Money & Capital Markets - Earlham College



Money & Capital Markets

Fall 2007

Assignment 4 — Yahoo!

Purpose. Are you the next Warren Buffett or Peter Lynch? Both of these famous investors were not true believers in Modern Portfolio Theory (a nice cartoon points out what the initials sound like when read together). During the next couple of weeks we will study MPT in more depth and also learn some of its lessons for investing. To jump to the last chapter of our detective story, the lesson is the stock picking is pretty pointless. An investor is better off holding a diversified portfolio for the long-term. Nowadays, an investor can simply buy an index fund which replicates ‘the’ market (e.g., S&P 500 or DJIA) or some segment of the market (e.g., growth fund) and sleep well at night. Before going down the road of passive investing too far, let’s see how much fun we’d be missing following that road by attempting to pick one really good stock - maybe a 10 bagger (i.e., increase in value by 10 times what we pay for it). In the final part of the course we will be doing something like we’re doing here. However, we will have a much more structured way of doing it (though no less fun) and broader goal of just stock picking. For now, I want you to have some fun (Yahoo!) playing around with stock data and information. As you do the assignment, make a special note of the items you don’t understand and data/information you would like to have before making a recommendation.

Objective. Pick a stock with the potential of being a 10 bagger.

Steps to get you started.

1. Goto

2. Type CFC into the Enter Symbol box in the upper left hand side of the page. CFC is the stock symbol for Countrywide Financial Corporation (one of the largest players in the mortgage market)

3. Some basic information on CFC will appear. Along the left hand side of the page will be various options. At one time I mentioned that one approach to investing was Technical Analysis (or, Chartists) - we’ll study this in more detail later. The Technical Analyst believes that nearly all the information needed to make stock picks is contained in past prices (some of the other information would be the volume of trading in the stock).

Click on [Technical Analysis] option along the left hand side

You will see that you can choose how far back you want to observe the history of the stock price. You can also include a 5, 10, 20, 50, etc. day moving average. What would it mean when a market price was above or below a 100 day moving average? You can also include the volume of trading in the stock - assuming the stock price is falling, would it matter if there was heavy or light trading? You may also want to include Bollinger Bands. The upper and lower bands are typically 2 standard deviations away from a 20 day moving average (though, people vary the exact numbers). What would it mean to observe a current market price close to the lower band (e.g., two standard deviations below the 20 day moving average). You’ll notice lots of other choices here. Frankly, I don’t know what all of them mean (nor do I really want to). Try some of the various options and see what you think. Can you form some prediction about where the price of the stock is headed? Do you see a pattern emerging? Note, the belief of the technical analyst is that this information is really all you need (no point looking at earnings, dividends, products, etc.).

4. Another investment strategy is to look at the fundamentals of the underlying asset (i.e., the corporation in the case of a stock). Think of attempting to apply the Gordon Model in valuing this stock. What information do we need? We need to know about earnings, future earnings, what percent of the earnings are paid out in dividends, risk, etc. Much of the information is contained in the broad categories along the left hand side of “Company” and “Analyst Coverage”.

Goto [Profile] to learn what the company does and who runs it.

Goto [Key Statistics]

What is the P/E? What is the Price/Book? Beta?

Dividend yield? Payout Ratio? etc. etc. etc.

Goto [Competitors] to get a quick comparison

Goto [Analyst Opinion] and [Analyst Coverage] to see what the ‘pros’ think

Goto [Company Events] under the “News and Info” then scroll down to 24-Jul-07 to listen to the conference (Earnings) call

You can get the balance sheets, income statements, and cash flow statements toward the bottom along the left side as well. Consider how you might use this information to determine whether the stock is a good buy or not.

5. Now it is time for you to pick a stock. If you don’t have a stock in mind, one way to proceed is to

Goto [Symbol Lookup] towards the top of the page and to the right of the Get Quotes

You can search for stock by choosing an industry (e.g., Financials, Healthcare, etc.) or the most heavily traded. For example, you may know that you want a stock in the “technology industry” and within that industry you want “personal computers”, then you can choose from a list of companies within that sector (you’ll also see some basic information for each before choosing). From there, you simply do some of the steps we did above and have fun.

Completing the assignment. Write a brief recommendation for your stock. Include some of the items your basing your recommendation on (e.g., P/E, near low 50 day average, etc.).

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