Presentation Transcript

1. Common Cents Investment Group October 1st 2012
2. Agenda Helpful hints Today in the Market Stocks vs. Bonds vs. Options Accounting Analysis Additional Info
3. Helpful Hints There’s an app for that… Investopedia Bloomberg Yahoo! Finance Morningstar Access http://ccig.osu.edu/?p=399
4. Today in the Market The fourth fiscal quarter starts today Value Investing Congress http://www.bloomberg.com/video/which-stocks-are-hot-this-year-alTGSDSDQFOKYmh8r5qPrw.html Google overcomes Microsoft in market cap today Displays how the the technology industry has shifted Financials and Energy industries are on the rise http://www.bloomberg.com/video/what-to-buy-at-the-sprint-to-the-finish-HN5q~W2AQDqfMeFGbFGRbw.html
5. Today in the Market Facebook reveals a new focus Moving towards E-Commerce http://video.cnbc.com/gallery/?video=3000119464&play=1
6. Useful Definitions Speculation: The practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a tradable good. Separate than profiting from long term value such as capital gains, interest or dividends Risk Capital: Investment funds allocated specifically to speculative activity (high risk/high reward activity)
7. Stocks vs. Bonds vs. Options Stock: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings Bond: A debt investment in which an investor loans money to an entity (corp. or govt.) that borrows the funds for a defined period of time at a fixed interest rate Options: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder)
8. Stocks Ownership is determined by the number of shares a person owns relative to the number of outstanding shares Stocks are the foundation of nearly every portfolio Historically, they outperform most other investments over the long run
9. Bonds The entity issues a bond that states the interest rate (coupon) that will be paid along with the funds (bond principal) after a certain time period (maturity date). Corporate bonds Municipal bonds U.S. Treasury bonds, notes & bills (“Treasuries”) Two features of a bond: Credit quality and duration Bond maturities range from 90-day to 30-year
10. Options A sophisticated security with a tremendous amount of versatility and power Options can be as speculative or conservative as you want Can be very risky…usually carry a disclosure “Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital”
11. Options An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a specific price on or before a certain date. A Call gives the holder the right to buy an asset at a certain price (hope the stock will increase substantially) A Put gives the holder the right to sell an asset at a certain price (hope the stock will decrease substantially)
12. Options The total cost (the price) of an option is called the Premium and it is determined by several factors: Stock price Strike price (contract price) Time remaining Volatility Called a derivative because they derive their value from an underlying asset
13. Options Offer to buy a house for $200,000 3 years from now…for a premium of $3,000 The house was discovered to be where Elvis used to live and is worth $1,000,000. Profit = $797,000 The house is infested by mice who eat everything in site. House Is worth $50,000 Profit = -$153,000 http://www.investopedia.com/university/options/#axzz2811oUpt
14. Stocks vs. Bonds vs. Options Riskiness Options > Stocks > Bonds
15. Accounting or Financial Analysis…
16. Why Accounting is Importantto Value Investors Needed for… Ability to accurately and properly interpret financial statement data Use in valuation modeling Discounted Cash Flow Model, etc. Understanding the health of a business
17. Why Accounting is Importantto Value Investors Identifying past, current, and forecasting future performance Return on Equity, Free Cash Flow, other ratios How it affects the manner in which its components are reported Mark-to-market regulations, etc. This has become a major hotspot lately; if you’re interested, do a Google search for “FAS 157”
18. Financial Statements These are what publicly traded companies issue through the SEC and GAAP to report quarterly and yearly performance Many sites (Yahoo, Google Finance, etc.) report semi-accurate data However, often times they are not the best source for in-depth research Best to look at the actual filing Sources? investing.businessweek.com sec.edgar-online.com
19. Financial Statements What are the three (primary) financial statements? Balance Sheet Also called Statement of Financial Position Snapshot Income Statement Also called Statement of Earnings Statement of Cash Flows
20. Balance Sheet We talked about balance sheets last week… Reports a company’s assets, liabilities, and shareholder’s equity at an exact point in time Differs from the income statement and cash flow statements in this aspect; they cover a period of time whereas the Balance Sheet is a “snapshot” Useful in determining the company’s structure
21. Balance Sheet Important for analyzing the capital structure of the company Do they have a lot of cash relative to their debt? If not, do they have a lot of liquid assets? How do they finance their investments? Mainly through stock issuance or with bonds/borrowing? Do they have a lot of intangibles (goodwill, patents, etc.)?
22. Income Statement This statement lists all of the companies revenues, expenses, gains, and losses for a given period of time Example: Apple, Inc. Revenue = Sale from an iPod, iPhone, Macbook, etc. Expense = Cost of goods sold (items needed to manufacture a product), salaries/wages, research & development, taxes etc.
23. Income Statement Important to distinguish differences within each type of account Is that revenue part of our normal operations or from interest/investments? What type of expenses is the company incurring and in what volume? Is this gain or loss occurring frequently or once in a lifetime?
24. Income Statement What is depreciation/amortization? When a company purchases an asset, it has a limited useful life (5 years, 20 years, etc.) Depreciation is an annual expensing of the original purchase price of said asset There are many methods available, but the principle remains the same Key point: Depreciation in a NON-CASH expense
25. Income Statement Net Income and Earnings Per Share Ultimately, every company reports net income (or loss) for the given period It’s important to know everything to goes into calculating this number Earnings Per Share (EPS) = Allows comparison of company profitability regardless of overall size
26. Statement of Cash Flows Similar to the Income Statement, as it provides information about a company during a given period of time However, the Statement of Cash Flows only deals with what the company did with their CASH A company may be profitable according to their Income Statement, but they may have trouble generating cash
27. Statement of Cash Flows The different components Cash flows from… Operating activities Investing activities Financing activities
28. Statement of Cash Flows Useful for determining what the company did with its cash Are they collecting a reasonable amount from their normal operations? Are they spending a lot of their cash on new assets, prospects for expansion, etc.? If they have an excess amount sitting around, are they paying out a dividend?
29. Statement of Cash Flows Free Cash Flow (FCF): Operating Cash Flow  Inflow or outflow from everyday operations Capital Expenditures  Outflow used to acquire or upgrade physical assets such as machinery, buildings, etc. Good indicator of whether or not the company is expanding and still has cash on hand to pay its current debt obligations
30. Statement of Cash Flows
31. Accounting Analysis At a later date we will introduce more advanced concepts of accounting Financial Ratios Profitability, Leverage, Solvency, Liquidity, Efficiency Comparison to other companies in the same industry Valuation modeling Is the company’s equity more than its market cap? Anything else you guys would like to learn more about
32. Additional Info Visit www.wsj.com/semester for 75% off Luv Sherma will be speaking next week about Technical Analysis and his new Educational Program!!
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35. Questions? ? Questions, comments or concerns?