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Table of Contents

S.N

o

Title Page

No.

1. Student Declaration….……………………………………………………….. i

2. Certificate from Company…………………………………………………… ii

3. Certificate from guide………………………………………………………. iii

4. Acknowledgement……………………………………………………………. iv

5. !ecutive Summary………………………………………………………… v

". #i$t of %a&le$………………………………………………………………… vi

'. #i$t of C(art$…………………………………………………………………. vii

).CHAPTER 1: INTRODUCTION…………………………………………..

1.1 A&out t(e *ndu$try………………………………………………………

1.2 A&out t(e *ndian Stock +arket….……………………………………

1.3 A&out t(e %opic…………………………………………………………

1-3

2

"

1,

-. CHAPTER : !ITERATURE RE"IE#…………………………………. 33-3$

1,.CHAPTER 3 : RESEARCH %ETHODO!O&'…………………………

  3.1 urpo$e of t(e $tudy……………………………………………………..

  3.2 /&0ective of t(e $tudy…………………………………………………...

3.3 Scope of t(e $tudy………………………………………………………

3(-3)

3'

3'

3'

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STUDENT DEC!ARATION

%(i$ i$ to certify t(at t(e ro0ect titled A st24 on e52it4 anal4sis 6it7 s8e9ial efeen9e

to Sto9; Pi9;ing Stategies< (ave &een completed under t(e guidance of =ani9a 0at7la<

in t(e partial fulfillment of t(e reuirement for t(e award of t(e degree of +a$ter in u$ine$$

Admini$tration from ukmini Devi *n$titute of Advanced Studie$6 7ew Del(i. %(i$ i$ anoriginal work &y me.

Na>e of t7e st2ent: %a42es7 Ti6ai ?Sign@

Co2se: %0A

0at97: /1 1 -13

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CERTIICATE RO% THE &UIDE

%(i$ i$ to certify t(at t(e pro0ect titled A st24 on e52it4 anal4sis 6it7 s8e9ial efeen9e to

Sto9; Pi9;ing Stategies< i$ an academic work done &y %a42es7 Ti6ai< $u&mitted in

t(e partial fulfillment of t(e reuirement for t(e award of t(e degree of +a$ter$ in u$ine$$

Admini$tration from ukmini Devi *n$titute of Advanced Studie$6 7ew Del(i. under my

guidance and direction. %o t(e &e$t of my knowledge and &elief t(e data and information

 pre$ented &y (im in t(e pro0ect (a$ not &een $u&mitted earlier el$ew(ere.

Na>e =ani9a 0at7la

?PoBe9t &2ie@

RDIAS

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AC=NO#!ED&E%ENT

* offer my $incere t(ank$ and (um&le regard$ to ukmini Devi *n$titute /f Advanced

Studie$6 88S* 9niver$ity6 7ew Del(i for imparting u$ very valua&le profe$$ional training in

+A.

* pay my gratitude and $incere regard$ to =ani9a 0at7la6 my pro0ect 8uide for giving me t(e

cream of (i$ knowledge. * am t(ankful to (im a$ (e (a$ &een a con$tant $ource of advice6

motivation and in$piration. * am al$o t(ankful to (im for giving (i$ $ugge$tion$ and

encouragement t(roug(out t(e pro0ect work.

* take t(e opportunity to e!pre$$ my gratitude and t(ank$ to our computer #a& $taff and

li&rary $taff for providing me opportunity to utili:e t(eir re$ource$ for t(e completion of t(e

 pro0ect.

* am al$o t(ankful to my family and friend$ for con$tantly motivating me to complete t(e

 pro0ect and providing me an environment w(ic( en(anced my knowledge.

Na>e of t7e st2ent: %a42es7 Ti6ai ?Sign@

Co2se: %0A

0at97: /1 1 -13

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EECUTI"E SU%%AR'

%(e pro0ect titled A $tudy on euity analy$i$ wit( $pecial reference to Stock icking Strategie$

(a$ &een completed after an in;dept( analy$i$ of *nve$tor$ perception and market reaction$.

*n t(i$ pro0ect *ndian <inancial Sy$tem (a$ &een $tudied6 in w(ic( &ot( t(e organi:ed and

unorgani:ed $ector$ (ave &een e!plored. %(e pro0ect cover$ financial $y$tem covering <inancial

*n$titution$ =vi:. egulatory6 <inancial *ntermediarie$6 7on *ntermediarie$>6 organi:ed and

unorgani:ed <inancial +arket$6 <inancial *n$trument$ and <inancial Service$. #egi$lation$

 pa$$ed &y t(e * elating to <oreign *nve$tment$ and t(eir implication$ were clo$ely e!amined.

8uideline$ &y t(e * pertaining to Commodity <uture$ %rading were look forward in order to

reali:e variou$ tool$ and procedure$ to ad(ere federal agencie$. Security !c(ange &oard of *ndia

=S*> and it$ Capital market$ operation$ were di$cu$$ed including S*?$ <unction$ and it$

o&0ective$. 8uideline$ &y S* for Commodity <uture$ trading (ave &een under$tood in order to

 pur$ue $ucce$$ful and et(ical future$ trading in commodity market.

%(e pro0ect include$@

• +o$t of t(e $trategie$ di$cu$$ed in t(i$ pro0ect u$e t(e tool$ and tec(niue$

of fundamental analy$i$6 w(o$e main o&0ective i$ to find t(e wort( of a company6 or

it$ intrin$ic value.

• *n uantitative analy$i$6 a company i$ wort( t(e $um of it$ di$counted ca$( flow$. *n ot(er

word$6 it i$ wort( all of it$ future profit$ added toget(er.

• Some ualitative factor$ affecting t(e value of a company are it$ management6   &u$ine$$ 

model6 indu$try and &rand name.

• alue inve$tor$6 concerned wit( t(e pre$ent6 look for $tock$ $elling at a price t(at i$ lower

t(an t(e e$timated wort( of t(e company6 a$ reflected &y it$ fundamental$. 8rowt(

inve$tor$ are concerned wit( t(e future6 &uying companie$ t(at may &e trading (ig(er t(an

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t(eir intrin$ic wort( &ut $(ow t(e potential to grow and one day e!ceed t(eir

current valuation$.

• %(e 8A $trategy i$ a com&ination of &ot( growt( and value@ inve$tor$ concerned wit(

Bgrowt( at a rea$ona&le priceB look for companie$ t(at are $omew(at undervalued given

t(eir growt( potential.• *ncome inve$tor$6 $eeking a $teady $tream of income from t(eir $tock$6 look for $olid

companie$ t(at pay a (ig( &ut $u$taina&le dividend yield.

.

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!ist of Tables

Table

No.

Na>e of t7e Table Page No.

1.1 Ca$( <low 13

1.2 e$idual alue 1*

1.3 i$torical arning$ $

4.1 indalco %a&le */

4.2 7C %a&le *1

4.3 rook$ #a&oratorie$ %a&le *

4.4 7**% %a&le *3

4.5 a0a0 olding$ %a&le **

!ist of C7ats

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C7at

No.

Na>e of t7e C7at Page No.

1.1 *ndian <inancial Sy$tem 2

4.1 Stock$ <inancial$ 45

CHAPTER  1

INTRODUCTION

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1.1 A0OUT THE INDUSTR'

%(e *ndian financial $y$tem con$i$t$ of many in$titution$6 in$trument$ and market$. <inancial

in$trument$ range from t(e common coin$6 currency note$ and c(eue$6 to t(e more e!otic

future$ $wap$ of (ig( finance.

 %(e *ndian <inancial Sy$tem

/t(er$#and #ord$

awnroker$

*ndigenou$anker$

<inancial+arket$

<inancialService$

<inancial*n$titution

$

<inancial*n$trument

$

+oney#ender$

 7on;*ntermediarie$

Diarie$

*ntermediarie$ egulatory

9n;/rgani:edSector 

/rgani:ed $ector 

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?1.1@ Inian inan9ial S4ste>

%(e *ndian financial $y$tem i$ &roadly cla$$ified into 2 &road 8roup$@;

1. /rgani:ed Sector 

2. 9norgani:ed Sector 

1. Oganie Se9to

%(e organi:ed $ector con$i$t$ of@ ;

I@ inan9ial Instit2tions

a@ Reg2lato4

%(e regulatory in$titution$ are t(e one$6 w(ic( form t(e regulation$6 and control t(e *ndian

financial $y$tem. %(e e$erve ank of *ndia i$ t(e regulatory &ody6 w(ic( regulate$6 guide$

control$ and promote$ t(e *<S.

b@ inan9ial Inte>eiaies

%(ey are t(e intermediarie$ w(o intermediate &etween t(e $aver and inve$tor$. %(ey lend money

a$ well mo&ili:e$ $aving$ t(eir lia&ilitie$ are toward$ ultimate $aver$6 w(ile t(eir a$$et$ are from

t(e inve$tor$ or &orrower$.

%(ey can &e furt(er cla$$ified into@

• 0an;ing

  All &anking in$titution$ are intermediarie$.

• Non-0an;ing

%rader$

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  Some 7on;anking in$titution$ al$o act a$ intermediarie$6 and w(en t(ey do $o t(ey are

known a$ 7on;

anking <inancial *ntermediarie$.9%*6 #*C6 8*C E 7AAD are $ome of t(e 7<C?$ in

*ndia.

9@ Non Inte>eiaies

 7on;intermediarie$ in$titution$ do t(e loan &u$ine$$ &ut t(eir re$ource$ are not directly o&tained

from t(e $aver.

II. inan9ial %a;ets

<inancial +arket$ are t(e center$ or arrangement$ t(at provide facilitie$ for &uying E $elling of

financial claim$ and $ervice$. <inancial market$ can &e cla$$ified into@ ;

• Oganie >a;ets

%(e$e market$ compri$e of corporation$6 financial in$titution$6 individual$ and

government$ w(o trade in t(e$e market$ eit(er directly or indirectly t(roug( &roker$ on

organi:ed e!c(ange$ or office$.

• Unoganie >a;ets

%(e financial tran$action$6 w(ic( take place out$ide t(e well;e$ta&li$(ed e!c(ange$ or

wit(out $y$tematic and orderly $tructure or arrangement$ con$titute$ t(e unorgani:ed

market$. %(ey generally refer to t(e market$ in t(e village$.

III. inan9ial Inst2>ents

<inancial in$trument$ con$titute of $ecuritie$6 a$$et$ and claim$. <inancial $ecuritie$ are cla$$ified

a$ primary and $econdary $ecuritie$. %(e primary $ecuritie$ are i$$ued &y t(e companie$ directly

to t(e ultimate $aver$ a$ ordinary $(are$ and de&enture$6 w(ile t(e $econdary $ecuritie$ are i$$ued &y t(e financial intermediarie$ to t(e ultimate $aver$ a$ &ank depo$it$6 in$urance policie$ $o and

on.

I". inan9ial Sei9es

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%(e term financial $ervice in a &road $en$e mean$ +o&ili:ing and allocating $aving$. %(u$6 it

can al$o &e offered a$ a proce$$ &y w(ic( fund$ are mo&ili:ed from a large num&er of $aver$ and

make t(em availa&le to all t(o$e w(o are in need of it6 particularly to t(e corporate cu$tomer$.

. T7e Unoganie Se9to%(e unorgani:ed financial $y$tem compri$e$ of relatively le$$ controlled money lender$6

indigenou$ &anker$6 lending pawn &roker$6 land lord$6 trader$ etc. %(i$ part of t(e financial

$y$tem i$ not directly controlled &y *.

!egislations 8asse b4 t7e R0I Relating to oeign Inest>ents

%(e e$erve ank of *ndia t(roug( it$ circular R0IF//*F3, A.P.Di seies 9i92la no

(*Feb2a4 * //* (a$ introduced a $pecial $c(eme T7e !ibealie Re>ittan9e $c(eme of

9SD 256,,, =per year> for e$ident individual$.

