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Security Investment Analysis > Lecture 5: Fundamental Analysis - Top-down approach (cont'd) > Flashcards

Lecture 5: Fundamental Analysis - Top-down approach (cont'd) Flashcards

1
Q

Different industries - different sensitivity to business cycle:

  • cyclical industries: high beta - highly sensitive
  • defensive industries: low beta - low sensitivity
A

Different industries - different sensitivity to business cycle:

  • cyclical industries: high beta - highly sensitive
  • defensive industries: low beta - lowly sensitive
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2
Q

Business cycle - Important variables:

  • sensitivity of sales
  • operating leverage
  • financial leverage
A

Business cycle - Important variables:

  • sensitivity of sales
  • operating leverage
  • financial leverage
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3
Q

In EARLY part of Business Cycle, these sectors outperform the market:

  • consumer ?
  • ?cials
  • ?trials
  • information ?
  • ?rials
  • real ?
A

In EARLY part of Business Cycle, these sectors outperform the market:

  • consumer discretionary
  • financials
  • industrials
  • information technology
  • materials
  • real estate
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4
Q

At the peak of Business Cycle, ?? & ?? sectors outperform market.

A

At the peak of Business Cycle, Communication Services & Information Technology sectors outperform market.

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5
Q

In Late part of Business Cycle, these sectors outperform market:

  • Consumer ?
  • ?
  • ? care
  • Materials
  • ?
A

In Late part of Business Cycle, these sectors outperform market:

  • Consumer staples
  • Energy
  • Health care
  • Materials
  • Utility
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6
Q

During recession, these sectors outperform market:

  • Consumer ?
  • ??
  • ?

These sectors underperform the market:

  • ? services
  • ?
  • ??
  • ? Technology
A

During recession, these sectors outperform market:

  • Consumer staples
  • Health care
  • Utility

These sectors underperform the market:

  • Communications services
  • Industrial
  • Real estate
  • Information Technology
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7
Q

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)

A

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)

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8
Q

Defensive industries are not overly ? to business cycle => ? variation in their performance
e.g. ???

A

Defensive industries are not overly sensitive to business cycle => little variation in their performance
e.g. Health care, utilities, Consumer defensive

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9
Q

? investing:

Some investors may pick different ? to invest in according to how they perform in different phases of business cycle.

A

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)

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10
Q

Warren Buffet advises: You should only invest in the ? that you ?.

A

Warren Buffet advises: You should only invest in the industries that you understand.

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11
Q

? helps reduce risks

=> investing ? may help diversify.

A

Diversification helps reduce risks

=> investing internationally may help diversify.

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12
Q

What happened in the past is ?? to happen again in t’ future.

A

What happened in the past is not guaranteed to happen again in t’ future.

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13
Q

Industry Life Cycle: (in terms of sale over time)
? & ? growth (start up) (? potential gains but ?!)
=> ? growth (?)
=> Slowing growth (?)
=> ? or ? growth (relative decline)

A

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)

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14
Q

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

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.

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15
Q

Some mature industries contain ‘??’
firms that generate ? and are ? investments.
e.g. Microsoft, Intel

A

Some mature industries contain ‘cash cows
firms that generate cash and are good investments.
e.g. Microsoft, Intel

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16
Q

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.

A

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.

17
Q

Industry Analysis - Porter (1985)’s 5 factors:
2. Rivalry between existing competitors:
=> cause price competition
=> drive down profits

A

Industry Analysis - Porter (1985)’s 5 factors:
2. Rivalry between existing competitors:
=> cause price competition
=> drive down profits

18
Q

Industry Analysis - Porter (1985)’s 5 factors:
3. Pressure from ? products:
=> hard to maintain ??
=> barrier to increase ? bec of likelihood of losing ??.

A

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.

19
Q

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 ??.

A

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.

20
Q

Industry Analysis - Porter (1985)’s 5 factors:
5. Bargaining power of ?:
? & ? can have significant power on pricing policies
e.g. labour union -> supply labour.

A

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.

21
Q

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
A

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
22
Q

Some strengths of Top-down approach:

  • systematic & logical
  • consider external & internal factors
  • embedded within business cycle approach
A

Some strengths of Top-down approach:

  • systematic & logical
  • consider external & internal factors
  • embedded within business cycle approach
23
Q

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
A

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
24
Q

Final step of Fundamental analysis - Top-down approach is Valuation of ??.

Approaches:

  1. ? valuation:
    - determine a ? price using ??? Models (rely on ?? => ?) & compare it to ? price.
  2. ? valuation:
    - use of ??
A

Final step of Fundamental analysis - Top-down approach is Valuation of individual companies.

Approaches:

  1. Intrinsic valuation:
    - determine a fair price using Discounted Cash Flow Models (rely on expected values => uncertainty) & compare it to market price.
  2. Relative valuation:
    - use of financial ratios

Security Investment Analysis (14 decks)

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