Stock (Equity) Fundamentals

Transcription

1 Orange Empire Railway Museum: L.A. Railway LARy-3001, entered service in 1937, dedicated by child film star Shirley Temple. Stock (Equity) Fundamentals Essential features of pricing, buying, venue (c) 2018 Gary R. Evans. This slide set by Gary R. Evans is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 Intertational License.

2 Stocks listed in the U.S ,248 stocks in the U.S. in Jan NYSE NASDAQ Source: The World Federation of Exchanges 52,220 in the world!!

3 What is a market index? An index is a weighted and summed list of stocks that is meant to indicate a measure of performance for a certain class of stocks. Most stock indexes are weighted by market cap, shares outstanding times price (DJIA not). Weights are adjusted for splits, mergers and acquisitions, and additions and deletions from the list. Most indexes are now represented by ETPs. The major indexes are represented by mutual funds.

4 The Major Stock Indexes Dow-Jones Industrial Average NASDAQ Composite (and 100) S&P 500 Russell 2000 (small cap) Russell Midcap (800 smallest of top 1000) Russell 6000 Various sector indexes Various global indexes Source: bigcharts.com

5 The Wall Street Journal list of indexes: WSJ: September 7, 2018

6 The Dow Jones Industrial Average AAPL Apple HD Home Depot NKE Nike AXP American Express IBM IBM PFE Pfizer BA Boeing INTC Intel PG Procter Gamble CAT Caterpillar JNJ Johnson & Johnson TRV The Travelers Cos. CSCO Cisco JPM JP Morgan Chase UNH UnitedHealth Group CVX Chevron Corporation KO Coca Cola UTX United Technolgies DWDP DowDuPont MCD McDonalds V Visa DIS Disney MMM 3M VZ Verizon WBA Walgreens Boots Al MRK Merck WMT Wal Mart GS Goldman Sachs MSFT Microsoft XOM Exxon Mobile Stocks that have been removed in recent years include General Electric (GE replaced by WBA on June 20, 2018, was one of the original stocks in the index), Altria (MO), Honeywell (HON), AIG, Citigroup (C), and General Motors (GM), Kraft food (KFT), Bank of America (BA), Hewlett Packard (HP), Alcoa (AA), and AT&T (T). Stocks in this index are weighted by price (a stock with double the price will have double the weight).

7 19 strong years (the S&P 500) 3,500 3,000 8/29/ ,500 2,000 1,500 3/24/ The dot.com crash 10/9/ The mortgage meltdown The longest bull market in U.S. history 1, /9/ /9/

8 01/02/18 01/09/18 01/16/18 01/23/18 01/30/18 02/06/18 02/13/18 02/20/18 02/27/18 03/06/18 03/13/18 03/20/18 03/27/18 04/03/18 04/10/18 04/17/18 04/24/18 05/01/18 05/08/18 05/15/18 05/22/18 05/29/18 06/05/18 06/12/18 06/19/18 06/26/18 07/03/18 07/10/18 07/17/18 07/24/18 07/31/18 08/07/18 08/14/18 08/21/18 08/28/ : Started as a volatile year, with corrections but strength at the end 3,000 2,900 The S&P as of August 31. 2,800 2,700 2,600 2,500 2,400

9 Relative Index Performance DJIA vs. Russell 2000, 2018 DJIA is green HLC DJIA is 30 large cap industrials whereas Russell 2000 is small caps only (the smallest 2000 of the largest 3000). Over this time period the small caps are clearly more volatile. Source: bigcharts.com

10 Basic information about your stock INTC This is a candlestick chart... read in the chapter about how it works Go to yahoo or google to see what is there /2/2018 2/2/2018 3/2/2018 4/2/2018 5/2/2018 6/2/2018 7/2/2018 8/2/2018 9/2/2018

11 DWBH!... and our Python models grab a lot more data

12 Sector and industry-based performance... 9/7/2018 Sector and industry-based listings can show you that there is considerable variance from one sector or industry to another.

