Lecture 5: Fundamental Analysis - Top-down approach (cont'd) Flashcards
Different industries - different sensitivity to business cycle:
- cyclical industries: high beta - highly sensitive
- defensive industries: low beta - low sensitivity
Different industries - different sensitivity to business cycle:
- cyclical industries: high beta - highly sensitive
- defensive industries: low beta - lowly sensitive
Business cycle - Important variables:
- sensitivity of sales
- operating leverage
- financial leverage
Business cycle - Important variables:
- sensitivity of sales
- operating leverage
- financial leverage
In EARLY part of Business Cycle, these sectors outperform the market:
- consumer ?
- ?cials
- ?trials
- information ?
- ?rials
- real ?
In EARLY part of Business Cycle, these sectors outperform the market:
- consumer discretionary
- financials
- industrials
- information technology
- materials
- real estate
At the peak of Business Cycle, ?? & ?? sectors outperform market.
At the peak of Business Cycle, Communication Services & Information Technology sectors outperform market.
In Late part of Business Cycle, these sectors outperform market:
- Consumer ?
- ?
- ? care
- Materials
- ?
In Late part of Business Cycle, these sectors outperform market:
- Consumer staples
- Energy
- Health care
- Materials
- Utility
During recession, these sectors outperform market:
- Consumer ?
- ??
- ?
These sectors underperform the market:
- ? services
- ?
- ??
- ? Technology
During recession, these sectors outperform market:
- Consumer staples
- Health care
- Utility
These sectors underperform the market:
- Communications services
- Industrial
- Real estate
- Information Technology
Cyclical sectors tend to ? after the ? of the business cycle
e.g. ?? Sector: industries that tend to be the ? sensitive to economic cycles (e.g. ?, household durable goods, textiles & apparel and ? equipment)
Cyclical sectors tend to outperform after the trough of the business cycle.
e.g. Consumer Discretionary Sector: industries that tend to be the most sensitive to economic cycles (automotive, household durable goods, textiles & apparel and leisure equipment)
Defensive industries are not overly ? to business cycle => ? variation in their performance
e.g. ???
Defensive industries are not overly sensitive to business cycle => little variation in their performance
e.g. Health care, utilities, Consumer defensive
? investing:
Some investors may pick different ? to invest in according to how they perform in different phases of business cycle.
Sector investing:
Some investors may pick different sectors to invest in according to how they perform in different phases of business cycle.
(check out fidelity.com)
Warren Buffet advises: You should only invest in the ? that you ?.
Warren Buffet advises: You should only invest in the industries that you understand.
? helps reduce risks
=> investing ? may help diversify.
Diversification helps reduce risks
=> investing internationally may help diversify.
What happened in the past is ?? to happen again in t’ future.
What happened in the past is not guaranteed to happen again in t’ future.
Industry Life Cycle: (in terms of sale over time)
? & ? growth (start up) (? potential gains but ?!)
=> ? growth (?)
=> Slowing growth (?)
=> ? or ? growth (relative decline)
Industry Life Cycle: (in terms of sale over time)
Rapid & Increasing growth (start up) (significant potential gains but risky!)
=> Stable growth (Consolation)
=> Slowing growth (Maturity)
=> Minimal or negative growth (relative decline)
A ?? is a company in the S&P 500 that has paid and increased its base dividend every year for at least 25 consecutive years.
A ?? is a company in the S&P 500 that has paid and increased its base dividend every year for at least 25 consecutive years.
Some mature industries contain ‘??’
firms that generate ? and are ? investments.
e.g. Microsoft, Intel
Some mature industries contain ‘cash cows
firms that generate cash and are good investments.
e.g. Microsoft, Intel
Final phase in Industry Analysis considers considers the following 5 factors that determine relationship between industrial ?, ? strategy & ? according to Porter (1985):
1. ? of ?:
highly profitable industries => encourage ? => effective ??? (e.g. ? advantages, brand ?, ?) are required if potential competition is to be fended off.
Final phase in Industry Analysis considers the following 5 factors that determine relationship between industrial structure, competitive strategy & profitability according to Porter (1985):
1. Threat of entry:
highly profitable industries => encourage entrance => effective barriers to entry (e.g. cost advantages, brand loyalty, patents) are required if potential competition is to be fended off.
Industry Analysis - Porter (1985)’s 5 factors:
2. Rivalry between existing competitors:
=> cause price competition
=> drive down profits
Industry Analysis - Porter (1985)’s 5 factors:
2. Rivalry between existing competitors:
=> cause price competition
=> drive down profits
Industry Analysis - Porter (1985)’s 5 factors:
3. Pressure from ? products:
=> hard to maintain ??
=> barrier to increase ? bec of likelihood of losing ??.
Industry Analysis - Porter (1985)’s 5 factors:
3. Pressure from substitute products:
=> hard to maintain competitive advantage
=> barrier to increase price bec of likelihod of losing market share.
Industry Analysis - Porter (1985)’s 5 factors:
4. ? power of buyers:
Large purchases => significant ? pressures on prices a firm can charge.
e.g. UK’S NHS is a large scale purchaser of pharmaceutical & equipment firms => NHS can ?? to its ?due to its ??.
Industry Analysis - Porter (1985)’s 5 factors:
4. Bargaining power of buyers:
Large purchases => significant downward pressures on prices a firm can charge.
e.g. UK’S NHS is a large scale purchaser of pharmaceutical & equipment firms => NHS can negotiate contracts to its advantage due to its market power.
Industry Analysis - Porter (1985)’s 5 factors:
5. Bargaining power of ?:
? & ? can have significant power on pricing policies
e.g. labour union -> supply labour.
Industry Analysis - Porter (1985)’s 5 factors:
5. Bargaining power of suppliers:
Monopolies & Oligopolies can have significant power on pricing policies
e.g. labour union -> supply labour.
Warren Buffet’s concept of a ‘?’:
a firm’s ability to sustain its ?? & protect its ?? & ? over the ? run.
A moat can be achieved through:
- ? advantage
- ? advantage
- existence of ?
- high ? costs
Warren Buffet’s concept of a ‘moat’:
a firm’s ability to sustain its competitive advantage & protect its market share & profitability over the long run.
A moat can be achieved through:
- cost advantage
- size advantage
- existence of intangibles
- high switching costs
Some strengths of Top-down approach:
- systematic & logical
- consider external & internal factors
- embedded within business cycle approach
Some strengths of Top-down approach:
- systematic & logical
- consider external & internal factors
- embedded within business cycle approach
Some weaknesses of Top-down approach:
- fail to identify ? ? in ? firms in other markets & sectors that are ?? by this approach
- require knowledge to ? business cycles
Some weaknesses of Top-down approach:
- fail to identify investment opportunities in successful firms in other markets & sectors that are screened out by this approach
- require knowledge to forecast business cycles
Final step of Fundamental analysis - Top-down approach is Valuation of ??.
Approaches:
- ? valuation:
- determine a ? price using ??? Models (rely on ?? => ?) & compare it to ? price. - ? valuation:
- use of ??
Final step of Fundamental analysis - Top-down approach is Valuation of individual companies.
Approaches:
- Intrinsic valuation:
- determine a fair price using Discounted Cash Flow Models (rely on expected values => uncertainty) & compare it to market price. - Relative valuation:
- use of financial ratios
