantitative Analysis
• Fundamental vs. Technical Analysis
• Value vs. Growth Investing
• Fundamental Analysis
• Qualitative Aspects (Understanding the business,
  competitive advantages, industry, management,
  etc.)
• Value Investing
• Buying stocks that are valued below its intrinsic
  value
• Using various financial ratios and measures

6
Today

• Growth Investing
• CAN SLIM
• C Current Quarterly Earnings per share
• A Annual Earnings Increases
• N New Products, Managements, Highs
• S Supply and Demand
• L Leader or Laggard
• I Institutional Sponsorship
• M Market Direction

7

• GROWTH
• INVESTING

8
Growth Investing

• Buy stocks that expected to grow quickly in sales
  and earnings (relative to industry and market)
• Underlying quality of the business and the rate
  at which it is growing
• Usually newer companies, industries, and markets
• Will usually have a higher P/E. Why?

9
Growth Investing

• No automatic formula for determining best growth
  stocks
• General guidelines
• Strong historical earnings growth
• Strong forward earnings growth
• Management control of costs and revenues
• Company efficiency
• Innovative products / industry

10

• CAN SLIM
• INVESTING

11
CAN SLIM Background

• Developed by William ONeil
• Developed from studies on greatest stock winners
  of all time
• Provides solid guidelines to prevent subjectivity
• Combination of growth, fundamental, technical
  analysis

12
Source American Association of Individual
Investors
13
C Current Quarterly EPS

• Bottom line counts - major increase in current
  quarter EPS (25 or more)
• Look for accelerating growth
• What does this mean?
• Should be supported by sales growth (revenue)
  Why?

14
C Current Quarterly EPSExamples

• Cisco Systems EPS gains of 150 and 155 in 2
  quarters prior to 1467 run-up over next three
  years
• AOL EPS gains of 900 and 283 before rising
  557 in 6 months
• Dell 74 and 108 before rising 1780 in 27
  months in November 1996

15
Resource for Quarterly Earnings MSN Money
Revenue Figures (Calculate growth rates yourself)
EPS Growth Rates (Year over Year) (Eg. Q1 04 vs
Q1 05)
16
A Annual Earnings

• Annual earnings growth 25 or more over past 3
  5 years
• ROE at least 17 or higher
• As ONeil says, "who wants to own part of an
  establishment showing no growth"?
• Why is annual growth vs. quarterly growth
  important?

17
A Annual EarningsExample

• Xerox
• earnings growth rate 32 before soaring 700 in
  1963-1966
• Wal-Mart
• 43 annual EPS growth before rocketing 11,200
  from 1977 to 1990
• Cisco (257) and Microsoft (99)

18
Resource for Quarterly Earnings MSN Money
Annual Earnings Per Share
19
N New products, management, highs

• Takes something new to produce startling advances
  in price of stock (ideas, products, services,
  etc.)
• Apple
• Abercrombie
• Cisco
• Charles Schwab
• Taser
• Sunpower

20
N New products, management, highs

• Buy stocks when emerge from consolidations
  patterns and make new highs (technical analysis)
• Buy low, sell high
• vs.
• Buy high, sell higher

21
S Supply and Demand

• Law of supply and demand determines price of
  almost everything

This is where technical analysis comes into play
Want to buy stocks that are being bought by
institutions (importance of volume)
22
L Leader or Laggard

• Narrow down selection to best industries /
  sectors of stock market
• Narrow further by selecting best companies in the
  industry
• Best doesnt mean
• the biggest or
• most well-known

23
L Leader or Laggard

• New leaders every cycle
• 1999-2000 Tech, Telecom
• 2002-2004 Real Estate, Energy, Retail
• 2004-Present Foreign, ???
• Look for companies that withstand downturns in
  market the best
• What does this mean?
• Criteria
• Earnings / sales growth, ROE, margins, etc.

24
A Tool for Industry Research / Rankings
Stockcharts.com Industry Tool lthttp//stockcharts.
com/charts/performance/perf.html?BKX,XAU,SOX,O
SX,DRG,GSPMS,DOT,BTK,XBDgt
25
A Tool for Industry Research / Rankings
Investors Business Daily
26
A Tool for Industry Research / Rankings
www.prophet.net
Rank Industries by Performance over Various
Periods
Click on the chart box to get charts for all
companies within the industry
27
I Institutional Sponsorship

• Want to own stocks significantly owned by top
  institutions
• Institutions mutual funds, pension funds, hedge
  funds, banks, universities
• Can account for up to 70 of trading activity

28
I Institutional Sponsorship
Institutional Investors - Mutual Funds -
Hedge Funds - Pension Funds - Educational
Institutions - Bank Trusts
Individual Investors - You - Me -
Parents - Uncle Joe
29
A Tool for Institutional Sponsorship MSN Money
(http//moneycentral.msn.com/ownership)
Mutual Fund Ownership
Ownership Activity
Specific Mutual Funds Ownership (with links to
fund quotes)
30
M Market Direction

• You can be right about everything, but if youre
  wrong about where market is heading
• Why?

31
M Market Direction

• Importance of following the market
• It can be done! (Next lecture)
• Bull market vs. Bear market
• Myth of Long-Term Buy-and-hold Investing
• 33 loss requires 50 gain to break even
• 50 loss requires 100 gain to break even

32
M Market Direction

• Stay out in cash during bear markets and invest
  during bull markets
• Dont try to anticipate the market (gambling)
• Instead, let market guide you
• How to do this? (next lecture)

33
CAN SLIM Overall Strategy

• Narrow your selection (watch list) of stocks
  through fundamental analysis
• Use technical analysis (charts) to determine when
  to buy into stock and sell out
• Dont buy stock just b/c of low price
• You dont make money on how many shares you own,
  but by how much money is invested
• Do not let small losses turn into large ones (cut
  losses early)

34
Homework / Reading

• Paper Complete by next week
• Reading
• Investopedia. Introduction to Support Resistance