T7e i>8li9ations of t7is legislation

e$ident *ndian$ can now freely inve$t in any over$ea$ tran$action t(i$ open$ t(e entire gamut of

t(e *ndian *nve$tment $cenario to over$ea$ in$trument$ like fore! market$6 fore! derivative$6

inde! future$6 commodity future and option$ and all ot(er alternative inve$tment$. %(e legi$lation

would eventually lead to complete li&erali:ation in t(e area$ of over$ea$ inve$tment$.

1.1.1 SECURITIES AND ECHAN&E 0OARD O INDIA ?SE0I@

S* wa$ $etup in April 126 1-)). %o $tart wit(6 S* wa$ $et up a$ a non;$tatutory &ody. *t took

4 year$ for t(e government to &ring a&out a $eparate legi$lation in t(e name of $ecuritie$ and

e!c(ange &oard of *ndia Act6 1--26 conferring $tatutory power$ over practically all a$pect$ of

capital market operation$.

ObBe9ties of SE0I

• %o protect t(e intere$t of inve$tor$ $o t(at t(ere i$ a $teady flow of $aving$ into t(e capital

market

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• %o regulate t(e $ecuritie$ market and en$ure fair practice$ &y t(e i$$uer$ of $ecuritie$6 $o

t(at t(ey can rai$e re$ource$ at minimum co$t

• %o provide efficient $ervice$ &y &roker$6 merc(ant &anker$ and t(e ot(er intermediarie$6

$o t(at t(ey &ecome competitive and profe$$ional

2n9tions of SE0I

Sec 11 of t(e S* act $pecifie$ t(e function$ a$ follow$@;

• egulation of t(e $tock e!c(ange and $elf;regulatory organi:ation$

• egi$tration and regulation of $tock &roker$6 $u&;&roker$6 regi$trar to all i$$ue6 merc(ant

 &anker$6 underwriter$6 portfolio manager$ and $uc( ot(er intermediarie$ w(o are

a$$ociated wit( $ecuritie$ market

•

egulation and regi$tration of t(e working of collective inve$tment $c(eme$ including+utual fund$

• ro(i&ition of fraudulent and unfair trade practice$ relating to $ecurity market

• ro(i&it in$ider trading in $ecuritie$

1. A0OUT THE INDIAN STOC= %AR=ET

+ark %wain once divided t(e world into two kind$ of people@ t(o$e w(o (ave $een t(e famou$

*ndian monument6 t(e %a0 +a(al6 and t(o$e w(o (avenBt. %(e $ame could &e $aid a&out inve$tor$.

%(ere are two kind$ of inve$tor$@ t(o$e w(o know a&out t(e inve$tment opportunitie$ in *ndia and

t(o$e w(o donBt. *ndia may look like a $mall dot to $omeone in t(e 9.S.6 &ut upon clo$er

in$pection6 you will find t(e $ame t(ing$ you would e!pect from any promi$ing market. ere

weBll provide an overview of t(e *ndian $tock market and (ow intere$ted inve$tor$ can gain

e!po$ure.

T7e 0SE an NSE

+o$t of t(e trading in t(e *ndian $tock market take$ place on it$ two $tock e!c(ange$@

t(e om&ay Stock !c(ange =S> and t(e 7ational Stock !c(ange =7S>. %(e S (a$ &een

in e!i$tence $ince 1)'5. %(e 7S6 on t(e ot(er (and6 wa$ founded in 1--2 and $tarted trading in

1--4. owever6 &ot( e!c(ange$ follow t(e $ame trading mec(ani$m6 trading (our$6 $ettlement

 proce$$6 etc. At t(e la$t count6 t(e S (ad a&out 46',, li$ted firm$6 w(erea$ t(e rival 7S (ad

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%(e two prominent *ndian market inde!e$ are Sen$e! and 7ifty. Sen$e! i$ t(e olde$t market

inde! for euitie$ it include$ $(are$ of 3, firm$ li$ted on t(e S6 w(ic( repre$ent a&out 45F of

t(e inde!B$ free;float market capitali:ation. *t wa$ created in 1-)" and provide$ time $erie$ data

from April 1-'-6 onward.

Anot(er inde! i$ t(e SE C7I 7ifty it include$ 5, $(are$ li$ted on t(e 7S6 w(ic( repre$ent

a&out "2F of it$ free;float market capitali:ation. *t wa$ created in 1--" and provide$ time $erie$

data from July 1--,6 onward.

%a;et Reg2lation

%(e overall re$pon$i&ility of development6 regulation and $upervi$ion of t(e $tock market re$t$

wit( t(e Securitie$ E !c(ange oard of *ndia =S*>6 w(ic( wa$ formed in 1--2 a$ an

independent aut(ority. Since t(en6 S* (a$ con$i$tently tried to lay down market rule$ in line

wit( t(e &e$t market practice$. *t en0oy$ va$t power$ of impo$ing penaltie$ on market

 participant$6 in ca$e of a &reac(.

#7o Can Inest In Inia

*ndia $tarted permitting out$ide inve$tment$ only in t(e 1--,$. <oreign inve$tment$ are cla$$ified

into two categorie$@ foreign direct inve$tment =<D*> and foreign portfolio inve$tment =<*>. All

inve$tment$ in w(ic( an inve$tor take$ part in t(e day;to;day management and operation$ of t(e

company6 are treated a$ <D*6 w(erea$ inve$tment$ in $(are$ wit(out any control over

management and operation$6 are treated a$ <*.

<or making portfolio inve$tment in *ndia6 one $(ould &e regi$tered eit(er a$ a foreign in$titutional 

inve$tor  =<**> or a$ one of t(e $u&;account$ of one of t(e regi$tered <**$. ot( regi$tration$ are

granted &y t(e market regulator6 S*. <oreign in$titutional inve$tor$ mainly con$i$t of mutual 

fund$6 pen$ion fund$6 endowment$6 $overeign wealt( fund$6 in$urance companie$6 &ank$6 a$$et

management companie$ etc. At pre$ent6 *ndia doe$ not allow foreign individual$ to inve$t directly

into it$ $tock market. owever6 (ig(;net;wort( individual$ =t(o$e wit( a net wort( of at lea$t

K9S5, million> can &e regi$tered a$ $u&;account$ of an <**.

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<oreign in$titutional inve$tor$ and t(eir $u& account$ can inve$t directly into any of t(e $tock$

li$ted on any of t(e $tock e!c(ange$. +o$t portfolio inve$tment$ con$i$t of inve$tment in

$ecuritie$ in t(e primary and $econdary market$6   including $(are$6 de&enture$ and warrant$ of

companie$ li$ted or to &e li$ted on a recogni:ed $tock e!c(ange in *ndia. <**$ can al$o inve$t in

unli$ted $ecuritie$ out$ide $tock e!c(ange$6 $u&0ect to approval of t(e price &y t(e  e$erve ank  of *ndia. <inally6 t(ey can inve$t in unit$ of mutual fund$ and derivative$ traded on any $tock

e!c(ange.

An <** regi$tered a$ a de&t;only <** can inve$t 1,,F of it$ inve$tment into de&t in$trument$.

/t(er <**$ mu$t inve$t a minimum of ',F of t(eir inve$tment$ in euity. %(e &alance of 3,F can

 &e inve$ted in de&t. <**$ mu$t u$e $pecial non;re$ident rupee &ank account$6 in order to move

money in and out of *ndia. %(e &alance$ (eld in $uc( an account can &e fully repatriated.

Resti9tionsFInest>ent Ceilings

%(e government of *ndia pre$cri&e$ t(e <D* limit and different ceiling$ (ave &een pre$cri&ed for

different $ector$. /ver a period of time6 t(e government (a$ &een progre$$ively increa$ing t(e

ceiling$. <D* ceiling$ mo$tly fall in t(e range of 2";1,,F.

y default6 t(e ma!imum limit for portfolio inve$tment in a particular li$ted firm6 i$ decided &y

t(e <D* limit pre$cri&ed for t(e $ector to w(ic( t(e firm &elong$. owever6 t(ere are two

additional re$triction$ on portfolio inve$tment. <ir$t6 t(e aggregate limit of inve$tment &y all <**$6

inclu$ive of t(eir $u&;account$ in any particular firm6 (a$ &een fi!ed at 24F of t(e paid;up

capital. owever6 t(e $ame can &e rai$ed up to t(e $ector cap6 wit( t(e approval of t(e companyB$

 &oard$ and $(are(older$.

Secondly6 inve$tment &y any $ingle <** in any particular firm $(ould not e!ceed 1,F of t(e paid;

up capital of t(e company. egulation$ permit a $eparate 1,F ceiling on inve$tment for eac( of

t(e $u&;account$ of an <**6 in any particular firm. owever6 in ca$e of foreign corporation$ or

individual$ inve$ting a$ a $u&;account6 t(e $ame ceiling i$ only 5F. egulation$ al$o impo$e

limit$ for inve$tment in euity;&a$ed derivative$ trading on $tock e!c(ange$.

T7e 0otto> !ine

merging market$ like *ndia6 are fa$t &ecoming engine$ for future growt(. Currently6 only a very

low percentage of t(e (ou$e(old $aving$ of *ndian$ are inve$ted in t(e dome$tic $tock market6 &ut

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wit( 8D growing at ';)F annually and a $ta&le financial market6 we mig(t $ee more money

 0oining t(e race. +ay&e itB$ t(e rig(t time for out$ide inve$tor$ to $eriou$ly t(ink a&out 0oining t(e

*ndia &andwagon.

1.3 A0OUT THE TOPIC

H(en it come$ to per$onal finance and t(e accumulation of wealt(6 few $u&0ect$ are more talked

a&out t(an $tock$. *tB$ ea$y to under$tand w(y@ playing t(e $tock market i$ t(rilling. ut on t(i$

financial roller;coa$ter ride6 we all want to e!perience t(e up$ wit(out t(e down$.

efore e!ploring t(e va$t world of $tock;picking met(odologie$6 we $(ould addre$$ a few

mi$conception$. +any inve$tor$ new to t(e $tock;picking $cene &elieve t(at t(ere i$ $ome

infalli&le $trategy t(at6 once followed6 will guarantee $ucce$$. There is no foolproof system for

 picking stocks!

%(i$ doe$nBt mean you canBt e!pand your wealt( t(roug( t(e $tock market. *tB$ 0u$t &etter to t(ink

of $tock;picking a$ an art rat(er t(an a $cience. %(ere are a few rea$on$ for t(i$@

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1. So many factor$ affect a companyB$ (ealt( t(at it i$ nearly impo$$i&le to con$truct a formula

t(at will predict $ucce$$. *t i$ one t(ing to a$$em&le data t(at you can work wit(6 &ut uite

anot(er to determine w(ic( num&er$ are relevant.

2. A lot of information i$ intangi&le and cannot &e mea$ured. %(e uantifia&le a$pect$ of a

company6 $uc( a$ profit$6 are ea$y enoug( to find. ut (ow do you mea$ure t(e ualitative

factor$6 $uc( a$ t(e companyB$ $taff6 it$ competitive advantage$6 it$ reputation and $o onL %(i$

com&ination of tangi&le and intangi&le a$pect$ make$ picking $tock$ a (ig(ly $u&0ective6 even

intuitive proce$$.

3. ecau$e of t(e (uman =often irrational> element in(erent in t(e force$ t(at move t(e $tock

market6 $tock$ do not alway$ do w(at you anticipate t(eyBll do. motion$ can c(ange uickly and

unpredicta&ly. And unfortunately6 w(en confidence turn$ into fear6 t(e $tock market can &e a

dangerou$ place.

%(e &ottom line i$ t(at t(ere i$ no one way to pick $tock$. etter to t(ink of every $tock $trategy

a$ not(ing more t(an an application of a t(eory ; a M&e$t gue$$M of (ow to inve$t. And $ometime$

two $eemingly oppo$ed t(eorie$ can &e $ucce$$ful at t(e $ame time. er(ap$ 0u$t a$ important a$

con$idering t(eory6 i$ determining (ow well an inve$tment $trategy fit$ your per$onal outlook6

time frame6 ri$k tolerance and t(e amount of time you want to devote to inve$ting and picking

$tock$.