13 It starts with the IPO... (see the reading) The stock is released to the public for the first time on the day of the Initial Public Offering (IPO). Thereafter the stock is traded in a the secondary market. That is the stock market.

14 Tesla Motors (TSLA) Price History Since the IPO I would sell the TSLA right now. I admire Musk and his wonderful car - would love to own one (wife says no) but financially it is a pure subsidy play. Depending upon whose numbers you believe, somewhere between $20K and $35K of actual price of each Tesla is subsidized by clean air credits, which means that their profits are 100%+ subsidy, and that sort of thing can disappear in a single evening. Don't get me wrong, I approve of Tesla and the subsidy, but it makes for very tenuous business. ( to Chris Streiter May 9, 2013) 50 0

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16 IPO Glory Days... prior to the 2000 dot.com crash The 10 Most Successful First-day IPOs (as measured by percentage gains in the first day) Company IPO Date IPO Price $ 1st day close Gain % TheGlobe.com November 13, Braodcast.com July 17, EarthWeb November 11, Secure Computing November 17, EBay September 24, Yahoo April 12, Rambus May 13, Boston Chicken November 8, Planning Sciences April 30, Home Shopping Net May 13, Source: Los Angeles Times, November 14, Original data source was Securities Data.

17 IPOs have failed to outperform the market compared to the S&P 500. Source:

18 ... and the IPO market has cooled off some.. Source: Renaissance Capital

19 A good 2016 IPO: Twilio slide from last year.. ultimately a sad story From CNBC, June 23, 2016 Twilio's initial public offering marks the first U.S. venturebacked tech IPO of It entered the market on a day filled with uncertainty as the world awaits the outcome of the U.K.'s referendum on its European Union membership. The San Francisco-based Twilio has grown quickly by selling software that helps companies communicate with customers using voice, video and messaging in an anonymized manner. Uber, OpenTable, and Nordstrom are some of the company's clients. The company hits the public market having yet to turn a profit. In 2015, the company's revenue almost doubled to $166.9 million, but it still posted a net loss of $35.5 million.

20 An then TWLO screws up IPO Hey, what do you say we do a secondary public offering, not so much to raise more money but so we can sell our stock!!... in 2018 Twilio is forgiven after very strong earnings growth, and the stock has a banner year. A lot of Mudders work for TWLO. On October 10, 2016, Twilio announced that they were going to do a secondary public offering and sell $400 million more in class A common stock. However, this was not to benefit the company. This was to allow inside shareholders of the company that had just IPOed in the previous June to dump their shares on the market. Even by the cynical ethically-empty standards of Wall Street, this was seen as excessive and brazen and the stock was deservedly pounded to a pulp. Your teacher had just repurchased TWLO in order to write covered calls and suffered a huge loss. After a year passed, TWLO recovered. But these short stories remind us that these markets can be hazardous for retail investors, especially if not diversified.

21 An IPO that we will watch... Kodiak Sciences KOD

22 The Kodiak S1...

23 The fake red herring... This companies stock opened at 22.21, not 17! This red herring practice allows a company to announce their opening price the day before the IPO, which allows a large final block of stocks to be sold to favored inside investors at the price. Then the stock actually opens the next day to the public at a higher price. In the case of SNAP, this was $ So SNAP was not up , it was not up at all! Also SNAP set a new unhealthy precedent in that these were all non-voting shares! See the book for comment. Greed, greed, greed everywhere you look! Has it 30 paid off???

24 The private securities markets... See chapter 1: they are called secondary private markets there.

25 Alphabet Class A (GOOGL) and Class C (GOOG) stock (and B) Source: bigcharts.marketwatch.com Source: bigcharts.com Class A shares get one vote, class C shares get no votes, and class B shares get 10 votes. The issue: should you buy only stocks with voting rights??

26 SNAP - the stock with NO voting rights! Source: bigcharts.com compared to the S&P 500 since SNAP's inception. But on the other hand SNAP is not going to be in the S&P 500, is it?

