Introductory Fundamental and Technical Analysis Tan Junda junda@uobkayhian.com (65) 6590 6616 Jeffrey Tan jeffreytan@uobkayhian.com (65) 6590 6629
Our Focus Today What kind of investor are you? Technical Fundamental 1
Our Focus Today Top-Down Fundamental Analysis of Stocks 2
Our Focus Today Reading market direction based on economic data Basic analysis of financial statements Stock valuation using price multiples 3
Economic Indicators Economic and business cycles drive stock markets Stock market moves 6-12 months ahead of economy Indicators give clues to the state of economy Three main types of indicators: leading, lagging, coincident Leading indicators tend to better predict market direction 4
Economic Indicators 5
Economic Indicators Reading market direction using leading economic indicators Singapore purchasing managers index (PMI) Compiled from factual survey of purchasing managers Very good forward indicator of manufacturing activity Reading above 50 signals expansion, and vice versa Gives indication of acceleration/deceleration in activity eg reading of 59 coming after 51 last month signals acceleration www.sipmm.org.sg 6
Economic Indicators Reading market direction using leading economic indicators Composite Leading Index Used to anticipate economic turning points Comprises 9 components including US PMI, stock prices, new companies formed, stock of finished goods, liquidity Track quarter-on-quarter index % change http://app.mti.gov.sg 7
Economic Indicators Decline in mid-11 Market bottom in 2009 8
Economic Indicators Some other useful leading indicators Yield curves Money supply 9
Financial Analysis 3 key statements to focus on: Income statement how much earned and spent over a period Balance sheet how much the company owns and owes Cash flow statement inflow and outflow of cash 10
Financial Analysis Income Statement Income statement (S$m) 1H11 1H10 yoy % chg Revenue 29.1 26.3 10.5 Cost of sales (11.6) (10.7) 9.0 Gross profit 17.5 15.7 11.6 Other income 0.2 0.4 (33.6) Selling & Admin (15.7) (14.3) 10.4 Finance/ other costs (0.4) (0.6) (33.8) Income tax (0.4) (0.2) 98.3 Profit 1.2 1.0 25.9 EPS, S cent 1.3 1.0 24.3 Gross margin, % 60.1 59.7 Source: Old Chang Kee Revenue growth a function of store openings and sales per store Gross/net margin measure of cost control (gross/net profit revenue) Earnings per share (EPS) Profit attributable to each share 11
Financial Analysis Introduction to the Balance Sheet Asset Assets = Liability + Equity Liability Shareholders Equity/ Book Value 12
Financial Analysis Balance Sheet Balance Sheet, S$m 1H11 Assets Plant & equipment 11.9 Cash 13.1 Other assets 4.9 Total Assets 29.9 Liabilities Payables 4.9 Other liabilities 3.8 Equity 21.2 Total Liabilities and Equity 29.9 Source: Old Chang Kee 13 Debt to Equity ratio (gearing) - measure of financial health (total borrowings total equity) Return on Equity (ROE) measure of returns on shareholders investment (net profit total equity) Book value per share Equity attributed to each share (equity no. shares)
Valuation Valuation multiples are commonly used due to simplicity Examples are price-to-earnings, price-to-sales, price-tobook Multiples are usually used in comparison to peers 14
Valuation Price-to-earnings (PE) ratio is one of the most commonly used PE = Share price EPS Measures number of years the company will earn back your investment Lower PE value indicates undervaluation 15
Valuation Should you buy stocks with low PEs and sell stocks with high PEs? Not necessarily Google was trading at a seemingly high ~100x PE in 2004 EPS grew by more than six-fold Six-fold increase in share price in 4 years 16
Valuation Why do stocks trade at a high or low PE? Growth expectations are the largest drivers of PE Pick stocks with low PE and higher expected growth Use PEG (Price-earnings-growth) multiple as a guide PEG = PE ratio EPS Growth (%) eg EPS of 8.0x EPS growth of 10.0% = 0.8x PEG Visit www.reuters.com for EPS estimates 17
Valuation Valuation using the price-to-book (P/B) ratio Book value per share reflects the amount belonging to shareholders P/B ratio reflects book value growth Net profit after dividend payouts will add to book value ROE measures the rate of growth of book value Pick stocks with low P/B and high ROE 18
In Conclusion 19
What Is Technical Analysis? Based on supply and demand History tends to repeat itself and prices move in trends Market discounts everything Prices are the result of investors /traders actions Filter out news and fundamental valuations for an unbiased technical view Technical analysis is an art
What Is Technical Analysis? Typically does not work for: Sparsely traded stocks in terms of price and trading volume Companies that are no longer a going concern, eg companies going bust Companies affected by one-off events such as the 1Q11 earthquake in Japan
Types Of Charts Candlestick Line (eg only 1 price) Bar
Stages In Market Action 1. Accumulation - At the bottom of the chart 2. Rally - Breaks out with high volume 3. Consolidation - Sideway movement - Well-defined continuation patterns 4. Distribution - At the top of the chart - Downward movement is likely to be faster than upward movement - More volatile (vs consolidation) 5. Decline - Breaks support level(s)
Support And Resistance Why are we learning this? A way to identify peaks and troughs - potential profits and risks Where supply meets demand A support level is where prices are unlikely to retreat further A resistance level is where prices are unlikely to move up further Construction: Draw a line through each significant peak into the future
Support And Resistance Use as many points as possible to draw a support or resistance line (or trend lines) Not necessarily horizontal Anything steeper than 66 degrees may not be an indicative trend
Support And Resistance A resistance level can turn into a support level Resistance-turnedsupport line (in purple) appears when prices break resistance and refuse to move down from the original resistance line The reverse applies for support-turnedresistance (in blue)
Support And Resistance Can you identify the significant support lines in this chart?