At t(i$ point6 you may &e a$king your$elf w(y $tock;picking i$ $o important. H(y worry $o muc(

a&out itL H(y $pend (our$ doing itL %(e an$wer i$ $imple@ wealt(. *f you &ecome a good $tock;

 picker6 you can increa$e your per$onal wealt( e!ponentially. %ake +icro$oft6 for e!ample. ad

you inve$ted in ill 8ate$B &rainc(ild at it$ */ &ack in 1-)" and $imply (eld t(at inve$tment6

your return would (ave &een $omew(ere in t(e neig(&or(ood of 356,,,F &y $pring of 2,,4. *n

ot(er word$6 over an 1);year period6 a K1,6,,, inve$tment would (ave turned it$elf into a cool

K3.5 millionN =*n fact6 (ad you (ad t(i$ fore$ig(t in t(e &ull market of t(e late B-,$6 your returncould (ave &een even greater.> Hit( return$ like t(i$6 itB$ no wonder t(at inve$tor$ continue to

(unt for Mt(e ne!t +icro$oftM.

Hit(out furt(er ado6 letB$ $tart &y delving into one of t(e mo$t &a$ic and crucial a$pect$ of $tock;

 picking@ fundamental analy$i$6 w(o$e t(eory underlie$ all of t(e $trategie$ we e!plore =wit( t(e

e!ception of t(e la$t $ection on tec(nical analy$i$>. Alt(oug( t(ere are many difference$ &etween

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eac( $trategy6 t(ey all come down to finding t(e wort( of a company. Oeep t(i$ in mind a$ we

move forward.

1.3.1 Sto9;-Pi9;ing Stategies: 2na>ental Anal4sis

ver (ear $omeone $ay t(at a company (a$ M$trong fundamental$ML %(e p(ra$e i$ $o overu$ed t(at

itB$ &ecome $omew(at of a clic(P. Any analy$t can refer to a companyB$ fundamental$ wit(out

actually $aying anyt(ing meaningful. So (ere * define e!actly w(at fundamental$ are6 (ow and

w(y t(ey are analy:ed6 and w(y fundamental analy$i$ i$ often a great $tarting point to picking

good companie$.

T7e T7eo4 

Doing &a$ic fundamental valuation i$ uite $traig(tforward all it take$ i$ a little time and energy.

%(e goal of analy:ing a companyB$ fundamental$ i$ to find a $tockB$ intrin$ic value6 a fancy term

for w(at you &elieve a $tock i$ really wort( ; a$ oppo$ed to t(e value at w(ic( it i$ &eing traded in

t(e marketplace. *f t(e intrin$ic value i$ more t(an t(e current $(are price6 your analy$i$ i$

$(owing t(at t(e $tock i$ wort( more t(an it$ price and t(at it make$ $en$e to &uy t(e $tock.

Alt(oug( t(ere are many different met(od$ of finding t(e intrin$ic value6 t(e premi$e &e(ind all

t(e $trategie$ i$ t(e $ame@ a company i$ wort( t(e $um of it$ di$counted ca$( flow$. *n plainngli$(6 t(i$ mean$ t(at a company i$ wort( all of it$ future profit$ added toget(er. And t(e$e

future profit$ mu$t &e di$counted to account for t(e time value of money6 t(at i$6 t(e force &y

w(ic( t(e K1 you receive in a yearB$ time i$ wort( le$$ t(an K1 you receive today.

%(e idea &e(ind intrin$ic value eualing future profit$ make$ $en$e if you t(ink a&out (ow a

 &u$ine$$ provide$ value for it$ owner=$>. *f you (ave a $mall &u$ine$$6 it$ wort( i$ t(e money you

can take from t(e company year after year =not t(e growt( of t(e $tock>. And you can take

$omet(ing out of t(e company only if you (ave $omet(ing left over after you pay for $upplie$ and

$alarie$6 reinve$t in new euipment6 and $o on. A &u$ine$$ i$ all a&out profit$6 plain old revenue

minu$ e!pen$e$ ; t(e &a$i$ of intrin$ic value.

 &eate ool T7eo4

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/ne of t(e a$$umption$ of t(e di$counted ca$( flow t(eory i$ t(at people are rational6 t(at no&ody

would &uy a &u$ine$$ for more t(an it$ future di$counted ca$( flow$. Since a $tock repre$ent$

owner$(ip in a company6 t(i$ a$$umption applie$ to t(e $tock market. ut w(y6 t(en6 do $tock$

e!(i&it $uc( volatile movement$L *t doe$nBt make $en$e for a $tockB$ price to fluctuate $o muc(

w(en t(e intrin$ic value i$nBt c(anging &y t(e minute.

%(e fact i$ t(at many people do not view $tock$ a$ a repre$entation of di$counted ca$( flow$6 &ut

a$ trading ve(icle$. H(o care$ w(at t(e ca$( flow$ are if you can $ell t(e $tock to $ome&ody el$e

for more t(an w(at you paid for itL Cynic$ of t(i$ approac( (ave la&eled it t(e greater fool 

t(eory6 $ince t(e profit on a trade i$ not determined &y a companyB$ value6 &ut a&out $peculating

w(et(er you can $ell to $ome ot(er inve$tor =t(e fool>. /n t(e ot(er (and6 a trader would $ay t(at

inve$tor$ relying $olely on fundamental$ are leaving t(em$elve$ at t(e mercy of t(e market

in$tead of o&$erving it$ trend$ and tendencie$.

%(i$ de&ate demon$trate$ t(e general difference &etween a tec(nical and fundamental inve$tor. A

follower of  tec(nical analy$i$ i$ guided not &y value6 &ut &y t(e trend$ in t(e market often

repre$ented in c(art$. So6 w(ic( i$ &etter@ fundamental or tec(nicalL %(e an$wer i$ neit(er. A$ we

mentioned in t(e introduction6 every $trategy (a$ it$ own merit$. *n general6 fundamental i$

t(oug(t of a$ a long;term $trategy6 w(ile tec(nical i$ u$ed more for $(ort;term $trategie$. =HeBll

talk more a&out tec(nical analy$i$ and (ow it work$ in a later $ection.>

P2tting T7eo4 into Pa9ti9e 

%(e idea of di$counting ca$( flow$ $eem$ okay in t(eory6 &ut implementing it in real life i$

difficult. /ne of t(e mo$t o&viou$ c(allenge$ i$ determining (ow far into t(e future we $(ould

foreca$t ca$( flow$. *tB$ (ard enoug( to predict ne!t yearB$ profit$6 $o (ow can we predict t(e

cour$e of t(e ne!t 1, year$L H(at if a company goe$ out of &u$ine$$L H(at if a company

$urvive$ for (undred$ of year$L All of t(e$e uncertaintie$ and po$$i&ilitie$ e!plain w(y t(ere are

many different model$ devi$ed for di$counting ca$( flow$6 &ut none completely e$cape$ t(ecomplication$ po$ed &y t(e uncertainty of t(e future.

#etB$ look at a $ample of a model u$ed to value a company. ecau$e t(i$ i$ a generali:ed

e!ample6 donBt worry if $ome detail$ arenBt clear. %(e purpo$e i$ to demon$trate t(e &ridging

 &etween t(eory and application. %ake a look at (ow valuation &a$ed on fundamental$ would look@

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Pat 1: Pei9t $ 'eas of

Cas7 lo6s

1 2 3 4 5

rior year ca$( flow K1,, K115 K132 K152 K1'5

8rowt( rate 15F 15F 15F 15F 15F

Ca$( flow K115 K132 K152 K1'5 K2,1

Di$count factor4 ,.-3 ,.)" ,.'- ,.'4 ,.")

Di$count value per year 5 K1," K113 K121 K12- K13'

Sum of of Ca$( flow K","

  <igure$ in 9SD million K

?Table 1.1 Cas7 lo6@

QDi$count rate )F

Q8rowt( rate for fir$t 5year$ 15F

Q8rowt( rate after 5year$ 5F

Pat : Resi2al "al2e

Ca$( flow five year$ K2,18rowt( rate 5F

Ca$( flow in $i! year$ K211.1-

Capitali:ation rate =k;g> 3F

alue at t(e end of year 5 K'6,3-.'5

Di$count factor at t(e end of year 5 ,.")

or re$idual value K4'-1.14

*ntrin$ic value of t(e company K53-'.1)

?Table 1. Resi2al "al2es@

%(e pro&lem wit( pro0ecting far into t(e future i$ t(at we (ave to account for t(e different rate$ at

w(ic( a company will grow a$ it enter$ different p(a$e$. %o get around t(i$ pro&lem6 t(i$ model

(a$ two part$@ =1> determining t(e $um of t(e di$counted future ca$( flow$ from eac( of t(e ne!t

five year$ =year$ one to five>6 and =2> determining Bre$idual valueB6 w(ic( i$ t(e $um of t(e future

ca$( flow$ from t(e year$ $tarting $i! year$ from now.

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*n t(i$ particular e!ample6 t(e company i$ a$$umed to grow at 15F a year for t(e fir$t five year$

and t(en 5F every year after t(at =year $i! and &eyond>. <ir$t6 we add toget(er all t(e fir$t five

yearly ca$( flow$ ; eac( of w(ic( are di$counted to year :ero6 t(e pre$ent ; in order to determine

t(e pre$ent value =>. So once t(e pre$ent value of t(e company for t(e fir$t five year$ i$calculated6 we mu$t6 in t(e $econd $tage of t(e model6 determine t(e value of t(e ca$( flow$

coming from t(e $i!t( year and all t(e following year$6 w(en t(e companyB$ growt( rate i$

a$$umed to &e 5F. %(e ca$( flow$ from all t(e$e year$ are di$counted &ack to year five and

added toget(er6 t(en di$counted to year :ero6 and finally com&ined wit( t(e of t(e ca$( flow$

from year$ one to five =w(ic( we calculated in t(e fir$t part of t(e model>. And voilRN He (ave an

e$timate =given our a$$umption$> of t(e intrin$ic value of t(e company. An e$timate t(at i$ (ig(er

t(an t(e current market capitali:ation indicate$ t(at it may &e a good &uy. elow6 we (ave gone

t(roug( eac( component of t(e model wit( $pecific note$@

1. rior;year ca$( flow ; %(e t(eoretical amount6 or total profit$6 t(at t(e $(are(older$ could

take from t(e company t(e previou$ year.

2. 8rowt( rate ; %(e rate at w(ic( ownerB$ earning$ are e!pected to grow for t(e ne!t five

year$.

3. Ca$( flow ; %(e t(eoretical amount t(at $(are(older$ would get if all t(e companyB$

earning$6 or profit$6 were di$tri&uted to t(em.

4. Di$count factor ; %(e num&er t(at &ring$ t(e future ca$( flow$ &ack to year :ero. *n ot(er

word$6 t(e factor u$ed to determine t(e ca$( flow$B pre$ent value =>.

5. Di$count per year ; %(e ca$( flow multiplied &y t(e di$count factor.

". Ca$( flow in year five ; %(e amount t(e company could di$tri&ute to $(are(older$ in year

five.

'. 8rowt( rate ; %(e growt( rate from year $i! into perpetuity.

). Ca$( flow in year $i! ; %(e amount availa&le in year $i! to di$tri&ute to $(are(older$.

-. Capitali:ation ate ; %(e di$count rate =t(e denominator> in t(e formula for a con$tantly 

growing perpetuity.

1,. alue at t(e end of year five ; %(e value of t(e company in five year$.

11. Di$count factor at t(e end of year five ; %(e di$count factor t(at convert$ t(e value of t(e

firm in year five into t(e pre$ent value.

12. of re$idual value ; %(e pre$ent value of t(e firm in year five.

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So far6 weBve &een very general on w(at a ca$( flow compri$e$6 and unfortunately6 t(ere i$ no

ea$y way to mea$ure it. %(e only natural ca$( flow from a pu&lic company to it$ $(are(older$ i$

a dividend6   and t(e dividend di$count model =DD+> value$ a company &a$ed on it$ future

dividend$. owever6 a company doe$nBt pay out all of it$ profit$ in dividend$6 and many

 profita&le companie$ donBt pay dividend$ at all.H(at (appen$ in t(e$e $ituation$L /t(er valuation option$ include analy:ing net income6 free 

ca$( flow6 *%DA and a $erie$ of ot(er financial mea$ure$. %(ere are advantage$ and

di$advantage$ to u$ing any of t(e$e metric$ to get a glimp$e into a companyB$ intrin$ic value. %(e

 point i$ t(at w(at repre$ent$ ca$( flow depend$ on t(e $ituation. egardle$$ of w(at model i$

u$ed6 t(e t(eory &e(ind all of t(em i$ t(e $ame.

