Student-Managed Investment Fund (SMIF) Analyst Newsletter
Assignment Introduction - Present an analyst's report on two competitors and the industry.
In investments (Finance 4320 and 5320), two competitor stocks.
- Each student will select a pair of competitors.
- After you have begun researching your stocks, you may want to change one of the competitors. This is fine.
In portfolio theory (Finance 4321 and 5321), both stocks should be viable candidates for addition to a portfolio. Each student will select two competitor firms that are mid/small cap stocks.
Topic Areas: You must cover all of the following areas. Try to stay in the same order of the topics.
1. Executive Summary and Synthesis
Present a summary of the newsletter.
Include your key findings and the recommendation. An executive summary is the conclusion but provided first for the reader who will only read the summary.
- It provides the synthesis of all the material in the analysis.
This section is written LAST! You write it after you have written the rest of the paper. It is merely the summary and your recommendation (based on the analysis and not a sales pitch).
The summary should include a short overview of the industry to which the stocks belong along with an overview of the two firms. If everyone knows your companies, there is not much needed for this section. The more your firms are unknown, the more you need to include.
The readers should be able to read the executive summary and learn all the main ideas, concepts, mathematical results, conclusions, and recommendation without reading the rest of the paper.
The summary includes the key facts and conclusions of every section that are needed to make a decision.
- Yes - remember that the reader should be able to read only your executive summary and make an informed decision on the industry.
- Yes - you provide the conclusions at the start so the reader does not have to read any further.
- Be sure to include a Buy Price and a Sell Price. In other words, at what price does the analysis indicate the stock would be a "buy" and a "sell"?
The summary should be forward-looking in its analysis - what is likely to happen to the firm.
The summary contains the conclusions from each section of the newsletter.
What is your recommendation? Your recommendation is on facts and not opinion.
- FIN 4320/5320: Discuss whether your reader should buy, hold, or sell the stock.
- Fin 4321/5321: Discuss which stock your reader should buy and why? If you have decided that neither stock is a buy, discuss why you have made this decision.
What likely factors could alter your recommendation? Does it make you more positive or more negative on the stock and why?
- For example, with Pepsi, a recommendation to buy could be changed if the input costs such as sugar rose dramatically enough to reduce the net profit margin.
The summary needs to catch the reader's attention and make him want to read the entire newsletter.
- The summary provides information on the areas of the paper so the reader does not have to read any more to know what is in the paper and what are the conclusions.
The executive summary is a good place to put a chart/table to summarize some of the findings.
You will want to use lots of headings to help the reader keep track of the conclusions and ideas from the report.
2. Macroeconomic Analysis
What is the main macroeconomic variable/influence on the valuation of the stocks and industry?
Choose either a demand or a supply variable. Note - you do not have to do both a demand and a supply variable. Pick the one that has the greatest impact on the firms' sales, profits, and cash flow.
Present and explain a graph or a chart showing the relationship between your stocks' prices/returns with the main variable.
Many students struggle with this section. What you are looking to find a major variable that the firm has NO control over (because it is a macro variable) that alters the environment in which the firms operate.
Here are some ideas if you choose a variable affecting demand for the product/service.
- Remember that demand is both the willingness to buy and the ability to buy. Choose a variable that affects willingness and/or ability.
- To what do the buyers respond or what variable has the greatest effect on buyer decision?
- What changes the buyers' decisions to purchase the product/service?
- What will cause them to buy more? What will cause them to buy less?
- What will cause them to buy from a different firm?
- Examples include interest rates (think buying on credit), consumption patterns, demographic characteristics, GDP, exchange rates, etc.
Here are some ideas if you choose a variable affecting supply of capital, input cost, ability to hire scientists, research & development, or another supply-side variable.
- Remember that supply is influenced by both the costs and availability of inputs along with the costs of substitutes and compliments in the production process.
- What will cause the firm to produce more? What will cause the firm to produce less?
- What will cause the firm to sell to different buyers?
- Examples include commodity prices, interest rates, exchange rates, oil prices, etc.
No matter if you choose a demand or a supply variable, discuss how that variable affects the firms' valuation.
