How to Buy and Sell Stocks

							How to Buy and Sell Stocks
 How can I predict whether a stock will
  go up or down?
 What determines the price of a stock?
 Where on the Internet can I get free
  information about recent changes in real
  companies’ earnings prospects?
How Can I Predict Whether a
Stock Will Go Up or Down?
Stock market analysts use two
  fundamentally different approaches to
  answer this question:
 Technical analysts focus on recent
  trends in stock market prices.
 They look for recurring patterns that
  can be used to make short-term
  predictions of whether a stock is about
  to go up or down.
How Can I Predict Whether a
Stock Will Go Up or Down?
 Fundamental analysts on the other
  hand believe the price of a stock
  responds minute-by-minute to changes
  in available information about that
  company’s earnings prospects.
 They believe the smart investor should
  ignore irrational fear in the market and
  buy stocks that are undervalued
  relative to their fundamental value.
What determines a stock’s
fundamental value?
 The net present value of all the
  dividends a company COULD pay to
  its shareholders without shrinking
 Approximately equal to the net present
  value of all future earnings per share
 If correct, then new information relevant
  to future earnings per share should
  cause the stock price to change
  immediately.
Key Implications of
Fundamental Value Theory
 Let’s review some of the key
  implications of fundamental value
  theory.
 In particular, let’s explore some of the
  things you can’t use to predict whether
  a stock is more likely to go up or down
  from its current value if fundamental
  value theory is correct.
1. Lower Priced Stocks are
More Likely to Go Up Than
Higher Priced Stocks
 Wrong. Just because Oracle’s price is
 lower than WalMart’s doesn’t mean it
 has a greater likelihood of going up.
2. Stocks Whose Prices Have
Dropped Recently are More
Likely to Go Up
 Wrong. If fundamental value theory is
  correct, a stock drops in price because,
  in the combined estimation of all buyers
  and sellers of that stock, the earnings
  prospects of that company have
  dimmed.
 Only new information about this
  company’s earnings prospects can
  cause its price to rise again.
3. The stock of a company that has
been more profitable in the past will
go+ up faster than that of a company
that has been less profitable
 Not necessarily. Just because WalMart
  has been more profitable recently
  than Oracle doesn’t necessarily mean
  its stock is more likely to go up.
 A company’s past profit is only relevant
  insofar as it can be used as a predictor
  of a company’s future profit.
4. The stock of a company that is
expected to be more profitable in the
future will go up faster than that of a
company that is expected to be less
profitable in the future
 Wrong. What we can predict is that its
 current price will be higher, but we
 cannot predict that it will rise in price
 over the next year more than the stock
 of the less profitable company.
Cisco Systems Inc (CSCO)            $18.45

                  Current   Next    Current   Next
                    Qtr      Qtr     Year     Year
Earnings Est       5-Apr    5-Jul    5-Jul    6-Jul
Avg. Estimate      $0.22    $0.24    $0.89    $1.01
No. of Analysts     35       33       36       34
Low Estimate       $0.21    $0.22    $0.87    $0.95
High Estimate      $0.24    $0.25    $0.92    $1.08
Year Ago EPS       $0.19    $0.21    $0.76    $0.89

% return to stockholders:            4.8%     5.5%
Wal-Mart Stores Inc (WMT)             $51.60

                   Current            Current    Next
                    Qtr    Next Qtr    Year     Year
Earnings Est       5-Apr    5-Jul      6-Jan    7-Jan
Avg. Estimate      $0.57    $0.70      $2.73    $3.10
No. of Analysts     25       23         28        21
Low Estimate       $0.56    $0.67      $2.70    $3.01
High Estimate      $0.58    $0.72      $2.76    $3.16
Year Ago EPS       $0.50    $0.62      $2.41    $2.73

% return to stockholders:             5.3%      6.0%
So how do I predict whether a stock
price will go up or down?
 What you want to look for is early
 warning of changes in predicted
 future earnings of the company.
Kroger Loses $675.9 Million in Fourth
Quarter on Writedown of 2 Brand Values;
Shares Sink
Tuesday March 8, 10:33 am ET
CINCINNATI (AP) -- Kroger Co., one of the nation's
biggest supermarket operators, reported a $675.9
million loss for its fourth quarter as it wrote down
the value of two of its grocery brands, Ralphs and
Food 4 Less. Its shares fell more than 4 percent.
Kroger, which has operations in 32 states, said
Tuesday the loss of 93 cents a share for the quarter
that ended Jan. 29 included an $884 million after tax
charge, or $1.21 a share, for writing down the value
of the Ralphs and Food 4 Less operations in
southern California.
       Excluding the writedown, Kroger would have earned
       28 cents per share for the latest quarter, 7 cents
       below estimates of analysts surveyed by Thomson
       First Call.

Kroger Co (KR)               $15.97

                   Current             Current     Next
                    Qtr    Next Qtr     Year      Year
EPS Trends         5-Apr    5-Jul      6-Jan      7-Jan
Current Estimate   $0.34    $0.26      $1.20      $1.43
7 Days Ago         $0.36    $0.25      $1.29      $1.44
30 Days Ago        $0.37    $0.24      $1.29      $1.40
60 Days Ago        $0.37    $0.24      $1.29      $1.40
90 Days Ago        $0.37    $0.24      $1.30      $1.40
Chip Maker’s Profit Falls 17% on
Charges
DOW JONES NEWSWIRES
March 10, 2005 1:14 p.m.
SANTA CLARA, Calif. -- National Semiconductor
Corp. (NSM) fiscal third-quarter net income fell 17%
on a decline in sales and a charge of $20 million for
severance costs.
However, the results beat analysts’ expectations, and
the company’s stock rose nearly 6%.
National Semiconductor Corp (NSM)                       $20.82