1.3. Sto9;-Pi9;ing Stategies: 2alitatie Anal4sis

<undamental analy$i$ (a$ a very wide $cope. aluing a company involve$ not only crunc(ing

num&er$ and predicting ca$( flow$ &ut al$o looking at t(e general6 more $u&0ective ualitie$ of a

company. ere we will look at (ow t(e analy$i$ of ualitative factor$ i$ u$ed for picking a $tock.

%anage>ent 

%(e &ack&one of any $ucce$$ful company i$ $trong management. %(e people at t(e top ultimately

make t(e $trategic deci$ion$ and t(erefore $erve a$ a crucial factor determining t(e fate of t(e

company. %o a$$e$$ t(e $trengt( of management6 inve$tor$ can $imply a$k t(e $tandard five H$@

w(o6 w(ere6 w(at6 w(en and w(yL

Who?

Do $ome re$earc(6 and find out w(o i$ running t(e company. Among ot(er t(ing$6 you $(ould

know w(o it$ C/6 C</6 C// and C*/ are. %(en you can move onto t(e ne!t ue$tion.

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Where? 

ou need to find out w(ere t(e$e people come from6 $pecifically6 t(eir educational and

employment &ackground$. A$k your$elf if t(e$e &ackground$ make t(e people $uita&le for

directing t(e company in it$ indu$try. A management team con$i$ting of people w(o come from

completely unrelated indu$trie$ $(ould rai$e ue$tion$. *f t(e C/ of a newly;formed miningcompany previou$ly worked in t(e indu$try6 a$k your$elf w(et(er (e or $(e (a$ t(e nece$$ary

ualitie$ to lead a mining company to $ucce$$.

What and When? 

H(at i$ t(e management p(ilo$op(yL *n ot(er word$6 in w(at $tyle do t(e$e people intend to

manage t(e companyL Some manager$ are more per$ona&le6 promoting an open6 tran$parent and

fle!i&le way of running t(e &u$ine$$. /t(er management p(ilo$op(ie$ are more rigid and le$$

adapta&le6 valuing policy and e$ta&li$(ed logic a&ove all in t(e deci$ion;making proce$$. ou can

di$cern t(e $tyle of management &y looking at it$ pa$t action$ or &y reading t(e annual 

reportB$ management6 di$cu$$ion E analy$i$ =+DEA> $ection. A$k your$elf if you agree wit( t(i$

 p(ilo$op(y6 and if it work$ for t(e company6 given it$ $i:e and t(e nature of it$ &u$ine$$.

/nce you know t(e $tyle of t(e manager$6 find out w(en t(i$ team took over t(e company. Jack

Helc(6 for e!ample6 wa$ C/ of 8eneral lectric for over 2, year$. i$ long tenure i$ a good

indication t(at (e wa$ a $ucce$$ful and profita&le manager ot(erwi$e6 t(e $(are(older$ and

t(e  &oard of director$ wouldnBt (ave kept (im around. *f a company i$ doing poorly6 one of t(e

fir$t action$ taken i$ management re$tructuring6 w(ic( i$ a nice way of $aying Ma c(ange in

management due to poor re$ult$M. *f you $ee a company continually c(anging manager$6 it may

 &e a $ign to inve$t el$ew(ere.

At t(e $ame time6 alt(oug( re$tructuring i$ often &roug(t on &y poor management6 it doe$nBt

automatically mean t(e company i$ doomed. <or e!ample6 C(ry$ler Corp wa$ on t(e &rink of

 &ankruptcy w(en #ee *acocca6 t(e new C/6 came in and in$talled a new management team t(at

renewed C(ry$lerB$ $tatu$ a$ a ma0or player in t(e auto indu$try. So6 management re$tructuring

may &e a po$itive $ign6 $(owing t(at a $truggling company i$ making effort$ to improve it$

outlook and i$ a&out to $ee a c(ange for t(e &etter.

Why? 

A final factor to inve$tigate i$ w(y t(e$e people (ave &ecome manager$. #ook at t(e managerB$

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employment (i$tory6 and try to $ee if t(e$e rea$on$ are clear. Doe$ t(i$ per$on (ave t(e ualitie$

you &elieve are needed to make $omeone a good manager for t(i$ companyL a$ $T(e &een (ired

 &ecau$e of pa$t $ucce$$e$ and ac(ievement$6 or (a$ $T(e acuired t(e po$ition t(roug(

ue$tiona&le mean$6 $uc( a$ $elf;appointment after in(eriting t(e companyL

 =no6 #7at a Co>8an4 Does an Ho6 it %a;es %one4

A $econd important factor to con$ider w(en analy:ing a companyB$ ualitative factor$ i$ it$

 product=$> or $ervice=$>. ow doe$ t(i$ company make moneyL *n fancy +A parlance6 t(e

ue$tion would &e MH(at i$ t(e companyB$ &u$ine$$ modelLM

Onowing (ow a companyB$ activitie$ will &e profita&le i$ fundamental to determining t(e wort(

of an inve$tment. /ften6 people will &oa$t a&out (ow profita&le t(ey t(ink t(eir new $tock will

 &e6 &ut w(en you a$k t(em w(at t(e company doe$6 it $eem$ t(eir vi$ion for t(e future i$ a little

 &lurry@ MHell6 t(ey (ave t(i$ (ig(;tec( t(ingama&o& t(at doe$ $omet(ing wit( fi&er;optic ca&le.M

*f you arenBt $ure (ow your company will make money6 you canBt really &e $ure t(at it$ $tock will

 &ring you a return.

/ne of t(e &igge$t le$$on$ taug(t &y t(e dotcom &u$t of t(e late B-,$ i$ t(at not under$tanding a

 &u$ine$$ model can (ave dire con$euence$. +any people (ad no idea (ow t(e dotcom

companie$ were making money6 or w(y t(ey were trading $o (ig(. *n fact6 t(e$e companie$

werenBt making any money itB$ 0u$t t(at t(eir growt( potential wa$ t(oug(t to &e enormou$. %(i$

led to over:ealou$ &uying &a$ed on a (erd mentality6 w(ic( in turn led to a market cra$(. ut not

everyone lo$t money w(en t(e &u&&le &ur$t@ Harren uffett didnBt inve$t in (ig(;tec( primarily

 &ecau$e (e didnBt under$tand it. Alt(oug( (e wa$ o$traci:ed for t(i$ during t(e &u&&le6 it $aved

(im &illion$ of dollar$ in t(e en$uing dotcom fallout. ou need a $olid under$tanding of (ow a

company actually generate$ revenue in order to evaluate w(et(er management i$ making t(e rig(t

deci$ion$.

In2st4FCo>8etition 

A$ide from (aving a general under$tanding of w(at a company doe$6 you $(ould analy:e t(e

c(aracteri$tic$ of it$ indu$try6 $uc( a$ it$ growt( potential. A mediocre company in a great

indu$try can provide a $olid return6 w(ile a mediocre company in a poor indu$try will likely take

a &ite out of your portfolio. /f cour$e6 di$cerning a companyB$ $tage of growt( will involve

appro!imation6 &ut common $en$e can go a long way@ itB$ not (ard to $ee t(at t(e growt(

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 pro$pect$ of a (ig(;tec( indu$try are greater t(an t(o$e of t(e railway indu$try. *tB$ 0u$t a matter

of a$king your$elf if t(e demand for t(e indu$try i$ growing.

+arket $(are i$ anot(er important factor. #ook at (ow +icro$oft t(oroug(ly dominate$ t(e

market for operating $y$tem$. Anyone trying to enter t(i$ market face$ (uge o&$tacle$ &ecau$e

+icro$oft can take advantage of economie$ of $cale. %(i$ doe$ not mean t(at a company in a near

monopoly $ituation i$ guaranteed to remain on top6 &ut inve$ting in a company t(at trie$ to take

on t(e M5,,;pound gorillaM i$ a ri$ky venture.

arrier$ again$t entry into a market can al$o give a company a $ignificant ualitative advantage.

Compare6 for in$tance6 t(e re$taurant indu$try to t(e automo&ile or p(armaceutical$ indu$trie$.

Any&ody can open up a re$taurant &ecau$e t(e $kill level and capital reuired are very low. %(e

automo&ile and p(armaceutical$ indu$trie$6 on t(e ot(er (and6 (ave ma$$ive &arrier$ to entry@

large capital e!penditure$6 e!clu$ive di$tri&ution c(annel$6 government regulation6 patent$ and $o

on. %(e (arder it i$ for competition to enter an indu$try6 t(e greater t(e advantage for e!i$ting

firm$.

0an Na>e 

A valua&le &rand reflect$ year$ of product development and marketing. %ake for e!ample t(e

mo$t popular &rand name in t(e world@ Coca;Cola. +any e$timate t(at t(e  intangi&le value of

CokeB$ &rand name i$ in t(e &illion$ of dollar$N +a$$ive corporation$ $uc( a$ rocter E 8am&le

rely on (undred$ of popular &rand name$ like %ide6 amper$ and ead E S(oulder$. aving a

 portfolio of &rand$ diver$ifie$ ri$k  &ecau$e t(e good performance of one &rand can compen$ate

for t(e underperformer$.

Oeep in mind t(at $ome $tock;picker$ $teer clear of any company t(at i$ &randed around one

individual. %(ey do $o &ecau$e6 if a company i$ tied too clo$ely to one per$on6 any &ad new$

regarding t(at per$on may (inder t(e companyB$ $(are performance even if t(e new$ (a$ not(ing

to do wit( company operation$. A perfect e!ample of t(i$ i$ t(e trou&le$ faced &y +art(a Stewart

/mnimedia a$ a re$ult of StewartB$ legal pro&lem$ in 2,,4.

DonJt Oe9o>8li9ate 

ou donBt need a (D in finance to recogni:e a good company. *n (i$ &ook  " /ne 9p on Hall

StreetM6 eter #ync( di$cu$$e$ a time w(en (i$ wife drew (i$ attention to a great product wit(

 p(enomenal marketing. ane$ wa$ te$t marketing a product called #Begg$@ womenB$ panty(o$e

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 packaged in colorful pla$tic egg $(ell$. *n$tead of $elling t(e$e in department or $pecialty $tore$6

ane$ put t(e product ne!t to t(e candy &ar$6 $oda and gum at t(e c(eckout$ of $upermarket$ ; a

 &rilliant idea $ince re$earc( $(owed t(at women freuented t(e $upermarket a&out 12 time$ more

often t(an t(e traditional outlet$ for panty(o$e. %(e product wa$ a (uge $ucce$$ and &ecame t(e

$econd (ig(e$t;$elling con$umer product of t(e 1-',$.+o$t women at t(e time would (ave ea$ily $een t(e popularity of t(i$ product6 and #ync(B$ wife

wa$ one of t(em. %(ank$ to (er advice6 (e re$earc(ed t(e company a little deeper and turned (i$

inve$tment in ane$ into a $olid earner for <idelity6 w(ile mo$t of t(e male manager$ on Hall

Street mi$$ed out. %(e point i$ t(at itB$ not only Hall Street analy$t$ w(o are privy to information

a&out companie$ average everyday people can $ee $uc( wonder$ too. *f you $ee a local company

e!panding and doing well6 dig a little deeper6 a$k around. H(o know$6 it may &e t(e ne!t ane$.

Con9l2sion 

A$$e$$ing a company from a ualitative $tandpoint and determining w(et(er you $(ould inve$t in

it are a$ important a$ looking at $ale$ and earning$. %(i$ $trategy may &e one of t(e $imple$t6 &ut

it i$ al$o one of t(e mo$t effective way$ to evaluate a potential inve$tment.