27 BABA and the VIE... Should you buy Alibaba, Chinese stocks, or any other Variable Interest Entity (VIE)? The VIE is popular for Chinese tech firms that want to list in the United States, including Alibaba (BABA). But you are not buying common stock when you buy a VIE: In the VIE structure, American stockholders don t own the Chinese company. They just own a company that has some contracts that are supposed to mimic what it would look like to own the Chinese company. You re not buying stock in Alibaba when you buy Alibaba on the NYSE. You re buying a holding company called Alibaba Holdings registered in the Cayman Islands with a claim on some of Alibaba s profits but no actual ownership stake. You don t own shares in the real Alibaba and you don t get a vote in how Alibaba is run, although you do get to share in Alibaba s profits. The danger some observers have noted is that those contractual claims on Alibaba s profits are only enforceable in a Chinese court (because the contract is between the Chinese subsidiary of the Cayman Islands-based holding company and the Chinese incarnation of Alibaba). Will those contracts between the Cayman Islands Alibaba and the Chinese Alibaba be upheld in court? Many experts in Chinese law doubt it. John Ford, "No One Who Bought AlibabaStock Actually Owns Alibaba," The Diplomat, September 24, 2014

28 American Depositary Receipts (ADRs) [From the book]: Generally, a given amount of shares denominated in the home currency are deposited in a financial institution and an identical amount of shares are then issued to the U.S. markets denominated in Dollars. For example, if a million shares of Yen-denominated Sony stock are deposited as an ADR, then a million shares of Sony stock can be issued through the New York Stock Exchange to be sold in Dollars. Thereafter these are traded just like stocks that had IPOed in the U.S. market, with no restrictions. Some of these stocks, such as oil giant BP plc (which used to stand for British Petroleum) often pay dividends both at home and in Dollars in the United States.

29 Stock splits and reverse splits (Image from CNNMoney) A board of directors can choose, with shareholder approval, to split a stock 2-for-1 or 3-for-1 or some other proportion to reduce the price back to a range that may be more attractive to investors. The amount owned and dividends and other rights are adjusted proportionately. Going the other direction, companies can also engineer reverse stock splits!

30 The Cabot Oil & Gas (COG) 2-for-1 split (Aug 15, 2013) Use stock split calendar in Google to find these In historical data series, the adjusted data will always account for the split (red line) so older data do not actually reflect the price that the stock was trading at /1/2013 8/6/2013 8/11/2013 8/16/2013 8/21/2013 8/26/2013 8/31/2013 Actual Market Price Adjusted quoted price

31 The 2014 Apple (AAPL) 7-1 stock split April 23 rd announcement of stock split /2/2014 2/2/2014 3/2/2014 4/2/2014 5/2/2014 6/2/2014 7/2/2014 8/2/2014 Adjusted Price Unadjusted price 60 Note: These labels are backwards here and in the text.

32 The effect upon the stock price of Citigroup (C) of the 1-for-10 reverse stock split of May 9, Prices shown are the actual market prices quoted The stock market crash nearly destroys C, sending the stock plunging to only $ 1 per share in early 2009, then stabilizing at around $3 to $4 per share until the reverse split. During this period C was a heavily traded speculator's stock The effect of the 1-for-10 split, May 9, 2011, upon the price of the stock is very obvious. For awhile the stock languished even with this asjustment, then C rallied with the general market and financial services rally in /3/2006 1/3/2007 1/3/2008 1/3/2009 1/3/2010 1/3/2011 1/3/2012 1/3/2013

33 2018: (Helios and Matheson Analytics Inc... parent of MoviePass) reverse stock split 1/250 Source: LA Times Aug 1, 2018 Source: finance.yahoo.com If on July 24, 2018, you owned 100 shares of HMNY, the next day you only owned 0.4 shares, because of a 1/250 stock split. On Friday, September 7, 2018 that stock would be worth X 0.04, or $ In this case, the effort to keep the stock listed will likely fail.