- Demand variable changes è Buyers purchase more/less è Firms' sales increase/decrease è Firm' profits increase/decrease èFirms' cash flow increases/decreases
- Supply variable changes è Firms produce more/less è Firms' sales increase/decrease è Firm' profits increase/decrease èFirms' cash flow increases/decreases
The St. Louis Fed's FRED database is a good source for macroeconomic data.
3. Industry Analysis
Discuss the current state of the industry.
- What is the main threat to the industry and to the stocks' prices and financial performances?
- Analyze the role of international markets on the industry and stocks.
Discuss the market structure of the industry.
- Is it monopolistically competitive or an oligopoly?
- Are the main products/services more commoditized, highly differentiated, or blockbuster?
- How does the market structure affect the ability of the firm to control the prices it charges for its products and for the prices it pays for its inputs? The more a firm can control its prices, the more it can control the income statement and EPS.
Calculate, present, and explain the five-year trend for each stock of sales, earnings, net profit margin, return on total capital (Value Line's version of ROA), long-term debt, P/E, dividend yield, and payout.
You can get all of this information from Value Line. If you do not have five years, use whatever you have or whatever makes sense.
Provide a conclusion on the overall state of the industry and your two firms' places in the industry both currently and in the future.
- Provide a conclusion on the overall financial soundness of each company.
- Does the firm have good liquidity?
- Does the firm have good profitability?
- Does the firm have manageable debt levels and cost?
- Is the firm using its assets well?
- Is the firm providing a large and growing dividend? If not, this might not be a bad thing if the firm is growing quickly.
- Is the market's valuation of the firm increasing? In other words, what is happening with the P/E ratio?
Value Line, Morningstar, Mergent Online, LexisNexis Academic, and S&P NetAdvantage will have some of this information. Additionally, you should use articles (not press releases) about the firms to gain insights into the industry and trends. Each industry has trade groups with websites and lots of industry information and analysis. Bigcharts has industry charts (look right about the chart for the link to Industry).
4. Fundamental Valuation
Calculate, present, and explain the required return. What does the number mean and how does it affect your recommendation?
Calculate, present, and explain the role of dividends in the valuation of your stocks. Do dividends matter? What do Gordon's Model and the Dividend Growth model say about your stocks?
- If a stock does not have dividends, you may skip this part but be sure to mention in the newsletter that the stock does not pay dividends.
Calculate, present, and explain the Expected Holding Period Return - Annualized for each stock. What is the expected alpha for each stock?
Calculate, present, and explain the sensitivity analysis for each stock? How sensitive is each stock to your assumptions on P/E and EPS?
What are the expected future prices of the stocks?
- Under what conditions would the stocks be buys?
Present an overview of the fundamental valuation. What can you conclude about each stock?
You can find all of this information on Value Line and Morningstar.
You are welcome to use the stock valuation model from class to assist with the calculations.
5. Corporate Governance Considerations
Discuss the recent actions of insiders and institutional investors.
- Are the insiders mostly buying or selling? At what price?
- Are the institutional investors mostly buying or selling? At what price?
- Yahoo! Finance and Nasdaq websites have information about insider and institutional holdings and their buy/sell actions.
Relative Valuation - For portfolio theory students only
- Present the P/E, P/Sales and P/Book Value and companion variables for your two stocks over the last five years. All of this information is from Value Line.
- Which stock is relatively better?
- Is your stock value, growth, GARP, etc.?
- You can find all of this information on Value Line and Morningstar.
- You are welcome to use the stock valuation model from class to assist with the calculations.
Next Product or Trend - For investments students only
- Discuss how the firms are adapting the products/services for the changing customer.
- Which firm(s) in the industry is on the cutting edge?
6. Technical Valuation
Present and discuss at least one line chart for each stock (use bigcharts.marketwatch.com).
- What do the charts say about the historical prices and trend?
- What do the charts say about demand and supply for owning the stock?
- What do the charts of the simple moving average (SMA) of 50 days and 200 days say about when investors are buying/selling the stock?
- What is the event(s) that caused spikes in volume?
For portfolio theory students only - Present and discuss at least one point and figure chart for each stock (use stockcharts.com).
- What do the charts say about the historical prices and trend?
- What do the charts say about demand and supply for owning the stock?
- What do investors think are buy and sell prices?
References - BANKING INDUSTRY: FIRST FINANCIAL VS JP MORGAN VS WELLS FARGO.
Attachment:- Assignment Files.rar