1.3.3 Sto9;-Pi9;ing Stategies: "al2e Inesting

alue inve$ting i$ one of t(e &e$t known $tock;picking met(od$. *n t(e 1-3,$6 en0amin 8ra(am

and David Dodd6 finance profe$$or$ at Colum&ia 9niver$ity6 laid out w(at many con$ider to &e

t(e framework for value inve$ting. %(e concept i$ actually very $imple@ find companie$ trading

 &elow t(eir in(erent wort(.

%(e value inve$tor look$ for $tock$ wit( $trong fundamental$ including earning$6 dividend$6 &ook  

value6 and ca$( flow ; t(at are $elling at a &argain price6 given t(eir uality. %(e value inve$tor

$eek$ companie$ t(at $eem to &e incorrectly valued =undervalued> &y t(e market and t(erefore(ave t(e potential to increa$e in $(are price w(en t(e market correct$ it$ error in valuation.

"al2eK Not L2n;M 

efore we get too far into t(e di$cu$$ion of value inve$ting6 letB$ get one t(ing $traig(t. alue

inve$ting doe$nBt mean 0u$t &uying any $tock t(at decline$ and t(erefore $eem$ Mc(eapM in price.

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alue inve$tor$ (ave to do t(eir (omework and &e confident t(at t(ey are picking a company t(at

i$ c(eap given it$ (ig( uality.

*tB$ important to di$tingui$( t(e difference &etween a value company and a company t(at $imply

(a$ a declining price. Say for t(e pa$t year Company A (a$ &een trading at a&out K25 per $(are

 &ut $uddenly drop$ to K1, per $(are. %(i$ doe$ not automatically mean t(at t(e company i$

$elling at a &argain. All we know i$ t(at t(e company i$ le$$ e!pen$ive now t(an it wa$ la$t year.

%(e drop in price could &e a re$ult of t(e market re$ponding to a fundamental pro&lem in t(e

company. %o &e a real &argain6 t(i$ company mu$t (ave fundamental$ (ealt(y enoug( to imply it

i$ wort( more t(an K1, ; value inve$ting alway$ compare$ current $(are price to intrin$ic 

value not to (i$toric $(are price$.

"al2e Inesting at #o;

/ne of t(e greate$t inve$tor$ of all time6 Harren uffett6 (a$ proven t(at value inve$ting can

work@ (i$ value $trategy took t(e $tock of erk$(ire at(away6 (i$ (olding company6 from K12 a

$(are in 1-"' to K',6-,, in 2,,2. %(e company &eat t(e SE 5,,B$ performance &y a&out

13.,2F on average annuallyN Alt(oug( uffett doe$ not $trictly categori:e (im$elf a$ a value

inve$tor6 many of (i$ mo$t $ucce$$ful inve$tment$ were made on t(e &a$i$ of value inve$ting

 principle$.

024ing a 02sinessK not a Sto9; 

He $(ould emp(a$i:e t(at t(e value inve$ting mentality $ee$ a $tock a$ t(e ve(icle &y w(ic( a

 per$on &ecome$ an owner of a company ; to a value inve$tor profit$ are made &y inve$ting in

uality companie$6 not &y trading. ecau$e t(eir met(od i$ a&out determining t(e wort( of t(e

underlying a$$et6 value inve$tor$ pay no mind to t(e e!ternal factor$ affecting a company6 $uc( a$

market volatility or day;to;day price fluctuation$. %(e$e factor$ are not in(erent to t(e company6

and t(erefore are not $een to (ave any effect on t(e value of t(e &u$ine$$ in t(e long run.

Contai9tions 

H(ile t(e efficient market (ypot(e$i$ =+> claim$ t(at price$ are alway$ reflecting all relevant

information6 and t(erefore are already $(owing t(e intrin$ic wort( of companie$6 value inve$ting

relie$ on a premi$e t(at oppo$e$ t(at t(eory. alue inve$tor$ &ank on t(e + &eing true only in

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$ome academic wonderland. %(ey look for time$ of inefficiency6 w(en t(e market a$$ign$ an

incorrect price to a $tock.

alue inve$tor$ al$o di$agree wit( t(e principle t(at (ig( &eta =al$o known a$ volatility6

or $tandard deviation> nece$$arily tran$late$ into a ri$ky inve$tment. A company wit( an intrin$ic

value of K2, per $(are &ut i$ trading at K15 would &e6 a$ we know6 an attractive inve$tment to

value inve$tor$. *f t(e $(are price dropped to K1, per $(are6 t(e company would e!perience an

increa$e in &eta6 w(ic( conventionally repre$ent$ an increa$e in ri$k . *f6 (owever6 t(e value

inve$tor $till maintained t(at t(e intrin$ic value wa$ K2, per $(are6 $T(e would $ee t(i$ declining

 price a$ an even &etter &argain. And t(e &etter t(e &argain6 t(e le$$er t(e ri$k. A (ig( &eta doe$

not $care off value inve$tor$. A$ long a$ t(ey are confident in t(eir intrin$ic valuation6 an increa$e

in down$ide volatility may &e a good t(ing.

S9eening fo "al2e Sto9;s

 7ow t(at we (ave a $olid under$tanding of w(at value inve$ting i$ and w(at it i$ not6 letB$ get into

$ome of t(e ualitie$ of  value $tock$.

Uualitative a$pect$ of value $tock$@

1. Where are value stocks found? ; veryw(ere. alue $tock$ can &e found trading on

t(e 7S6 7a$da6 A+I6 over t(e counter6 on t(e <%S6 7ikkei and $o on.

2. a> In what industries are value stocks located? ; alue $tock$ can &e located in

anyindu$try6 including energy6 finance and even tec(nology =contrary to popular &elief>.

 &> In what industries are value stocks most often located? ; Alt(oug( value $tock$ can

 &e located anyw(ere6 t(ey are often located in indu$trie$ t(at (ave recently fallen on (ard

time$6 or are currently facing market overreaction to a piece of new$ affecting t(e indu$try

in t(e $(ort term. <or e!ample6 t(e auto indu$tryB$ cyclical nature allow$ for period$ of

undervaluation of companie$ $uc( a$ <ord or 8+.

3. Can value companies be those that have just reached new lows?  ; Definitely6 alt(oug(

we mu$t re;emp(a$i:e t(at t(e Mc(eapne$$M of a company i$ relative to intrin$ic value. A

company t(at (a$ 0u$t (it a new 12;mont( low or i$ at (alf of a 12;mont( (ig( may

warrant furt(er inve$tigation.

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ere i$ a &reakdown of $ome of t(e num&er$ value inve$tor$ u$e a$ roug( guide$ for picking

$tock$. Oeep in mind t(at t(e$e are guideline$6 not (ard;and;fa$t rule$@

1. S(are price $(ould &e no more t(an two;t(ird$ of intrin$ic wort(.

2. #ook at companie$ wit( T ratio$ at t(e lowe$t 1,F of all euity $ecuritie$.

3. 8 $(ould &e le$$ t(an one.4. Stock price $(ould &e no more t(an tangi&le &ook value.

5. %(ere $(ould &e no more de&t t(an euity =i.e. DT ratio V 1>.

". Current a$$et$ $(ould &e two time$ current lia&ilitie$.

'. Dividend yield $(ould &e at lea$t two;t(ird$ of t(e long;term AAA &ond yield.

). arning$ growt( $(ould &e at lea$t 'F per annum compounded over t(e la$t 1, year$.

T7e PFE an PE& Ratios

Contrary to popular &elief6 value inve$ting i$ not $imply a&out inve$ting in low T $tock$. *tB$

 0u$t t(at $tock$ w(ic( are undervalued will often reflect t(i$ undervaluation t(roug( a low T

ratio6 w(ic( $(ould $imply provide a way to compare companie$ wit(in t(e $ame indu$try. <or

e!ample6 if t(e average T of t(e tec(nology con$ulting indu$try i$ 2,6 a company trading in t(at

indu$try at 15 time$ earning$ $(ould $ound $ome &ell$ in t(e (ead$ of value inve$tor$.

Anot(er popular metric for valuing a companyB$ intrin$ic value i$ t(e 8 ratio6 calculated a$ a

$tockB$ T ratio divided &y it$ pro0ected year;over;year earning$ growt( rate. *n ot(er word$6 t(e

ratio mea$ure$ (ow c(eap t(e $tock i$ w(ile taking into account it$ earning$ growt(. *f t(e

companyB$ 8 ratio i$ le$$ t(an one6 it i$ con$idered to &e undervalued.

Nao6ing It Do6n Een 2t7e

/ne well;known and accepted met(od of picking value $tock$ i$ t(e net;net met(od. %(i$ met(od

$tate$ t(at if a company i$ trading at two;t(ird$ of it$ current a$$et$6 no ot(er gauge of wort( i$

nece$$ary. %(e rea$oning &e(ind t(i$ i$ $imple@ if a company i$ trading at t(i$ level6 t(e &uyer i$

e$$entially getting all t(e permanent a$$et$ of t(e company =including property6 euipment6 etc>

and t(e companyB$ intangi&le a$$et$ =mainly goodwill6 in mo$t ca$e$> for freeN 9nfortunately6

companie$ trading t(i$ low are few and far &etween.

T7e %agin of Safet4

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A di$cu$$ion of value inve$ting would not &e complete wit(out mentioning t(e u$e of a margin of

$afety6 a tec(niue w(ic( i$ $imple yet very effective. Con$ider a real;life e!ample of a margin of

$afety. Say youBre planning a pyrotec(nic$ $(ow6 w(ic( will include flame$ and e!plo$ion$. ou

(ave concluded wit( a (ig( degree of certainty t(at itB$ perfectly $afe to $tand 1,, feet from t(e

center of t(e e!plo$ion$. ut to &e a&$olutely $ure no one get$ (urt6 you implement a margin of$afety &y $etting up &arrier$ 125 feet from t(e e!plo$ion$.

%(i$ u$e of a margin of $afety work$ $imilarly in value inve$ting. *tB$ $imply t(e practice of

leaving room for error in your calculation$ of intrin$ic value. A value inve$tor may &e fairly

confident t(at a company (a$ an intrin$ic value of K3, per $(are. ut in ca$e (i$ or (er

calculation$ are a little too optimi$tic6 (e or $(e create$ a margin of $afetyTerror &y u$ing t(e K2"

 per $(are in t(eir $cenario analy$i$. %(e inve$tor may find t(at at K15 t(e company i$ $till an

attractive inve$tment6 or (e or $(e may find t(at at K246 t(e company i$ not attractive enoug(. *f

t(e $tockB$ intrin$ic value i$ lower t(an t(e inve$tor e$timated6 t(e margin of $afety would (elp

 prevent t(i$ inve$tor from paying too muc( for t(e $tock.

Con9l2sion 

alue inve$ting i$ not a$ $e!y a$ $ome ot(er $tyle$ of inve$ting it relie$ on a $trict $creening

 proce$$. ut 0u$t remem&er6 t(ereB$ not(ing &oring a&out outperforming t(e SE &y 13F over a

4,;year $panN

1.3.* Sto9;-Pi9;ing Stategies: &o6t7 Inesting

*n t(e late 1--,$6 w(en tec(nology companie$ were flouri$(ing6 growt( inve$ting tec(niue$

yielded unprecedented return$ for inve$tor$. ut &efore any inve$tor 0ump$ onto t(e growt(

inve$ting &andwagon6 $T(e $(ould reali:e t(at t(i$ $trategy come$ wit( $u&$tantial ri$k$ and i$ not

for everyone.

"al2e es2s &o6t7 

%(e &e$t way to define growt( inve$ting i$ to contra$t it to value inve$ting. alue inve$tor$ are

$trictly concerned wit( t(e (ere and now t(ey look for $tock$ t(at6 at t(i$ moment6 are trading for

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le$$ t(an t(eir apparent wort(. 8rowt( inve$tor$6 on t(e ot(er (and6 focu$ on t(e future potential

of a company6 wit( muc( le$$ emp(a$i$ on it$ pre$ent price. 9nlike value inve$tor$6 growt(

inve$tor$ &uy companie$ t(at are trading (ig(er t(an t(eir current intrin$ic wort( ; &ut t(i$ i$ done

wit( t(e &elief t(at t(e companie$B intrin$ic wort( will grow and t(erefore e!ceed t(eir

current valuation$. 

