Portfolio Management – Fundamental Analysis Project

The goal of this assignment is to apply the fundamental analysis tools that we have studied. We will use these tools to analyze a firm’s fundamentals and then come up with a trading strategy.

  1. First choose a publicly traded company that you would hypothetically want to analyze/track/invest in.
  2. Using a financial news website such as the following, look up the financial statements of that company. (There are other places to look; it’s your choice.)
    • http://moneycentral.msn.com/investor/invsub/results/statemnt.asp
    •  www.valueline.com (when on a campus computer)
  3. Using the Constant Perpetual Dividend Growth Model, the Residual Income Model, the P/E ratio, the P/CF ratio, and the P/S ratio, perform valuations on or predictions of the firm’s stock price.
    • For the Constant Dividend Growth Model, find current dividends per share, D(0), from the income statement. Estimate the dividend growth rate, g, or find it on the ratios/statements pages. Estimate the discount rate, k, using the CAPM. (Note: Some stocks don’t pay dividends. If that is the case, then state that and skip the dividend model.)
    • Residual Income Model: Find or estimate the EPS growth rate. Find book value per share on the balance sheet. Use the discount rate, k, from part a.
    • P/E ratio: Find or estimate the EPS growth rate. (You can use the same EPS growth rate from part b.) Predict next year’s EPS. Then predict next year’s stock price using the average P/E ratio. (Use the average P/E of the last few years.)
    • P/CF ratio: Find or estimate the CFPS growth rate. Predict next year’s CFPS. (You can use Cash From Operations on the Cash Flow Statement to approximate operating cash flow.) Then predict next year’s stock price using the average P/CF ratio. (Use the average P/CF of the last few years.)
    • P/S ratio: Find or estimate the SPS growth rate. Predict next year’s SPS. Then predict next year’s stock price using the average P/S ratio. (Use the average P/S of the last few years.)
  4. Now for the fun part! You now have as many as five different estimates for the stock value based on part 3. Compare your estimates of stock value to the current actual stock price (on Yahoo Finance or other). Make a prediction about whether the stock is underpriced or overpriced (i.e. whether you should buy it or short it).
  5. 5. Once you’ve made your prediction about the stock price direction, go to Stock-Trak and make the appropriate trade. Remember, you short sell if you think it’s overpriced (this means you think the current price is too high). You buy it if you think it’s underpriced (this means you think the current price is too low).
  6. Under “Trading”, click on “Stocks”. Enter the ticker symbol and the number of shares to trade.

Note: I’ll leave it up to you to decide how many shares to trade. That might depend on how sure you feel about your prediction. Also, remember that the transaction cost on Stock-Trak is $25 per trade, so it may take a large number of shares to overcome that cost. (Transaction fees come out of your hypothetical $1 million.)

What you are to turn in on Thursday, October 1:

Create a neat, organized report of your stock analysis & trading with the three sections as follows:

  • Section 1: Include your name, the assignment (Stock Trak #1), and a typed concise description of your analysis. Include why you picked the stock, and your conclusions on whether the stock is overvalued or undervalued. Do the results of your calculations agree with other current information that you may know about the company?
  • Section 2: Neat, organized, legible calculations for steps 3a, 3b, 3c, 3d, and 3e. This page(s) can be hand written or typed. Clearly show your five stock price predictions compared to the market price.
  • Section 3: A printout of either your Stock-Trak Confirmation page or Transaction History. If you include Transaction History, circle the trade that corresponds with this assignment.

Extra Credit (Optional)

Any time after you make your initial trade, but before December 11, reverse your trade on Stock-Trak when and if the stock price moves in the direction you predicted. If you can show me that you made a profit (net of transaction costs), I’ll give you 5 extra credit points on the final exam. Thus, there is incentive here to try to make quality valuations/predictions.

In order to receive extra credit, you must:

a. Print out the “Transaction History: View All” page
b. Circle the initial trade and the reverse trade
c. Show through neat, legible calculations that you made a positive profit (net of transaction costs).

This extra credit portion can be turned in anytime before the final exam, but you must make your final trade by December 11. That is the day our Stock-Trak subscription expires.

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