“How to Analyze a Stock” Wayne A. Thorp, CFA Editor, Computerized Investing Senior Financial Analyst, AAII [email protected] www.twitter.com/CI_Editor 2 3 Narrow Your Focus with Stock Screening 4 AAII Stock Screens www.aaii.com/stock-screens 5 Top-Down Stock Analysis Economy ▼ Industry ▼ Company 6 Relationship Between the Economy & Economic Indicators www.fxwords.com 7 www.newyorkfed.org/research/national_economy/nationalindicators.html 8 www.investopedia.com/university/releases/ 9 www.forbes.com/economy 10 www.briefing.com/investor/public/calendars/economiccalendar.htm 11 Merrill Lynch Investment Clock 12 Sectors & the Economic Cycle www.sectorexchange.com 13 14 15 16 17 18 Ratio Analysis 19 Putting it Together: Corning Incorporated (GLW) 20 DuPont Method of Earnings & Growth Analysis Developed by DuPont Co. to determine the factors affecting return on equity Components of return on equity (ROE): Net profit margin Total asset turnover Leverage (equity multiplier) Illustrates the interaction between pricing, sales volume, and leverage 21 Net Profit Margin Net income ÷ sales revenue 22 Total Asset Turnover Sales revenue ÷ Total assets 23 Leverage or Equity Multiplier Total assets ÷ Total shareholders’ equity 24 Return on total assets (ROA) Net income ÷ Total assets 25 Return on Equity (ROE) Net income ÷ Total Shareholders’ Equity 26 27 Historical Growth Trends 28 Valuation Models 29 30 Value Doesn’t Always Equal Price 31 32 Sources of Data for Company Analysis & Industry Comparisons 33 Reuters www.reuters.com 34 MSN Money www.investor.com 35 Morningstar www.morningstar.com 36 Stock Investor Pro (800) 428-2244 - www.aaii.com/stockinvestor Systems: Windows (Vista & 7 compatible) Price: $198/year (AAII Member); $247/year (Non-AAII Member) Universe: 9,800+ Number of Data Fields: 2,000+ Fields for Screening: 2,000+ Data Sources: Thomson Reuters, I/B/E/S Frequency: Monthly via CD; Weekly & Monthly data downloads from Web 37