A$ t(e name $ugge$t$6 growt( $tock$ are companie$ t(at grow $u&$tantially fa$ter t(an ot(er$.

8rowt( inve$tor$ are t(erefore primarily concerned wit( young companie$. %(e t(eory i$ t(at

growt( in earning$ andTor revenue$ will directly tran$late into an increa$e in t(e $tock price.

%ypically a growt( inve$tor look$ for inve$tment$ in rapidly e!panding indu$trie$ e$pecially

t(o$e related to new tec(nology. rofit$ are reali:ed t(roug( capital gain$ and not dividend$ a$

nearly all growt( companie$ reinve$t t(eir earning$ and do not pay a dividend.

No A2to>ati9 o>2la 

8rowt( inve$tor$ are concerned wit( a companyB$ future growt( potential6 &ut t(ere i$ no

a&$olute formula for evaluating t(i$ potential. very met(od of picking growt( $tock$ =or any

ot(er type of $tock> reuire$ $ome individual interpretation and 0udgment. 8rowt( inve$tor$ u$e

certain met(od$ ; or $et$ of guideline$ or criteria ; a$ a framework for t(eir analy$i$6 &ut t(e$e

met(od$ mu$t &e applied wit( a companyB$ particular $ituation in mind. +ore $pecifically6 t(e

inve$tor mu$t con$ider t(e company in relation to it$ pa$t performance and it$ indu$tryB$ performance. %(e application of any one guideline or criterion may t(erefore c(ange from

company to company and from indu$try to indu$try.

T7e NAIC

%(e  7ational A$$ociation of *nve$tor$ Corporation =7A*C> i$ one of t(e &e$t known

organi:ation$ u$ing and teac(ing t(e growt( inve$ting $trategy. *t i$6 a$ it $ay$ on it$ we&$ite6

Mone &ig inve$tment clu&M w(o$e goal i$ to teac( inve$tor$ (ow to inve$t wi$ely. %(e 7A*C (a$

developed $ome &a$ic Muniver$alM guideline$ for finding po$$i&le growt( companie$ ; (ereB$ a

look at $ome of t(e ue$tion$ t(e 7A*C $ugge$t$ you $(ould a$k w(en con$idering $tock$.

1. Strong istorical !arnings "rowth? 

According to t(e 7A*C6 t(e fir$t ue$tion a growt( inve$tor $(ould a$k i$ w(et(er t(e company6

 &a$ed on annual revenue6 (a$ &een growing in t(e pa$t. elow are roug( guideline$ for t(e rate

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of S growt( an inve$tor $(ould look for in companie$ of differing $i:e$6 w(ic( would indicate

t(eir growt( inve$ting potential@

Co>8an4 Sie %ini>2> &o6t7 in !ast $4eas

W K4 5F

W K4,,m W K4 'F

V K4,,+ 12F

?Table 1.3 Histoi9al Eanings@

Alt(oug( t(e 7A*C $ugge$t$ t(at companie$ di$play t(i$ type of S growt( in at lea$t t(e la$t

five year$6 a 1,;year period of t(i$ growt( i$ even more attractive. %(e &a$ic idea i$ t(at if a

company (a$ di$played good growt( =a$ defined &y t(e a&ove c(art> over t(e la$t five; or 1,;year

 period6 it i$ likely to continue doing $o in t(e ne!t five to 1, year$.

#. Strong $orward !arnings "rowth? 

%(e $econd criterion $et out &y t(e 7A*C i$ a pro0ected five;year  growt( rate of at lea$t 1,;12F6

alt(oug( 15F or more i$ ideal. %(e$e pro0ection$ are made &y analy$t$6 t(e company or ot(er

credi&le $ource$.

%(e &ig pro&lem wit( forward e$timate$ i$ t(at t(ey are e$timate$. H(en a growt( inve$tor $ee$

an ideal growt( pro0ection6 (e or $(e6 &efore tru$ting t(i$ pro0ection6 mu$t evaluate it$ credi&ility.

%(i$ reuire$ knowledge of t(e typical growt( rate$ for different $i:e$ of companie$. <or

e!ample6 an e$ta&li$(ed large cap will not &e a&le to grow a$ uickly a$ a younger  $mall;cap tec(

company. Al$o6 w(en evaluating analy$t con$en$u$ e$timate$6 an inve$tor $(ould learn a&out t(ecompanyB$ indu$try ; $pecifically6 w(at it$ pro$pect$ are and w(at $tage of growt( it i$ at.

%. Is &anagement Controlling Costs and 'evenues? 

%(e t(ird guideline $et out &y t(e 7A*C focu$e$ $pecifically on pre;ta! profit margin$. %(ere are

many e!ample$ of companie$ wit( a$tounding growt( in $ale$ &ut le$$ t(an out$tanding gain$ in

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earning$. ig( annual revenue growt( i$ good6 &ut if S (a$ not increa$ed proportionately6 itB$

likely due to a decrea$e in profit margin.

y comparing a companyB$ pre$ent profit margin$ to it$ pa$t margin$ and it$ competitionB$ profit

margin$6 a growt( inve$tor i$ a&le to gauge fairly accurately w(et(er or not management i$

controlling co$t$ and revenue$ and maintaining margin$. A good rule of t(um& i$ t(at if company

e!ceed$ it$ previou$ five;year average of pre;ta! profit margin$ a$ well a$ t(o$e of it$ indu$try6

t(e company may &e a good growt( candidate.

(. Can &anagement )perate the *usiness !fficiently?

fficiency can &e uantified &y u$ing return on euity =/>. fficient u$e of a$$et$ $(ould &e

reflected in a $ta&le or increa$ing /. Again6 analy$i$ of t(i$ metric $(ould &e relative@ a

companyB$ pre$ent / i$ &e$t compared to t(e five;year average / of t(e company and t(e

indu$try.

+. Can the Stock ,rice -ouble in $ive ears? 

*f a $tock cannot reali$tically dou&le in five year$6 itB$ pro&a&ly not a growt( $tock. %(atB$ t(e

general con$en$u$. %(i$ may $eem like an overly (ig(6 unreali$tic $tandard6 &ut remem&er t(at

wit( a growt( rate of 1,F6 a $tockB$ price would dou&le in $even year$. So t(e rate growt(

inve$tor$ are $eeking i$ 15F per annum6 w(ic( yield$ a dou&ling in price in five year$.

1.3.$ Sto9;-Pi9;ing Stategies: &ARP Inesting

Do you feel t(at you now (ave a firm gra$p of t(e principle$ of &ot( value and growt( inve$tingL

*f youBre comforta&le wit( t(e$e two $tock;picking met(odologie$6 t(en youBre ready to learn

a&out a newer6 (y&rid $y$tem of $tock $election. ere we take a look at growt( at a rea$ona&le 

 price6 or 8A.

#7at Is &ARP

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%(e 8A $trategy i$ a com&ination of &ot( value and growt( inve$ting@ it look$ for companie$

t(at are $omew(at undervalued and (ave $olid $u$taina&le growt( potential. %(e criteria w(ic(

8Aer$ look for in a company fall rig(t in &etween t(o$e $oug(t &y t(e value and growt(

inve$tor$.

#7at &ARP Is NOT 

ecau$e 8A &orrow$ principle$ from &ot( value and growt( inve$ting6 $ome mi$conception$

a&out t(e $tyle per$i$t. Critic$ of 8A claim it i$ a wi$(y;wa$(y6 fence;$itting met(od t(at fail$

to e$ta&li$( meaningful $tandard$ for di$tingui$(ing good $tock pick$. owever6 8A doe$nBt

deem 0u$t any $tock a wort(y inve$tment. #ike mo$t re$pecta&le met(odologie$6 it aim$ to

identify companie$ t(at di$play very $pecific c(aracteri$tic$.

Anot(er mi$conception i$ t(at 8A inve$tor$ $imply (old a  portfolio wit( eual amount$ of

 &ot( value and growt( $tock$. Again6 t(i$ i$ not t(e ca$e@ &ecau$e eac( of t(eir $tock pick$ mu$t

meet a $et of $trict criteria6 8Aer$ identify $tock$ on an individual &a$i$6 $electing $tock$ t(at

(ave neit(er purely value nor purely growt( c(aracteri$tic$6 &ut a com&ination of t(e two.

#7o Uses &ARP 

/ne of t(e &igge$t $upporter$ of 8A i$ eter #ync(6 w(o$e p(ilo$op(ie$ we (ave alreadytouc(ed on in t(e $ection on ualitative analy$i$. #ync( (a$ written $everal popular &ook$6

including M/ne 9p on Hall StreetM and M#earn to arnM6 and in t(e late 1--,$ and early 2,,, (e

$tarred in t(e <idelity *nve$tment commercial$. +any con$ider #ync( t(e worldB$ &e$t fund 

manager 6 partly due to (i$ 2-F average annual return over a 13;year $tretc( from 1-'';1--,.

T7e H4bi C7aa9teisti9s 

#ike growt( inve$tor$6 8A inve$tor$ are concerned wit( t(e growt( pro$pect$ of a company@

t(ey like to $ee po$itive earning$ num&er$ for t(e pa$t few year$6 coupled wit( po$itive earning$

 pro0ection$ for upcoming year$. ut unlike t(eir growt(;inve$ting cou$in$6 8A inve$tor$ are

$keptical of e!tremely (ig( growt( e$timation$6 $uc( a$ t(o$e in t(e 25;5,F range. Companie$

wit(in t(i$ range carry too muc( ri$k  and unpredicta&ility for 8Aer$. %o t(em6 a $afer and

more reali$tic earning$ growt( rate lie$ $omew(ere &etween 1,;2,F.

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Somet(ing el$e t(at 8Aer$ and growt( inve$tor$ $(are i$ t(eir attention to t(e / figure. <or

 &ot( inve$ting type$6 a (ig( and increa$ing / relative to t(e indu$try average i$ an indication

of a $uperior company.

8Aer$ and growt( inve$tor$ $(are ot(er metric$ to determine growt( potential. %(ey do6

(owever6 (ave different idea$ a&out w(at t(e ideal level$ e!(i&ited &y t(e different metric$

$(ould &e6 and &ot( type$ of inve$tor$ (ave varying ta$te$ in w(at t(ey like to $ee in a company.

An e!ample of w(at many 8Aer$ like to $ee i$ po$itive ca$( flow or6 in $ome ca$e$6 po$itive

earning$ momentum.

ecau$e a variety of additional criteria can &e u$ed to evaluate growt(6 8A inve$tor$ can

cu$tomi:e t(eir $tock;picking $y$tem to t(eir per$onal $tyle. !erci$ing $u&0ectivity i$ an in(erent

 part of u$ing 8A. So if you u$e t(i$ $trategy6 you mu$t analy:e companie$ in relation to t(eir

uniue conte!t$ =0u$t a$ you would wit( growt( inve$ting>. Since t(ere i$ no magic formula for

confirming growt( pro$pect$6 inve$tor$ mu$t rely on t(eir own interpretation of company

 performance and operating condition$.

*t would &e (ard to di$cu$$ any $tock;picking $trategy wit(out mentioning it$ u$e of t(e T ratio.

Alt(oug( t(ey look for (ig(er T ratio$ t(an value inve$tor$ do6 8Aer$ are wary of t(e (ig(

T ratio$ favored &y growt( inve$tor$. A growt( inve$tor may inve$t in a company trading at 5,

or ", time$ earning$6 &ut t(e 8A inve$tor $ee$ t(i$ type of inve$ting a$ paying too muc(

money for too muc( uncertainty. %(e 8Aer i$ more likely to pick companie$ wit( T ratio$ in

t(e 15;25 range ; (owever6 t(i$ i$ a roug( e$timate6 not an infle!i&le rule 8Aer$ follow

wit(out any regard for a companyB$ conte!t.

