Intro To Technical Analysis Flashcards
Vocab/equations
Fundamental investors use what three tools to determine future investments opertunities.
financial statements, economic reports, and forecasts
Three main investment styles
Value, growth, and income stock.
Value investing
seeks stocks that have a market price lower than their intrinsic value.
intrinsic value
Intrinsic value is an estimate of the true worth of an asset based on all available information
Growth investing
seeks stocks with potentially high growth potential.
Income investing
seeks to find stocks that produce regularly increasing income through dividends.
company risk.
Company has issues with in house management or budgetary problems. I.e. Managing debt to revenue.
Market risk
When the market as a a whole has volitility issues or has a downward trend.
opportunity risk
Opportunity risk is the chance that your money could simply be better invested elsewhere.
financial ratio’s
Ratio’s used to better understand a company’s value. Used in fundamental analysis.
P/E - price to earnings .
P/S - price to sales.
P/B -price to book.
Earnings Per Share. (EPS)
This calculation measures the amount of earnings allocated to each share of stock.
Earnings ÷ outstanding shares of stock =Annual EPS
price-to-earnings (P/E) ratio
The P/E ratio compares the current stock price to the company’s annual earnings.
P//E ratio = stock price ÷ annual earnings per share
The P/E ratio is interpreted as a multiple, or measure, of how much an investor is paying for the stock compared to each dollar of a company’s annual earnings.
trailing P/E ratio
A trailing P/E uses the company’s last 12 months of earnings
forward P/E ratio
uses an estimate of the company’s next 12 months of earnings
price-to-sales (P/S) ratio
compares a stock’s price to the company’s annual sales per share
P/S Ratio = stock price ÷ annual sales per share
The P/S ratio is interpreted as a multiple of how much an investor is paying for the stock compared to each dollar of a company’s annual sales.
price-to-book (P/B) ratio
The P/B ratio compares the stock price to a company’s book value, which is the per-share value of shareholders’ equity.
P/B Ratio = stock price ÷ shareholders equity per share.
Shareholders’ equity (book value)
is a balance sheet item equal to the company’s assets minus liabilities. It’s essentially the portion of the company’s value that’s available to shareholders if the company closed and then sold all its assets and paid its liabilities.
Book value = assets - liabilities
Intrinsic value
Intrinsic value is a company’s estimated worth based on fundamental factors such as cash flows, future growth, and risk.
discounted cash flow (DCF) method
discounted cash flow (DCF) method, which calculates intrinsic value by making assumptions about a company’s future performance based on current cash flows.
In very basic terms, it takes a current measure of cash flow and extrapolates it into the future using an assumed rate of growth
What is an investor hoping to accomplish by estimating intrinsic value? Select all that apply.
Incorrect
Intrinsic value is compared to market value to determine whether a stock is undervalued or overvalued and to measure its margin of safety. Intrinsic value is typically not used to project the short-term trend of a stock.
Which of the following are inputs in the DCF model? Select all that apply.
Cash flows, growth rate, and discount rate are all inputs in the DCF model because they can help an investor determine a company’s intrinsic value by taking future growth and risk into account. A margin of safety is calculated by comparing the result of the DCF model (intrinsic value) to the stock’s current market price.
What does cash flow represent in the DCF model?
Cash flow in the DCF model refers to a future value shareholders may claim. An investor’s potential profit from value investing would come from the difference in the current stock price and the estimated intrinsic value.
growth rate
the rate at which a company is expected to grow over a given time period.
It’s common to estimate growth for around five years.
industry average growth rate
he industry average growth rate. This assumes that a company won’t experience long-term EPS growth higher than the industry average.
historical growth rates.
historical growth rates. For example, if earnings have historically grown at an average of 8% per year, you could project future earnings to grow at an average of 8% also.
infinite growth
Projecting EPS growth for five years is one thing, but stock investors expect a company to continuously grow earnings—forever. The current market price you pay for a stock is for the market’s expectation of the company’s infinite growth.
terminal value
A terminal value is a future stock price that represents the infinite growth past your projection period. By substituting an infinite number with a finite one, a terminal value can help your analysis be more manageable.
Projected year 5 EPS ÷exit multiple = terminal value.
Exit multiple
Exit multipleis a very simple calculation. It is the total cash out divided by the total cash in. So if you put $50,000 in and got $150,000 back, yourexit multiplewould be 3X.
discount rate
A rate applied to the DFC model that lowers the instrinsic value of a company. Higher discount rate means higher volitility. Lower discount rate means higher intrinsic value.
The discount rate is also sometimes referred to as an expected rate of return.
time value of money (TVM) concept
Given the choice between receiving a dollar today or receiving a dollar a year from now, it might be prudent to choose the dollar today. That’s because there is risk associated with waiting for a year—many things can happen to prevent you from receiving that dollar. Likewise, many things can happen to the price of a stock between today and when you project its value will increase. The discount rate attempts to quantify that risk.
Capital Asset Pricing Model (CAPM)
The CAPM formula calculates an expected rate of return E(Ri) for an investment, which serves as the discount rate when using the DCF model.
The formula accounts for two main factors. The first is the market risk-free rate.The second is the market risk premium.
E(Ri) = Rf + Bi (Rm-Rf)
Expected ROR = Risk Free ROR + Beta (market risk premium)
risk-free rate
the baseline rate an investor might expect to receive for investing in a risk-free investment.
market risk premium
the additional return demanded for investing in stocks in general.
estimating intrinsic value with the DCF model can be summarized into the following six steps:
Begin with a measure of a company’s cash flow, like the trailing twelve months (TTM) EPS.
Project the cash flow measurement for five years using an appropriate growth rate, like the five-year historical growth rate.
Estimate a terminal value after five years using an appropriate exit multiple, such as the industry average P/E ratio.
Determine the discount rate. For example, you might use the expected rate of return, which you can calculate using the CAPM formula.
Discount each projected cash flow measure and the terminal value using the discount rate.
Add the discounted values together to arrive at the estimated intrinsic value.
