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© Copyright 2007 Proshare . All Rights Reserved Becoming Your Own Stock Analyst ISBN 978-978-48027-1-0
© Copyright 2007 Proshare . All Rights Reserved
Becoming Your Own
Stock Analyst
ISBN 978-978-48027-1-0
Proshare Training does not guarantee any results or investment returns based on the information you receive. Although we have used our best efforts to provide the most accurate trading and investment strategies, we cannot promise your future profitability and do not promise verbally or in writing that you will earn a profit when or if you purchase/sell stocks.
Ultimately all decisions are made by you. Proshare Training approved marketing company that promotes Proshare or any other speakers or members of the Proshare Analyst Network are not in any way liable for your activities resulting from information obtained using this online training slides.
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Without limiting the rights under copyright reserved above, no part of the training material may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by
any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior written permission of the copyright owner of this material.
I have read and understood the above, and by viewing the training slides, I agree to the content of this disclaimer.
DISCLAIMER
The Course Objective….
…. To provide you with most of what you need to become a more successful and self-reliant investor!
The slides allows you to gain insight into the process for selecting stocks based on value, growth, and momentum strategies; appreciate valuation,
profitability, risk, business plans, management, and upside/downside potential; when to sell; and much
more.
OutlineOutline
The Importance now, than before
Identifying the Stocks suitable to your Goals
The Analysis Required
How to do a Quick Stock Prequalification
The more Detailed Analysis
Determining Why and When to Sell
Recommended Reading
Being Your Own Stock Analyst
Why It's Now More
Important Than Ever…
If you have been reading the financial news lately, you have undoubtedly run across the many stories of the sanctions and fines being levied against some brokerage firms.
It appears obvious that some firms engage in unethical practices which an average and ‘unsuspecting’ investor would not be aware of.
Some may even portray certain ‘dead’ stocks as a ‘once-in-a-lifetime’ deal.
Thus, some fund managers became very rich to the detriment of the retail investors.
Fact of the Matter
The fact is, there are inherent problems in the recommendations of a stock analyst.
Let’s look at the three main issues with paying attention to what a stock analyst
says:.
In the brokerage business, underwriting contributes much, much more to profits than does research. If the investment banking department of a big brokerage house underwrites a new issue, do you think a stock analyst in their right mind would have anything negative to say about the stock? Not if they have job security on their mind!
1. A stock analyst is virtually forced to make ‘rosy’ recommendations.
In analyzing the careers of the most successful stock analysts, it has been noted that the highest ranked have been the most ‘optimistic’ of the stock analysts.
Obviously, company CEO’s do not like to see sell recommendations on their company from a stock analyst. Companies can even retaliate against a stock analyst who downgrades the stock. The life of that stock analyst can become pretty miserable.
2. It is rare for a stock analyst to issue a ‘sell’recommendation.
Stock analyst sell recommendations have historically been in the 2/3% range of all recommendations.
A typical stock analyst is smart, and knows well the industry sectors and the firms within them that the stock analyst is assigned to cover. But sometimes their analysis does not take into consideration actual market forces going on at the time.
3. A stock analyst will overlook key forces at work, like supply and demand in the market.
For instance, a stock analyst may downgrade a stock simply because it is ‘too high, based on valuation’, even though it is likely to keep rising for months. Or they may upgrade a stock that has fallen to ‘undervalued levels’, even though the stock may stay ‘undervalued’ for years.
A Way Out
Using a system of Candlestick Analysis, you can easily eliminate these prejudices and truly be your
own stock analyst!
How? Because all the prejudices of a large brokerage firms’ stock analyst described above are totally
irrelevant in Candlestick Analysis.
You are not ‘forced’ to view any stock with any preconceived notions. You simply glance at the
candlestick pattern and say it’s a ‘buy’ or a ‘sell’.
Is it always easy?
Not on your life!
But that is what makes this game so much fun!
Lets BeginLets Begin……..
PreamblePreamble
Experts tell us that investment success requires a disciplined approach for finding, researching,
and analyzing potential investments.
The approach suggested here is based on sound principles that are practiced by market-beating
money managers. It's certainly not the only way, and it may not be the best way.
But it's a place to start, and following it will make you a better investor. After you've
mastered these strategies, you can modify them to suit your needs.
The Starting Point
The process involves finding investment stocks, weeding out the
obvious misfits, researching and analyzing the survivors, picking the
best candidates, and equally important, applying a clear-cut set of
selling rules.
Identifying the Stocks suitable to your GoalsIdentifying the Stocks suitable to your Goals
Finding stocks to analyze can be as easy as going to the bed, talking to your family, picking up a magazine, surfing
the Internet, or switching on the TV.
You'll find no shortage of tips, and you'll welcome them once you've gained confidence in your analysis
skills, because you'll be able to weed out the bad ideas quickly.