*n addition to a preference for a lower T ratio6 t(e 8A inve$tor $(are$ t(e value inve$torB$

attraction to a low price;to;&ook ratio =T> ratio6 $pecifically a T of &elow indu$try average. A

low T and T are t(e two more prominent criteria wit( w(ic( 8Aer$ in part mirror valueinve$ting. %(ey may u$e ot(er $imilar or differing criteria6 &ut t(e main idea i$ t(at a 8A

inve$tor i$ concerned a&out pre$ent valuation$.

04 t7e N2>bes

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 7ow t(at we know w(at 8A inve$ting i$6 letB$ delve into $ome of t(e num&er$ t(at 8Aer$

look for in potential companie$.

/he ,!" 'atio 

%(e 8 ratio may very well &e t(e mo$t important metric to any 8A inve$tor6 a$ it &a$ically

gauge$ t(e &alance &etween a $tockB$ growt( potential and it$ value.

8A inve$tor$ reuire a 8 no (ig(er t(an 1 and6 in mo$t ca$e$6 clo$er to ,.5. A 8 of le$$

t(an 1 implie$ t(at6 at pre$ent6 t(e $tockB$ price i$ lower t(an it $(ould &e given it$ earning$

growt(. %o t(e 8A inve$tor6 a 8 &elow 1 indicate$ t(at a $tock i$ undervalued and warrant$

furt(er analy$i$.

 ,!" at Work

Say t(e %SJ Sport$ Conglomerate6 a fictional company6 i$ trading at 1- time$ earning$ =T X 1->

and (a$ earning$ growing at 3,F. <rom t(i$ you can calculate t(at t(e %SJ (a$ a 8 of ,."3

=1-T3,X,."3>6 w(ic( i$ pretty good &y 8A $tandard$.

&ARP at #o;  

ecau$e a 8A $trategy employ$ principle$ from &ot( value and growt( inve$ting6 t(e return$

t(at 8Aer$ $ee during certain market p(a$e$ are often different t(an t(e return$ $trictly value

or growt( inve$tor$ would $ee at t(o$e time$. <or in$tance6 in a raging &ull market t(e return$

from a growt( $trategy are often un&eata&le@ in t(e dotcom &oom of t(e mid; to late;1--,$6 for

e!ample6 neit(er t(e value inve$tor nor t(e 8Aer could compete. owever6 w(en t(e market

doe$ turn6 a 8Aer i$ le$$ likely to $uffer t(an t(e growt( inve$tor.

%(erefore6 t(e 8A $trategy not only fu$e$ growt( and value $tock;picking criteria6 &ut al$o

e!perience$ a com&ination of t(eir type$ of return$@ a value inve$tor will do &etter

in &eari$( condition$ a growt( inve$tor will do e!ceptionally well in a raging &ull market and a

8Aer will &e rewarded wit( more con$i$tent and predicta&le return$.

Con9l2sion

8A mig(t $ound like t(e perfect $trategy6 &ut com&ining growt( and value inve$ting i$nBt a$

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ea$y a$ it $ound$. *f you donBt ma$ter &ot( $trategie$6 you could find your$elf &uying mediocre

rat(er t(an good 8A $tock$. ut a$ many great inve$tor$ $uc( a$ eter #ync( (im$elf (ave

 proven6 t(e return$ are definitely wort( t(e time it take$ to learn t(e 8A tec(niue$.

1.3.( Sto9;-Pi9;ing Stategies: In9o>e Inesting

*ncome inve$ting6 w(ic( aim$ to pick companie$ t(at provide a $teady $tream of income6 i$

 per(ap$ one of t(e mo$t $traig(t forward $tock;picking $trategie$. H(en inve$tor$ t(ink of $teady

income t(ey commonly t(ink of fi!ed;income $ecuritie$ $uc( a$ &ond$. owever6 $tock$ can al$o

 provide a $teady income &y paying a $olid dividend. ere we look at t(e $trategy t(at focu$e$ on

finding t(e$e kind$ of $tock$.

#7o Pa4s Diiens

*ncome inve$tor$ u$ually end up focu$ing on older6 more e$ta&li$(ed firm$6 w(ic( (ave reac(ed a

certain $i:e and are no longer a&le to $u$tain (ig(er level$ of growt(. %(e$e companie$ generally

no longer are in rapidly e!panding indu$trie$ and $o in$tead of reinve$ting  retained earning$ into

t(em$elve$ =a$ many (ig(;flying growt( companie$ do>6 mature firm$ tend to pay out retainedearning$ a$ dividend$ a$ a way to provide a return to t(eir $(are(older$.

%(u$6 dividend$ are more prominent in certain indu$trie$. 9tility companie$6 for e!ample6 (ave

(i$torically paid a fairly decent dividend6 and t(i$ trend $(ould continue in t(e future

Diien 'iel 

*ncome inve$ting i$ not $imply a&out inve$ting in companie$ wit( t(e (ig(e$t dividend$ =in dollar

figure$>. %(e more important gauge i$ t(e dividend yield6 calculated &y dividing t(e annual

dividend per $(are &y $(are price. %(i$ mea$ure$ t(e actual return t(at a dividend give$ t(e owner

of t(e $tock. <or e!ample6 a company wit( a $(are price of K1,, and a dividend of K" per $(are

(a$ a "F dividend yield6 or "F return from dividend$. %(e average dividend yield for companie$

in t(e SE 5,, i$ 2;3F.

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ut income inve$tor$ demand a muc( (ig(er yield t(an 2;3F. +o$t are looking for a minimum

5;"F yield6 w(ic( on a K1;million inve$tment would produce an income =&efore ta!e$> of

K5,6,,,;K",6,,,. %(e driving principle &e(ind t(i$ $trategy i$ pro&a&ly &ecoming pretty clear@

find good companie$ wit( $u$taina&le (ig( dividend yield$ to receive a $teady and predicta&le

$tream of money over t(e long term.

Anot(er factor to con$ider wit( t(e dividend yield i$ a companyB$ pa$t dividend policy. *ncome

inve$tor$ mu$t determine w(et(er a pro$pective company can continue wit( it$ dividend$. *f a

company (a$ recently increa$ed it$ dividend6 &e $ure to analy:e t(at deci$ion. A large increa$e6

$ay from 1.5F to "F6 over a $(ort period $uc( a$ a year or two6 may turn out to &e over;

optimi$tic and un$u$taina&le into t(e future. %(e longer t(e company (a$ &een paying a good

dividend6 t(e more likely it will continue to do $o in t(e future. Companie$ t(at (ave (ad $teady

dividend$ over t(e pa$t five6 1,6 156 or even 5, year$ are likely to continue t(e trend.

Diiens Ae Not Ee4t7ing 

ou $(ould never inve$t $olely on t(e &a$i$ of dividend$. Oeep in mind t(at (ig( dividend$ donBt

automatically indicate a good company. ecau$e t(ey are paid out of a companyB$ net income6 

(ig(er dividend$ will re$ult in a lower retained earning$. ro&lem$ ari$e w(en t(e income t(at

would (ave &een &etter re;inve$ted into t(e company goe$ to (ig( dividend$ in$tead.

%(e income inve$ting $trategy i$ a&out more t(an u$ing a $tock $creener to find t(e companie$

wit( t(e (ig(e$t dividend yield. ecau$e t(e$e yield$ are only wort( $omet(ing if t(ey are

$u$taina&le6 income inve$tor$ mu$t &e $ure to analy:e t(eir companie$ carefully6 &uying only

one$ t(at (ave good fundamental$. #ike all ot(er $trategie$ di$cu$$ed in t(i$ tutorial6 t(e income

inve$ting $trategy (a$ no $et formula for finding a good company. %o determine t(e $u$taina&ility

of dividend$ &y mean$ of fundamental analy$i$6 eac( individual inve$tor mu$t u$e (i$ or (er owninterpretive $kill$ and per$onal 0udgment ; for t(i$ rea$on6 we wonBt get into w(at define$ a Mgood

companyM.

Sto9; Pi9;ingK not iGe In9o>e 

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Somet(ing to remem&er i$ t(at dividend$ do not eual lower  ri$k . %(e ri$k a$$ociated wit(

any euity $ecurity $till applie$ to t(o$e wit( (ig( dividend yield$6 alt(oug( t(e ri$k can &e

minimi:ed &y picking $olid companie$.

TaGes TaGes TaGes/ne final important note@ in mo$t countrie$ and $tate$Tprovince$6 dividend payment$ are ta!ed at

t(e $ame rate a$ your wage$. A$ $uc(6 t(e$e payment$ tend to &e ta!ed (ig(er t(an capital gain$6

w(ic( i$ a factor t(at reduce$ your overall return.

CHAPTER

!ITERATURE RE"IE#

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.1 CAN S!I%

CA7 S#*+ i$ a p(ilo$op(y of $creening6 purc(a$ing and $elling common $tock. Developed &y

Hilliam /B7eil6 t(e co;founder of Investor's Business Daily6 it i$ de$cri&ed in (i$ (ig(ly

recommended &ook Mow to +ake +oney in Stock$M.

%(e name may $ugge$t $ome &oring government agency6 &ut t(i$ acronym actually $tand$ for a

very $ucce$$ful inve$tment $trategy. H(at make$ CA7 S#*+ different i$ it$ attention to tangi&le$

$uc( a$ earning$6 a$ well a$ intangi&le$ like a companyB$ overall $trengt( and idea$. %(e &e$t

t(ing a&out t(i$ $trategy i$ t(at t(ereB$ evidence t(at it work$@ t(ere are countle$$ e!ample$ of

companie$ t(at6 over t(e la$t (alf of t(e 2,t( century6 met CA7 S#*+ criteria &efore increa$ing

enormou$ly in price. *n t(i$ $ection we e!plore eac( of t(e $even component$ of t(e CA7 S#*+$y$tem.

C C2ent Eanings 

A Ann2al Eanings

N Ne6

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S S288l4 an De>an

! !eae o !agga

I Instit2tional S8onsos7i8 

% %a;et Die9tion

CA7 S#*+ maintain t(at t(e &e$t way to keep track of market condition$ i$ to watc( t(e

daily volume$ and movement$ of t(e market$. %(i$ component of CA7 S#*+ may reuire t(e

u$e of $ome tec(nical analy$i$ tool$6 w(ic( are de$igned to (elp inve$tor$Ttrader$ di$cern trend$.

. Dogs of t7e Do6

%(e inve$ting $trategy w(ic( focu$e$ on Dog$ of t(e Dow wa$ populari:ed &y +ic(ael iggin$

in (i$ &ook6 Meating t(e DowM. %(e $trategyB$ $implicity i$ one of it$ mo$t attractive attri&ute$.

%(e Dog$ of t(e Dow are t(e 1, of t(e 3, companie$ in t(e Dow Jone$ *ndu$trial Average =DJ*A>

wit( t(e (ig(e$t dividend yield. *n t(e Dog$ of t(e Dow $trategy6 t(e inve$tor $(uffle$ around (i$

or (er portfolio6 ad0u$ting it $o t(at it i$ alway$ eually allocated in eac( of t(e$e 1, $tock$. 

%ypically6 $uc( an inve$tor would need to completely rid (i$ or (er portfolio of a&out t(ree to

four $tock$ every year and replace t(em wit( different one$. %(e $tock$ are u$ually replaced

 &ecau$e t(eir dividend yield$ (ave fallen out of t(e top 1,6 or occa$ionally6 &ecau$e t(ey (ave &een removed from t(e DJ*A altoget(er.

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CHAPTER 3

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RESEARCH

%ETHODO!O&' 

ObBe9tie of t7e St24

• %o $tudy (ow to pick $tock$.

• %o e!plore t(e difference &etween good $tock$ and &ad $tock$

• %o minimi:e t(e e!po$ure

• %o find out t(e entry and e!it point w(ile &uying a $tock 

S2b ObBe9ties

 %o $tudy euitie$ li$ted on 7S

S9o8e of St24

• %(e $tudy will &oo$t up t(e confidence of inve$tor$ w(ile picking up t(e $tock$

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• %(e$e $trategie$ will (elp minimi:e t(e e!po$ure in t(e $tock market

• *nve$tor$ will &e a&le to ma!imi:e t(eir wealt( wit( t(e (elp of t(e$e $trategie$

• Onowledge empowerment will (elp inve$tor$ moving toward$ inve$ting in t(e $tock

market

Resea97 Design

De$criptive Y A$ variou$ te$t and $tock$ $creener$ (ave &een u$ed and t(e e$earc( follow t(e

de$criptive re$earc( de$ign

Sa>8le Design

%(e $ample $i:e i$ 5 Companie$ li$ted on 7ational Stock !c(ange.

