V. STOCKS

1. V. STOCKS

2. I. Fundamental Analysis (Continued) • Basic Ratios i. Earnings per Share = total earnings outstanding shares Tracks profitability regardless of firm size • Price/Earnings Ratio (P/E Ratio) = current share price earnings per share Provides a rough estimate of market opinion of current and future corporate operations

3. I. Fundamental Analysis (Continued) iii. Return on Assets = EBITDA assets Measures efficiency of use of firm assets iv. Return on Equity = EBITDA common stock equity Measures efficiency of the use of shareholder capital

4. I. Fundamental Analysis (Continued) v. Return on Invested Capital (ROIC) = EBITD common and preferred stock equity & long term debt Measures efficiency of the use of the entire corporate capital structure vi. Debt/Equity Ratio = total debt market capitalization Measures the leverage in a company and thus its vulnerability to interest rate changes

5. I. Fundamental Analysis (Continued) vii. Current Ratio = Current Assets Current Liabilities A measure of liquidity, whether a company has sufficient assets to pay current debts

6. I. Fundamental Analysis (Continued) • Issues Regarding Outstanding Shares • Float – the number of shares outstanding (available for purchase) • Stock repurchase (buy back) program – where a company purchases its own shares on the open market – reduces float (reduces supply of shares), decreasing number of shares outstanding, increasing earnings per share, and increasing share price

7. I. Fundamental Analysis (Continued) • Choosing Stocks Based Upon Fundamentals • Stock Market Selection Methods • Dogs of the Dow – buy highest yielding Dow stocks at the beginning of the year, selling best of stocks after 12 months • Relative Strength from Investors Business Daily – compares stocks with the overall market – See:

8. I. Fundamental Analysis (Continued) • S&P Star Quality Rankings – stocks are ranked by anticipated performance based upon fundamentals http://www2.standardandpoors.com/spf/pdf/index/SP_Citigroup_Global_STARS_Methodology_Web.pdf?vregion=us&vlang=en • Value Line Value Line - The Most Trusted Name in Investment Research

9. I. Fundamental Analysis (Continued) • Diversification – Selecting stocks that respond to the market in different ways – stocks should not all be positively correlated (prices moving in the same direction), in the same industry, or with the same market cap • Large Cap = market capitalization in excess of $5,000,000,000 • Midcap = market capitalization from $1,000,000,000 to $5,000,000,000 • Small Cap = market capitalization of less than 1,000,000,000

10. I. Fundamental Analysis (Continued) • Growth versus Value Stocks • Growth Stock – High P/E ratio, earnings expected to grow at an above average rate • Value Stocks – Low P/E ratio, searching for “bargains” – stocks that are out of favor or in industries out of favor with investors but with good fundamentals • Value Trap – Low P/E ratio stock that is a bad investment – P/E is low for a reason

11. I. Fundamental Analysis (Continued) • Cyclical Stocks – Rise and fall with the economy in general – ex. Transports • Defensive Stocks – Product demand exists in all phases of the business cycle – consumer staples, drugs, etc. • Domestic versus International – If markets are performing poorly in one country, stocks from another country could be performing well

12. I. Fundamental Analysis (Continued) • Data Sources • Financial press and Internet sites – provide readily available information, but may not be in depth or timely • Professional research – can have greater “depth,” can reveal more obscure information, but can be biased and expensive • Companies – can provide fairly detailed information, but biased towards the company • SEC filings – very detailed and thorough, must be accurate, but difficult to read and not timely

13. I. Fundamental Analysis (Continued) • Other Approaches • “Buy what you know” – Purchase shares of companies that you do business with and are impressed by • Consensus information – Agreement among analysts or researchers regarding whether a stock is a good value

14. J. Technical Analysis • 50 Day Moving Average – provides guidance regarding long term stock price movement trends (200 day = very long term) • Positive Momentum – Above the moving average • Negative Momentum – Below the moving average AVAV: Technical Analysis for AEROVIRONMENT, INC. - Yahoo! Finance • 5 - 20 Day Moving Average – Shows very short term trend

15. J. Technical Analysis (Continued) • Support – Stock “Bottom,” price below which shares have historically not traded • Resistance – Stock “Top,” the price that the stock tends to “bounce off of,” a stop to further price advances • Volume – Shares traded per day, indicates whether a price movement is “real” (ex. – stock trading higher on high volume shows interest in stock during price advances, stock price increasing on low volume is “drifting”

16. J. Technical Analysis (Continued) • Bollinger Bands – One standard deviation above and below the stock price, based upon 20 day moving average – a measure of stock price volatilityhttp://us.rd.yahoo.com/finance/chart/overlay/bollinger/*http:/finance.yahoo.com/q/ta?s=CSX&t=1y&l=on&z=m&q=l&p=b&a=&c= • Sharp price changes tend to occur after the bands tighten, indicating a “break out” from a less volatile pattern • Prices moving outside the bands indicate a continuing trend • Trend reversal is indicated by bottoms or tops outside the band, followed by bottoms and tops inside the band • A move originating at one band tends to move all the way to the other band

17. J. Technical Analysis (Continued) • Stock Chart Types – In all types, y axis indicates price, x axis is time • Line • Bar (High, Low, Close) • Candlesticks – White = stock up, Black = stock down • Point and figure • Chart Scaling • Arithmetic – Even scale of price movements • Logarithmic – Scale by percentage change, works best for highly volatile stocks