As your experience grows, you'll get a feel for what discriminates strong candidates, and you'll find yourself increasingly taking advantage of screening to uncover
investment ideas.
N
Picking Through ScreeningPicking Through Screening
Screening is a technique for scanning the entire market for stocks meeting
your criteria.
It's a powerful tool, but to use it effectively, you have to first understand how to identify the best stocks for you.
That will come with time, and in a different training module!
A Quick Tip
Treat all information you receive, whether from your e-mails,
friends, advisors, or even experts, as tips to analyze using the
techniques you are about to learn.
The Analysis RequiredThe Analysis Required
The preferred analysis techniques follow a survival-of-the-fittest approach, where you’re constantly weeding out the weakest contenders.
These techniques work best if you start with a large group of candidates, say 10 to 20, instead of just a few.
Researching stocks takes time and effort, so eliminate weak contenders as soon as you discover them. That way you can concentrate your research on the strongest candidates.
A Quick Tip
Be ruthless!
There is no point in wasting time researching stupid ideas.
AdviceLet theLet the TrendTrend be yourbe your FriendFriend
NewsNews Moves Moves thethe MarketsMarkets
Know the rulesKnow the rules Follow the rulesFollow the rules have have FUNFUN
Buy Low SELL SELL HIGHHIGHBuy on RumourBuy on Rumour Sell on NewsSell on News
The Quick Pre-qualification
Why & How to Identify the
obvious misfits…
Doing a quick pre-qualification test to identify the obvious misfits is the very first thing to do.
These may be stocks that would be bad news for any investor.
Perhaps they're firms with businesses based more on hype than reality with little or no sales or earnings.
Or they could be stocks that simply don't fit your investing style, e.g., maybe they're value stocks, and you're a growth investor.
Quick Stock PreQuick Stock Pre--qualificationqualification
Use the quick pre-qualify test to check
the following:
Find out something about the company's business and its industry. It may be in a business or market sector that you favor or that you want to avoid.
For instance, the home building industry usually prospers when economic boom occurs and suffers in a depressed environment.
So your take on the future direction of interest rates would influence how you view homebuilders
1. Company and Industry Overview
Market capitalization defines a company's total value (share price multiplied by number of shares). The biggest firms are designated large-caps, and progressively smaller firms are termed mid-caps, small-caps, and micro-caps.
There is no good or bad market capitalization, but each size has its own pluses and minuses in terms of potential risks and rewards. Generally, larger companies are considered safer, and smaller firms offer more growth potential. However, even these generalities vary with current market conditions.
You may decide that a particular company size range best suits your needs or, conversely, that you're open to all possibilities. Whatever you conclude, eliminate candidates in this step that don't fit your requirements.
2. Market Capitalisation
Valuation ratios such as price to earnings (P/E) or price to sales (P/S) define how market participants view your candidate's earnings growth prospects. High valuations reflect in-favor stocks, that is, those seen having strong growth prospects, and thus appeal to growth investors. Conversely, value players look for stocks with low valuation ratios, indicating that most market players (growth investors) view them as losers.
Any given candidate will fit into either the growth or value categories, but not both. The valuation ratios give you a quick read as to whether you have a value or growth candidate on your hands.
3. Valuation Ratios
Trading volume is the average number of shares traded daily.
Low trading volume stocks spell trouble because they're subject to price manipulation and mutual funds can't buy them.
Here's where you should toss these bad ideas.
4. Trading Volume
Corporate insiders such as key executives and board members are restricted as to when and how often they can buy and sell their company's shares. So insider-owned shares are not considered available for trading.
Acceptable float values depend on your investing style. Large firms typically have floats running from a few hundred million shares into the billions. However some investors seek out firms with much smaller floats, typically below 25 million shares. Since the float represents the supply of shares available for trading, these small floats mean that the share price could take off like a rocket if the company hits the news and the demand for shares overwhelms the available supply.
5. Float
The float is the number of outstanding shares not owned by insiders, and thus available for daily
trading.
Where reported earnings reflect myriad accounting decisions, cash flow is the amount of cash that actually flowed into, or out of, a company's bank accounts as a result of its operations. Consequently, cash flow is the best measure of profits.
Except for the fastest growers, viable growth candidates should be reporting positive cash flow.
Here's where growth investors should eliminate cash burners from consideration.
On the other hand, viable value candidates may very well be reporting negative cash flow resulting from the problems that caused their fall from grace.
6. Cash Flow
Whether you're seeking out-of-favour value prospects or hot growth stocks, your best prospects are firms with a long history of solid long-term sales and earnings growth.
In this step, you'll dispose of stocks that don't meet this basic requirement.