So29e of Data

rimary Data

• C(art$

•  7ew$

• Announcement$

• <inancial$

•Annual eport$

Secondary data

• +oneycontrol.com

• 8oogle <inance

• %(omp$on euter$

• a(oo finance

•  7ational Stock !c(ange

Tools fo Data Colle9tion

• Computer a$$i$ted te$ting tool$ w(ic( te$t t(e competency of $tock$

• ypot(e$i$ te$ting for identifying t(e $tock picking 0udgment

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• Codified te$t$ to pick t(e data determinant to pick t(e rig(t $tock 

• Stock$ $creener$ to $creen variou$ $tock$ li$ted on t(e $tock e!c(ange

• !pert$ recommendation$ (ave &een u$ed and evaluated

• +anagement report$ (ave &een looked up to developed inve$tor$ confidence

Anal4ses an Inte8etation

%(e variou$ tool$ for analy$i$ u$ed are grap($6 c(art$6 percentage growt(6 and $econdary data.

!i>itations an Constains

Con$traint of time.

#ack of re$ource$

Co$t Con$traint.

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CHAPTER *

ANA!'S'S ANDINERPRETATION

Stategi9 Sto9; Pi9;s

A$ per t(e $tudy6 algorit(m$ (ave &een developed and u$ing t(e algorit(m$ following five

companie$ (ave &een picked from 7S. %(e$e companie$ are con$i$tent performer6 undervalued6

and are great organi:ation$ wit( $trong fundamental value$ and management $upport. %(e$e

companie$ can &een con$idered a$ a great &et in long run.

Hinal9o In2sties !i>ite

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indalco *ndu$trie$ #imited i$ an integrated aluminum manufacturer. %(e Company mine$

 &au!ite and refine$ it into alumina. %(e CompanyB$ ot(er operation$ include t(e $melting of

alumina into aluminum6 t(e manufacture of $emi;fa&ricated rolled and e!truded product$. %(e

CompanyB$ product$ include aluminum ingot$6 $teel rod$ and rolled flat $teel product$.

C(airman@ =2>a %angala> 0ila

+anaging Director@ De&narayan (attac(arya

C(ief <inancial /fficer@ raveen +a(e$(wari

Net 8ofit >agin ?@  12.34

Total ebtFassets ?Re9ent 4@ ?@  ,."5

C2ent atio  2.1'

PFE atio  5.3-

$4 EPS go6t7 ate -.12FRet2n on inest>ent ?$ 4 ag@ ?@  32."5

Di e9ent 52ate  ;

Pi9e to boo;   .42

Di 4iel ?@  1.4"F

0eta 1.1-

C2ent Pi9e -5.",

?Table *.1 Hinal9o@

%(i$ $tock look$ great on paper$ and i$ undervalued *6 recommend to &uy t(e$e $tock to get good

return$ in long term.

NHPC !t

 7ational ydroelectric ower Corp #td. i$ a (ydro;power development company &a$ed in *ndia.

%(e Company (a$ con$tructed appro!imately 11 (ydro;power pro0ect$ in *ndia and a&road wit( a

total in$talled capacity of 2554.35 +H.

C(airmanT +anaging Director@ & Sai Pasa

Director %ec(nical@ D P 07agaa

Net 8ofit >agin ?@  21.5"

Total ebtFassets ?Re9ent 4@ ?@  ,.43

C2ent atio  1.1'

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PFE atio  ).31

$4 EPS go6t7 ate 15.12F

Ret2n on inest>ent ?$ 4 ag@ ?@  2).25

Di e9ent 52ate  ;

Pi9e to boo;   .-1

Di 4iel ?@  3.3""F

0eta 1.4"C2ent Pi9e 2,.-,

?Table *. NHPC@

8rowt( rate of t(i$ $tock &eat$ many of t(e &lue c(ip companie$ (ence *6 recommend to &uy t(i$

$tock.

0oo;s !aboatoies !t ?0=!@

rook$ #a&oratorie$ #imited i$ a re$earc( and development driven p(armaceutical manufacturing

company. %(e Company i$ a contract manufacturing company for t(e late$t molecule$ in

*n0ecta&le$ and Clavulanic Acid range in %a&let$ and Dry Syrup$.

Atul anc(al !ecutive E 7on *ndependent C(airman of t(e oard

D2ga San;a %ait4 C(ief !ecutive /fficer6 !ecutive Director ; %ec(nical6

Director 

A$(ima anod(a Compliance /fficer6 Company Secretary

Net 8ofit >agin ?@  13.4)

Total ebtFassets ?Re9ent 4@ ?@  ,.,,

C2ent atio  3.,5

PFE atio  3.31

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$4 EPS go6t7 ate 35.-'F

Ret2n on inest>ent ?$ 4 ag@ ?@  1-.41

Di e9ent 52ate  ,.,,

Pi9e to boo;   ,.3"

Di 4iel ?@  ;

0eta ;

C2ent Pi9e 2,.3,

?Table *.3 0oo;s !aboatoies@

8rowt( rate and profit margin of t(i$ $tock i$ e!ceptional w(ic( pampered me to pick t(i$ $tock.

Al$o after dawn of *% $tock$ (arma look$ good and * recommend &uying t(i$ $tock.

NIIT Te97nologies !i>ite

 7**% %ec(nologie$ #imited i$ an information tec(nology =*%> $olution$ organi:ation engaged in

application development and maintenance6 managed $ervice$6 cloud computing and &u$ine$$

 proce$$ out$ourcing to organi:ation$ in t(e financial $ervice$6 in$urance6 travel6 tran$portation

and logi$tic$6 manufacturing and di$tri&ution and government $ector$. %(e Company deliver$

$ervice$ acro$$ continent$ directly and t(roug( it$ network of $u&$idiarie$. *t i$ $ervicingcu$tomer$ in 7ort( E Sout( America6 urope6 t(e +iddle a$t6 A$ia and Au$tralia.

a0endra Sing( awar !ecutive C(airman of t(e oard6 +anaging Director  

Ain T7a;2 C(ief !ecutive /fficer6 Joint +anaging Director6

!ecutive Director 

rati&(a O. Advani C(ief <inancial /fficer  

Net 8ofit >agin ?@  13.)4Total ebtFassets ?Re9ent 4@ ?@  3.-,

C2ent atio  2.15

PFE atio  12.-"

$4 EPS go6t7 ate ).2)F

Ret2n on inest>ent ?$ 4 ag@ ?@  23.4'

Di e9ent 52ate  '

Pi9e to boo;   1.)4

Di 4iel ?@  2.)5

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 7et rofit margin of a0a0 olding i$ way a(ead t(an t(e market indice$ and t(e company

di$play it$ po$ition w(ile delivering (ig( return in long term. * recommend &uying t(i$ $tock.

0

10

20

30

40

50

60

70

80

Net profit

margin %

Totaldebt/assets %

Growt !ate %

"i#idend $ield

%

?C7at *.1 Sto9;s inan9ials@

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CHAPTER $

INDIN&S

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o> t7e anal4sis >ae in t7e 8eio2s 97a8te t7e follo6ing finings 9an be eie:

• +arket *nformation6 7ew$ and u$ine$$ activitie$ play$ varia&le role$ in day to day

fluctuation$ of t(e $tock price$. <or intraday trading new$ (ave immediate effect$ on

 price movement$ and efficient market (ypot(e$i$ (ave ma0or role in it.

• +o$t of t(e companie$ are overvalued and are trading at a price w(ic( i$ 2;1, time$ of

companie$ &ook value

• *ndian *nve$tor$ are maintaining di$tance from t(e $tock market w(ile <**$ are pampered

to influ! t(e money

• /nly large companie$ pay$ t(e dividend$6 mid;cap and $mall;cap companie$ often

reinve$t t(e profit

• Company?$ $ale$ are directly proportional to t(e fluctuation in t(eir $tock price$6 a$ it tell$

a&out t(e competency of t(e company

• <oreign market$ (ave immediate impact$ on *ndian $tock$.

•  /ver an entire day $tock$ $(ow movement$ of 5, point$ up and down.

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CHAPTER (

RECO%%ENDATIONS +CONC!USION

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Re9o>>enations

• +ore awarene$$ mu$t &e created &y marketing appropriately $o a$ to increa$e t(e intere$t

of *ndian *nve$tor$

• *f ta! &enefit$ are given6 t(i$ induce more people to inve$t in $tock market

• A$ capital market i$ growing $o one $(ould trade in e!c(ange traded market rat(er t(an

t(e /%C market

• /ne $(ould take &etter po$ition wit( t(e (elp of fundamental and tec(nical analy$i$

• *t i$ a nece$$ity t(at one mu$t &e very educated to inve$t in capital market. So6 it i$

recommended t(at t(o$e w(o are not $o well educated $(ould con$ult t(e profe$$ional

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Con9l2sion

•  7ow a day?$ inve$tor$ &ecome more careful in inve$tment wit( con$idering t(e factor like

glo&al economy6 inflation6 market $entiment$6 management etc.

• *n t(e trading $y$tem people con$ider a&ove factor for inve$tment $o we can conclude t(at

inve$tor are more moving toward$ t(e e!c(ange traded market

• %(e trading $y$tem al$o include$ trading and intermediary participant$6 w(o en$ure t(e

correct price di$covery. %(u$6 t(e trading $y$tem i$ one of t(e factor$6 w(ic( reduce t(e

ri$k in commodity future$.

• *n t(e capital market variou$ ri$k are involved &ut (ere wit( t(e (elp of t(e fundamental

and tec(nical analy$i$ inve$tor$ are reducing t(eir ri$k.

• %(i$ can &e emp(a$i:ed &y t(e fact t(at t(ere (a$ &een an increa$ing trend in t(e volume

traded in mo$t of t(e euitie$.

• <rom all t(e a&ove conclu$ion$ of it can &e concluded6 uitie$ can &e u$ed a$ a $ound

inve$tment in$trument

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0I0!IO&RAPH'

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AnneG2e

0oo;s

• ull C Jo(n =1-'4>. Stock$ and euitie$. Ha$(ington6 D.C.@ 7ational <inance Society.

• o(ra 7. D. =1--2>. <uture$ and /ption$. %ata +cgraw ill$ u&lication$. ol ** E***

•  7icol6 A. +.6 E e!man6 . +. =1--->. re$enting your finding$@ A practical guide for

creating wealt(.

• Searle$6 .6 E #a$t6 +. =1-'->. A readerB$ guide to fundamental analy$i$. 7ew ork@

<act$ on <ile6 *nc.

• %oomer6 J. =1-))>. Cane. d. Darwin %. %urner. 7ew ork@ 7orton.

Lo2nals

cluteonline.com/journals/index.php/IBER/article/download/3449/3496

www.ssmrae.com/admin/.../a8d27c43d9c9e9286!4a7494"673!c.pd

• Hall Street Journal 6 dated 14t( +arc( 2,136 article no. '

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• +oney 7ow dated 11t( +arc( 2,136 article no. 11

• % Journal$ dated 1't( <e&ruary 2,136 article no. 23

• loom&erg +oney dated 21$t marc( 2,136 article no. 4

• Anirud( Set(i eport dated 1-t( marc( 2,136 article no. -

#ebsites

• www.r&i.orgTpreZwatc($tock$indice$(tml

• www.$e&i.comT$tockZregi$teredZcompanyZwatc(Zmovement$.cm$

• (ttp@TTwww.n$eindia.comTliveZmarketTdynaContentTliveZwatc(Teuitie$Z$tockZwatc(.(tm

• (ttp@TTwww.moneycontrol.comTfinancial$

• (ttp@TTeconomictime$.indiatime$.comTmarket$T$tock$T$tock$;in;new$Ttop;five;momentum;

 pick$;for;t(i$;weekTarticle$(owT1))-11,2.cm$