34 Short Selling 1. Sell here 2. Buy here When you short-sell a stock you reverse the normal order of the transaction: (1) you sell the stock first, then (2) buy it back later. Normally you do this because you think the price of the stock will fall. How is this possible? Technically when you make this transaction you borrow the stock in-kind and offer collateral in cash and you promise to pay the stock back in-kind and have the collateral returned. You borrow it (indirectly usually) from a party who is long in the stock for the long term (like a pension fund) and is willing to loan it to you, using your collateral to earn a small return. You pay interest on this short loan and the interest rate is variable depending upon the stock, and may be higher than market if it is hard to borrow the stock.

35 Ameritrade short-selling process 2. Close the transaction with this later. 1. Initiate with this now.

36 Securities Lending and Short Selling Stock loan You (seller) Broker: TDAmeritrade, IB etc. Custodian Bank Securities Lending Program Stock Cash Cash Collateral Securities Lender: Pension, Mutual, Hedge Fund. etc. Buyer The original securities lenders will be typically large institutional investors like pension funds or mutual funds who plan to hold the stock in question for a very long time, like an S&P500 Index mutual fund. Therefore they are willing to lend that stock through an intermediary (the broker) so long as cash collateral is provided. They then take that cash collateral and invest it in a low-yield safe investment to enhance yield. Often (typically) there is a custodian bank offering a securities lending program, lending the securities and finding investments, for the securities lender.

37 Short data (free): 1. Short interest: Total # shares short 2. Days to cover (days short): SI / Avg daily volume (3 mos.) 3. Shorts as % of total outstanding note the volatility

38 Short data: The Wall Street Journal Note your sorting options: Very useful Note that index ETFs can be shorted! The SPY short was the third largest for that day! What might that imply (and remember, shorts have to be covered)?

39 Order routing Your limit or market order Broker (TDAmeritrade) Exchange (NYSE Arca) (or) Order-flow Market Maker (GSCO - Goldman Sachs) Quotation Service Clearing House

40 Discount/online Brokers Low transactions costs, instant execution ETrade, Ameritrade, Scottrade, TradeKing Traditional full-service "Private clients" charge 1% or so of assets Useful for very large accounts and clueless investors Track record rather motley in 2000 crash. Specialized online Allow exotic online interfaces for day-trades, options trading, programmed trading strategies Small-market traditional rip-off brokers for ignorant people

41 Assignment: Peruse TDAmeritrade, Interactive brokers, E-Trade and Robin Hood 1. Fees for trading 2. Trading platforms 3. Requirements to open an account

42 The primary role of the broker... executing your buy and sell orders... from Chapter 2...

43 TDAmeritrade Online Trading Screen Enter these Could also be a market order, price box disappears

44 Best Bid / Best Ask Best Bid Of the limit orders submitted to buy stock, this is (supposed to be) the highest. This is relevant to you if you are trying to sell the stock with a market order. Best Ask Of the limit orders submitted to sell stock, this is (supposed to be) the lowest. This is relevant to you if you are trying to buy the stock with a market order.

45 National (Protected) Best Bid and Offer [ask] (PBBO) Market and limit orders can be routed by many brokers through many market makers and other major transactors to any one of three primary exchanges in the United States. So how does a single Level II queue and, more important, how does a single Best Bid and Best Ask price emerge from this? Since 1978 an organization called the Securities Industry Automation Corporation (SIAC) has executed a protocol called the Consolidated Quote Plan resulting in the Consolidated Quotation System (CQS). As part of this service CQS identifies the Best Bid and Offer (highest bid and lowest ask), which is disseminated by SIAC to subscribing market participants (including your broker) through the CQS Multicast Line. This. PBBO (protected) quote (formally NBBO) is what you see on an online trading site when you ask for a quote. This is also called a Level 1 quote. Normally this system insures that no matter what exchange or network your broker trades through, you will get best bid or best ask on market orders to sell or buy

46 Types of orders Market order An order for the broker to buy a stock at the best possible price. Limit order An order to buy <sell> a stock only if the price falls below <above> some specified price. Example: Buy FEYE at $14.32 or below. Stop loss order (For a stock already owned) Sell at market if the price falls below $ Stop Limit Order Combination of a limit order and a stop order: place a limit order at X if the stock falls below X (or Y).