7. Historical Sales and Earnings Growth
There's no point wasting time researching a stock if the company's main product has just been rendered obsolete by the competition. At this point, get up to speed on the buzz surrounding your prospective stock. Negative buzz is bad news for growth stocks, and you should disqualify such growth candidates.
8. Check the Buzz
It's a different story for value prospects, however. The negative buzz is part and parcel of the market's disenchantment with the stock, and is contributing to making it a value candidate.
Key to Pre-qualification…
…You will eliminate many of your bad ideas during the quick pre-qualify check, most in less than five minutes once you get the
hang of it. Take your survivors on to the
detailed analysis…. .
The more Detailed Analysis - COSC
Concentrate on the
Strongest Candidates…
The COSC process consists of 11 steps, each using a corresponding analysis tool. For instance, Step 7 involves analyzing a candidate’s financial health,
and employs Tool 7- Financial Strength Analysis. You will obviously benefit from reading more on how the analysis tools can be applied to match your
investing style by attending our practical training classes or by reading the book - A Process for Analyzing Stocks on Your Own
The COSC Process
Obviously, you’ll need to be familiar with the
appropriate analysis tool to perform the corresponding
analysis step.
Eliminate a candidate when it fails any step. For
example, don’t carry a candidate to Step 2 if it
failed Step 1.
Market analysts are employed by firms to evaluate and rate publicly traded corporations.
Start your detailed analysis by reviewing market analysts’ buy/sell recommendations and earnings and revenue forecasts to determine the level of market enthusiasm for your candidate.
The best value candidates are the ones that analysts don’t like. Conversely, growth investors need to see some, but not too much, enthusiasm for their candidates.
Analysts’ earnings growth forecasts are another measure of a stock’s suitability as a growth or value candidate. Strong forecast earnings growth disqualifies value candidates but identifies strong growth prospects.
Step 1: Analyzing Analysts’ Data
Sources of Information..Sources of Information..
Proshare ““RReeport Cport Ceentralntral””
Would you buy a stock if you knew that the company would have to grow its earnings 75% every year merely to justify its current stock price?
Here, you’ll determine the earnings growth implied by your candidate’s current stock price. This will help you gauge whether there’s sufficient upside stock price potential to justify further research.
Step 2: Valuation
Many value investors use target prices to establish buy and sell points for otherwise-qualified stocks.
For instance, a stock may be an attractive candidate, but its current stock price is too high to provide the needed margin of safety. So the value investor will wait for the stock to come down to the pre-established target price before buying.
It isn’t bought if it doesn’t reach the buy target.
Once purchased, the stock is sold when it reaches its predetermined sell target price.
Step 3: Establishing Target Prices
Setting Target Prices ‘makes it easy’
Although setting buy and sell targets is a linchpin of the value strategy, growth
investors would benefit by following the same procedure.
Companies are more likely to achieve success and make money for their shareholders if they’re selling into fast-growing market sectors than if they’re mired in a slow growth or stagnant industry.
You should analyze your candidate’s industry growth prospects and other factors that affect industry player’s success prospects in this step.
Pinpointing attractive industries is all for naught if you pick the wrong companies. Thus, your analysis will also include identifying the strongest players in each industry.
Step 4: Industry Analysis
Step 5: Step 5: Business Plan AnalysisPlan Analysis
A Question of Business Models.
Dangote Group is one of Nigeria’s more profitable companies, while UTC struggles.
The difference is in the business models.
Here, you should determine if your candidate is more like a Dangote or a UTC.
Many money managers consider gauging management quality an important part of the analysis process.
You don’t have time to visit candidate’s plants and chat with key executives, and you don’t have to.
You can evaluate management quality from the comfort of your own home by reviewing the list of key executives and directors for stability, stake holding, corporate governance; and other accomplishments.
Step 6: Assess Management Quality
You lose big if one of your holdings goes bankruptcy. But a firm doesn’t have to go bankrupt to ruin your day.
Just the rumors that it might are enough to sink its stock price.
Market analysts typically don’t bother to check a firm’s financial strength before recommending a stock. That’s why so many advised buying Enron, Kmart, Global Crossing, and other recent bankruptcies just months before they failed.
You don’t have to be a victim. You can measure any public corporation’s financial health (Re: AnalysingCorporate Financial Health Course CFH/PS/IQ – e-mail: [email protected])
Step 7: Financial Strength Analysis
In the end, stock prices follow earnings.
In this step you should analyze sales and profitability trends to determine whether your candidate’s earnings are more likely heading up or heading down.
You should also find out if your candidate is really profitable, or just gives the appearance of making money.
Step 8: Profitability & Growth Analysis
It’s a disaster when you learn that your stock just dropped 40% because it reported disappointing earnings, or management cut future growth forecasts.
These disasters usually don’t come without warning.
In this step, you should check for red flags signaling future disappointments before they sink the stock price.
