Analysis Financial Report And

Business Assessment
EQUITY SECURITY ANALYSIS
CHAPTER 9
Presented by Group # 1

Bassem 041714253044
Bimo 041714253004
Irwan 041714253011
Equity Security Analysis
• Equity security analysis is the evaluation of a firm and its prospects
from the perspective of a current or potential investor in the firm’s
stock
• Security analysis is the foundation for the second step of investment
process, projecting future returns and assessing risk.
Equity Security Analysis and Market Efficiency
• Efficient market hypothesis: information would be reflected in
security prices fully and immediately upon its release.
• Under this condition it would be impossible to identify mispriced
securities on the basis of public information
• Efficient market hypothesis cannot represent an equilibrium in a strict
sense
Market Efficiency and the Role of Financial
Statement Analysis
• Market agents could profit from digesting financial statement
information:
• The information would be useful to the select few who receive newly
announced financial data, interpret it quickly, and trade on it within minutes
• The information would be useful for gaining understanding of the firm, so as
to place analyst in a better position to interpret other news as it arrives
• Create trading strategies designed to exploit any systematic ways in which the
publicly available data are ignored or discounted in the price-setting process
Approaches to Fund Management and
Security Analysis
• Active versus Passive Management
• Active: relies heavily on security analysis to identify mispriced securities
• Passive: serves as a price taker, avoiding the costs of security analysis and
turnover while seeking to hold a portfolio designed to match some overall
market index or sector performance
Approaches to Fund Management and
Security Analysis
• Quantitative versus Traditional Fundamental Analysis:
• Technical analysis: attempts to predict stock price movements on the basis of
market indicators
• Fundamental analysis: attempts to evaluate the current market prices relative
to projections of the firm’s future earnings and cash-flow generating
potential.
• Supplemented traditional fundamental analysis with more quantitative approaches
Approaches to Fund Management and
Security Analysis
• Formal versus Informal Valuation
• Formal method: described in ch.7
• Informal method:
• compare earnings projection with consensus forecast
• Recommend a stock because his or her earnings forecast appears relatively high in
comparison to the current price
• “Marginalist”
Performance of Security Analysts and Fund
Managers
• Performance of Security Analysts
• Analyst earnings forecasts are more accurate than those produced by time
series models that use past earnings to predict future earnings
• Stock prices tend to respond positively to upward revisions in analysts
earnings forecasts and recommendations, and negatively to downward
revisions
• Analysts play a valuable role in improving market efficiency
Performance of Security Analysts and Fund
Managers
• Performance of Fund Manager
• No consistent evidence that actively managed mutual funds generate
superior returns for investors