Support And Resistance Suggested solutions:
Moving Averages Simple Moving Average (SMA) and Exponential Moving Average (EMA) SMA: Derived by computing the average price of a stock over a specific period EMA: Reduce the lag by applying more weight to recent prices MAs work well for trend trading Golden and dead cross for reversals MAs do NOT work during consolidation phases Traders would be whipsawed No magic numbers in MA and no one-size-fits-all Popular day intervals: 10, 20, 50, 100, 200 (eg SMA200 on 6-month chart - not suitable for short-term trades)
Moving Averages MA acting as resistance Action item: SELL at resistance Dead Cross - Watch out for potential trend reversal MA acting as support Action item: BUY at support Golden Cross - Watch out for potential trend reversal
When to use SMA or EMA: No hard and fast rules Select the most suitable for individual charts Moving Averages
Example of identifying a downtrend counter using MA Note that the stock did not break the 200-day EMA until recently in Feb 12 Several instances whereby each EMA of 20, 50 and 100 days was acting as a resistance during the downtrend Moving Averages
Example of identifying a uptrend counter using MA (on a weekly chart): Note that the stock fell below 20- and 50- week EMA in 4Q08 and 1Q09 Stays above the said MA most of the time Moving Averages
Moving Averages Example of counter trend trading with MA: Golden Cross 20-day EMA crossing above the 50-day EMA The stock is well supported above its 20- day EMA Golden cross typically refers to a shorter-term MA crossing above a longer-term MA
Chart Patterns - Flags Continuation patterns Typically the formation should not exceed three months In an uptrend, they form declining and narrowing ranges. Breakouts are usually sharp, typically with comparatively higher trading volume Confirmation : Use the higher high (bullish flag)/ lower low (bearish) of the flag pole Action item: BUY upon breakout
Technical Indicators Stochastics Why are we learning this? A way to identify turning points - Potential profits and risks Stochastics is a momentum oscillator (a concept promoted by George Lane since 1954). It follows the speed or the momentum of price Typically, %K has a setting of 14 periods Fast %D is typically a three-day simple MA of %K (signal line) Slow %D: Smoothed %D or a MA of the MA of %K %K cross over %D in the Overbought or Oversold regions indicates that the turning point is near Rough gauge: Oversold - <20; Overbought - >80 Calculation:
Technical Indicators Stochastics Application: Signal line crossovers are the most common Stochastics indications A higher probability of this occurs in the overbought or oversold region for sell and buy set-up A chart that uses Stochastics-signal line crossovers could imply that the trend is reversing
Retail Market Monitor Introduce the technical sections in our Retail Market Monitor: Charts found in Money Talk section Use Fundamental Analysis for stock picks, use Technical Analysis for entry and exit
Retail Market Monitor Introduce the technical sections in our Retail Market Monitor: FSSTI and other Asian indices readings Readings and possible direction of FSSTI
Retail Market Monitor Introduce the technical sections in our Retail Market Monitor: Traders Corner Individual stocks & TA
Retail Market Monitor Introduce the technical sections in our Retail Market Monitor: Special Focus Combining Fundamental Analysis with Technical Analysis (PE, P/B, Dividend Yield ratios)
Retail Market Monitor Introduce the technical sections in our Retail Market Monitor: Weekly Support and Resistance Watch (SaRW) Discussion of S&R of 20 Stocks
THANK YOU 43
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