                   Current            Current    Next
                    Qtr    Next Qtr    Year      Year
EPS Trends         5-Feb 5-May        5-May     6-May
Current Estimate   $0.17    $0.19     $0.86     $0.89
7 Days Ago         $0.16    $0.19     $0.85     $0.88
30 Days Ago        $0.16    $0.19     $0.85     $0.88
60 Days Ago        $0.16    $0.19     $0.85     $0.87
90 Days Ago        $0.16    $0.18     $0.82     $0.86
What Constitutes Early Warning of a
Change in Future EPS?
 When interest rates go up, the
  earnings of banking and mortgage
  stocks tend to go down.
 Such as
   Citigroup
   J.P.
       Morgan Chase
   Bank of America
   Fannie Mae and Freddie Mac
What Constitutes Early Warning of a
Change in Future EPS?
 When oil prices go up, the earnings of
 companies that have large amounts of
 proven oil reserves go up, such as
   Exxon-Mobil:  up 40% since Apr-04
   Royal Dutch/Shell: Up 26% since Apr-04
   British Petroleum: Up 21% since Apr-04
   Andarko Petroleum: Up 18% since Apr-04
What Constitutes Early Warning of a
Change in Future EPS?
 When oil prices go up, the earnings of
 oil exploration equipment companies
 also tend to go up, such as
   Baker  Hughes, Inc: up 44% since June-04
   Halliburton: up 59% since Aug-04
   Global Sante Fe Corp: up 55% since
    June-04
What Constitutes Early Warning of a
Change in Future EPS?
 Increased oil and natural gas prices
 negatively affect:
   Aluminum    manufacturers
   Electricity generating companies such as
    Calpine
   Airlines, and many more.
Surging Fuel Costs Hit Struggling
Airlines Hard
August 19, 2004
The global airline industry, already hobbled
financially, is struggling to cope with the surge in oil
prices, and some carriers are running out of options.
Around the world, airlines need the oil from which
jet fuel is made to be priced within a range of about
$31 to $33 a barrel to break even. The price of U.S.
benchmark crude-oil futures for September reached
another high yesterday on the New York Mercantile
Exchange, rising 52 cents to settle at $47.27 a barrel.
Many analysts believe the price won't ease much
from the high levels of recent weeks anytime soon.
"It's going to be a disaster for the industry," said
Anthony Concil, spokesman for the International Air
Transport Association, the global industry trade
group.
Since 2001, the airline industry world-wide has
incurred losses of around $30 billion, industry
groups estimate. Early this year, many airline
executives had hoped for modest profits or at least
to break even. Now experts predict huge losses.
IATA calculates that the international airline industry
breaks even on flights when European benchmark
Brent North Sea crude oil, which is a few dollars
less expensive than the U.S. benchmark, trades at
$33 a barrel.
U.S. airlines would need $31 a barrel based on U.S.
benchmark prices to break even if other factors,
such as fares and cost structures, remain the same,
said John Heimlich, chief economist for the U.S.
industry group Air Transport Association.
Through July, Brent averaged about $34 a barrel, Mr.
Concil said. At a full-year average of $39, the global
industry's loss would hit $10 billion -- nearing the
sector's record loss of about $13 billion in 2001.
High fuel prices sock airlines with a one-two punch.
The first is a big rise in carriers' second-largest
expense, after labor: fuel accounts for about 15% of
airlines' total costs. Jet-fuel prices are now 48%
above year-earlier levels and up 11% in the past
three months.
The second hit comes on the revenue side, if
soaring petroleum prices prompt a broader
recession. If fuel prices choke economic growth, air
traffic would probably decline sharply, analysts
predict.
  Oil price increases similarly affect:
     Aluminum   manufacturers such as Alcoa
     Energy supply companies such as
      Calpine
     Delivery service providers such as
      Federal Express and United Parcel
      Service
     Auto manufacturers, and others
What Constitutes Early Warning of a
Change in Future EPS?
 Pharmaceutical company good news:
   FDA   approval of a new drug
   Clinic trials that show effectiveness in
    treating disease of a new drug
 Pharmaceutical company bad news:
   Newly-discovered   serious side-effects of
    one of their most profitable medicines
   Abandonment of a drug in development
    due to serious side-effects being
    discovered during the testing process
A Few of the Largest U.S.
Pharmaceutical Companies
 Pfizer
 Merck
 Johnson & Johnson
 Bristol-Myers Squibb
 Abbott Laboratories
 Eli Lilly & Co.
 What Constitutes Early Warning of a
 Change in Future EPS?
 Bad news for a company in any industry
   Reports that they have recently come under
    investigation by the Federal government for
    possible illegal activity
   One of its competitors announces a new
    line of products that offers substantially
    better price performance because it uses
    the latest generation of computer chips,
    which are more powerful and cheaper to
    manufacture.
   One of its competitors announces
    substantial cuts in the prices of its products.
What Constitutes Early Warning of a
Change in Future EPS?
 Retail Industry Good News:
   An  increase in consumer spending
   An increase in (U.S. consumer) jobs and/or
    income
   A decrease in consumer taxes (which
    increases consumer disposable income)
   An increase in year-over-year “same store
    sales”.
A Few of the Largest U.S. Retailers
 Wal-Mart
 Home Depot
 Kroger
 Target
 Sears
 CostCo
 Albertson’s
 Safeway
An Overview of Some Free
Research Tools
 Yahoo Finance top stories, market
  overview, and associated press articles
 Yahoo Finance top % gainers
 Yahoo Finance Analyst Estimates
 Motley Fool articles
 CBS Marketwatch’s Frontpage,
  Markets, and Global Markets articles
 CBS Marketwatch’s top % gainers