47 The distinction between a limit and market order... Figure 2 TDAmeritrade Ticket to Buy 100 shares of INTC with a Market Order (Top) and a Limit Order (Bottom)

48 NASDAQ Level II / DOM Quotations A limit order to buy (sell) will be placed in the bid (ask) queue wherever it belongs. Level II Cisco (CSCO) DOM: Depth of Market - other terms also now used. A market order to buy will (normally) be executed at Best Ask (the top of the ask queue). Vol MPID BID ASK MPID Vol 4 BATS ARCX 1 32 NSDQ PHLX 6 10 ARCX BATS CINN NSDQ GSCO GSCO 9 Market Participant IDs (MPID) Best Buy and Best Ask are shown in yellow. (highest on top) (lowest on top)

49 Typical Level II screen (IB) showing Bid/Ask queue for tsla with Best Bid (277.13) and Best Ask (277.46) at top. Bid queue represents limit orders to buy, Ask, to sell. The Bid queue declines and Ask queue rises. (Sept. 10, 2018) Limit orders make up the queues you are being shown the best order for each exchange or market maker.

50 This is the INTC deep book limit order book for 9/10/18 (same image as Ch 2 except longer and more recent)

51 Your teacher s Interactive Broker limit order book viewer and book trader (now also called the Deep Book) for ARCA (NYSE) and NASDAQ on 9/10/2018, 8:32 AM PDT for INTC. Limit orders to buy are on this side. Unlike Level II, this is a list of all limit orders. This costs about $25 per month. Blue is the last price. Limit orders to sell are on this side. When this is Armed, (see the box far upper left this example is not armed) then touching any price will send a limit order at share default size (100 in this case) to the market.

52 Here is Clovis Oncology (CLVS), which is far less liquid than INTC. Here are some good exam questions: (1) What is Best Buy? (2) What is Best Ask? (3) What is the last trade price? (4) If you submitted a market order to buy, what price would you pay? (5) If you submitted a limit order to buy for 34.95, what would happen? (6) If you were doing spread arbitrage (see the chapter reading) and wanted to have Best Bid and Best Ask at the same time, how could you do it?

53 More on Limit vs. Market Orders A market order to buy (sell) in an ordinary stock transaction will normally result in the immediate purchase of your stock at Best Ask (Bid). In an orderly market for a liquid stock where there is only a penny spread between bid and ask a market order is suitable. However, in a market for a less liquid stock there is often a wider spread between bid and ask. A limit order priced between bid and ask, or at least no higher than best ask when buying or no lower than best bid when selling, may be more suitable than a market order. In a high-volume volume volatile market when the bid/ask queue is racing, you must use a limit order or you might end up getting a price you really don't want! When trading first day IPOs, options, futures and other derivatives, again you must use limit orders and get very good at doing that. Rule of thumb: if trading practice using limit orders even in a stable market when market orders will suffice.

54 Illiquid Stocks and Big Spreads (and why you must use limit orders sometimes) Use a limit order here!! NATH is still a relatively illiquid stock (on 2018 average daily volume was 14.0K shares INTC had 24,752.7K!) so there is a big spread between Bid (86.15) and Ask (88.60) and sometimes the spread is a lot wider than this. This is one of the effects of lack of liquidity (relative trading volume).

55 Your first bit of trading advice: Use limit orders nearly always, not market orders. You can choose one of three strategies: (1) submit a limit order to buy at best bid (278.21), for automatic purchase, or (2) submit a limit order between Bid and Ask, or (3) submit a limit order on down the queue to get a better price than market, with no guarantee of exercise. Make sure you watch the videos.