Step 9: Detecting Red Flags
Despite the advantages of the Internet, mutual funds and other institutional investors have access to better information about stocks than individual investors. Therefore, analyzing institutional ownership data can help you decide whether you’re on the right track.
Insiders are directors, key officers, and large investors. Naturally, you’d like to see that key officers own their company’s stock, but too much insider ownership signals danger.
This is where you should sort out institutional and insider ownership data to determine if it’s favourableor unfavourable.
Step 10: Ownership Considerations
Believe it or not, occasionally knowledgeable insiders withhold important information that would affect your investment decision until they’ve had a chance to act by dumping or loading up on the stock.
In these instances, the stock’s price action is your only clue that something is going on.
That’s why it’s important to check a stock’s price chart before buying.
In this step, you should ascertain whether the stock chart is signaling that it’s okay to buy.
Step 11: Price Charts
Analysis Scorecards….
Learn to create separate scorecards for the growth and value analysis
strategies when you analyse a stock.
You’ll be amazed how just filling out the scorecard will improve
your analysis. .
Determining Why and When to Sell
Establishing a Strict Sell Discipline …
Selling can be hard work……..
For most, selling a stock is often more difficult than buying it.
If I've made money, I enjoyed the experience and I don't want to leave the party when there's still money to be made. It's even
harder to sell if I'm behind. The game isn't over as long as I hold onto the stock, and
there's always hope that it will go back up. But once sold, the loss goes on my
permanent record.
It's easy to delay selling by saying "Let's wait and see what it does
tomorrow."
All too often putting off selling turns profits into losses and turns small
losses into bigger losses.
Need for further work ……..
Establishing a strict sell discipline is an effective antidote for seller's
procrastination.
…But there is need for a much more detailed study and practice for
deciding when to sell
In many instances, a condition triggering a sell signal for a growth investor wouldn't provoke the same response from a value investor.
For example, a significant reduction in earnings forecasts usually triggers an automatic sell for growth investors, but wouldn't faze a value player.
Conversely, a strong up-trending price chart often tells a value investor that it's time to sell, but the same event would signal to a growth type that the party is just beginning.
Considerations
However ……..
Certain events such as deteriorating fundamentals, significant earnings
restatements, and announcements of large acquisitions warn all players
that it's time to sell.
Following an organized approach to finding, researching, buying, and selling stocks will make you a better investor.
Now that you know what is involved……where do you want to start?
Summary
CreditsCredits
•Fire Your Stock Analyst - A Process for Analyzing Stocks on Your Own * By Harry Domash.
•The Candlestick Forum Staff, www.candlestickforum.com
•Nigerian Fund Managers & Research Unit Staffs
•Nigerian Stock Exchange Research Unit
•Nigerian Media Reports – ThisDay, BusinessDay, Financial Standard, Punch & The Guardian.
•Commentaries from subscribers at www.proshareng.com
ABOUT THE AUTHORHarry Domash publishes Winning Investing, a monthly stock and mutual fund advisory newsletter, and the Dividend Detective website for dividend investors. He also conducts fundamental analysis workshops and is a frequent speaker at the American Association of Individual Investors’meetings. Domash’s investing tutorial columns appear in the San Francisco Chronicle and the Santa Cruz Sentinel newspapers and on the MSN Money website. His fundamental analysis columns have appeared in Business 2.0 magazine. He is the author of The Everything Online Investing Book: How to Use the Internet to Analyze Stocks & Mutual Funds and runs the www.winninginvesting.com and www.dividenddetective.com sites for personal investors.
ORDER THE BOOKThis book is available from http://proshareng.com/store
SUBSCRIBELearn about our latest slides as soon as they are available. Sign up for our free newsletter and be notified by email. http://www.proshareng.com/myproshare/portal_account_register.php
Recommended Book
Buy the BookFire Your Stock Analyst: Analyzing Stocks On Your Own* By Harry Domash and Published by Financial Times Prentice Hall.ISBN-10: 0-13-226038-7; ISBN-13: 978-0-13-226038-1; Published: Jan 30, 2006; Copyright 2006; Dimensions 6x9; Pages: 416; Edition: 1st.
N10,000 (Online orders)
Other Free Training Courses Online – (1)
•Making Money in the Nigerian Stock Market – A Foundational Guide
•Selecting a Fund Manager
•Becoming your own stock analyst
•Clubbing to Wealth
•Starting out with Confidence
Free Training Courses Online – (2)
Parable of the Monkey Market
Interpreting Stock Tables
A Fools Guide to Investing – B. Oni
Stock Selection Process
Be a CEO of your Own Money – P. Babalola
Monetize Your Certificate
Other E-books available online
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CREATION DATE
This document was created on 23 March 2007 and is based on the best information available at that time. To check for updates, kindly send us an e-mail at [email protected]
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