Applied Equity Analysis and Portfolio Management: Tools to Analyze and Manage Your Stock Portfolio

336 Pages·2014·19.34 MB·English

by  Robert A. Weigand

Applied Equity
Analysis and
Portfolio
Management
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Applied Equity
Analysis and
Portfolio
Management
Tools to Analyze and Manage
Your Stock Portfolio
ROBERT A. WEIGAND, PhD
Cover Design: Wiley
Cover Image: © iStockphoto.com/simon2579
Copyright © 2014 by Robert A. Weigand, PhD. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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ISBN 9781118630914 (Paperback)
ISBN 9781118819180 (ePDF)
ISBN 9781118819203 (ePub)
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
Contents
Preface ix
Acknowledgments xv
ChAPter 1
Perspectives on Active and Passive Money Management 1
Terminology: Investors, Investment Vehicles, Risk, and Return 1
The Top-Down Fundamental Analysis Process 3
The Record of Professional Money Managers 8
Market Efficiency, Behavioral Finance, and Adaptive Expectations 10
Additional Perspectives on Investing 18
Professional Investment Policy Statements 26
Summary 30
Questions 30
Answers to Selected Questions 32
References 33
Notes 34
ChAPter 2
Analyzing the Macro-Finance environment 35
Economic Analysis: The First Step of a Top-Down Fundamental Process 35
Data Considerations: Nominal and Real-Time Series 41
National Income, Corporate Profits, and Job Creation 41
Leading Economic Indicators 43
Coincident Economic Indicators 54
Lagging Economic Indicators 58
Supplemental Economic Indicators 64
Summary 67
Questions 67
References 69
Notes 69
ChAPter 3
Valuation, expected returns, and the Dividend Discount Model 71
Finance Principle 1: Valuation 71
Finance Principle 2: Value and Expected Returns 77
v
vi Contents
Summary 88
Questions and Problems 88
Answers to Selected Questions and Problems 93
Reference 96
Note 96
ChAPter 4
historical Performance Analysis 97
Getting Started 98
Historical Stock Returns 100
Growth in Revenues, Profits, and Dividends 101
Gross, Operating, and Net Profit Margins 108
Relative Valuation 111
Liquidity and Debt 115
Profitability: ROA and ROE 118
NOPAT, Total Invested Capital, Free Cash Flow, and ROIC 122
Value Creation: Cost of Capital, EVA, MVA, and Intrinsic Value 127
Using Diffusion Indexes to Summarize Performance Analysis 134
Summary: Historical Performance Analysis 136
Appendix: United Technologies’ Financial Statement Highlights,
2009–2012 136
Questions 138
Answers to Selected Questions 139
References 142
Notes 142
ChAPter 5
Financial Statement Forecasting, Financial Analysis, and Valuation 143
The Income Statement Forecast Worksheet 144
The Percent-of-Sales Forecasting Method 144
Forecasting MCD’s Income Statement 145
Forecasting MCD’s Balance Sheet 153
Pro Forma Analysis: MCD 159
Intrinsic Value Modeling 164
Financial Fitness and Probability of Bankruptcy Scorecards 170
Summary 171
Case Study 5.1: Two Perspectives on Valuation Analysis: The Curious
Case of Amazon, Inc. 172
Questions 175
References 208
Notes 208
ChAPter 6
Analyzing Company Strategy and Identifying Catalysts 209
Sources of Information 212
Unique Capabilities Lead to Sustainable Competitive Advantage 212
Getting Started: Analyzing Strategy and Competitive Advantage 216
Porter’s Five Forces Model 223
Contents vii
SWOT Analysis 229
Catalysts 232
Summary 232
Questions 233
Answers to Selected Questions 233
References 234
ChAPter 7
Portfolio risk and Performance Attribution 235
Foundations: Risk and Expected Return 236
Statistical Representations of Macroeconomic and
Firm-Specific Risk 240
Extending the Mean-Variance Framework: Beta 249
Performance Attribution: Sector Weights, Dividend Yield, Beta,
and Style 255
Multifactor Models 262
Summary 266
Questions and Problems 267
Answers to Selected Questions and Problems 271
References 279
Notes 279
APPenDIx
the time Value of Money and the Basics of Valuation 281
Basic Terminology 282
The Basic Future Value Tool 282
The Basic Present Value Tool 285
Perpetuities 292
Calculating Average Annual Compound Rates of Return 293
Integrated Problems Featuring Multiple TVM Tools 293
Solving for the Number of Periods 294
More on the EAR-to-APR Conversion 295
Arithmetic versus Geometric Averages 296
Questions and Problems 298
Answers to Selected Questions and Problems 302
About the Online Video Course 309
About the Author 311
Index 313