Growth Vs Value Investing - PowerPoint

							                           Lecture 7




Investment Strategy II
Economics 98 / 198 DeCal    Spring 2008
Announcements

• Homework due
Current Events
Lecture Content
Last Week

• Introduction to investment strategies
  • Qualitative vs. Quantitative Analysis
  • Fundamental vs. Technical Analysis
     • Value vs. Growth Investing

• Fundamental Analysis
  • Qualitative Aspects (Understanding the business,
    competitive advantages, industry, management, etc.)

  • Value Investing
     • Buying stocks that are valued below its intrinsic value
     • Using various financial ratios and measures
Today

• Growth Investing

• CAN SLIM
  •   C = Current Quarterly Earnings per share
  •   A = Annual Earnings Increases
  •   N = New Products, Managements, Highs
  •   S = Supply and Demand
  •   L = Leader or Laggard
  •   I = Institutional Sponsorship
  •   M = Market Direction
 GROWTH
INVESTING
Growth Investing

• Buy stocks that expected to grow quickly
  in sales and earnings (relative to industry
  and market)

• Underlying quality of the business and the
  rate at which it is growing
  • Usually newer companies, industries, and
    markets
  • Will usually have a higher P/E. Why?
Growth Investing

• No automatic formula for determining best
  growth stocks

• General guidelines
  •   Strong historical earnings growth
  •   Strong forward earnings growth
  •   Management control of costs and revenues
  •   Company efficiency
  •   Innovative products / industry
 CAN SLIM
INVESTING
CAN SLIM Background

• Developed by William O’Neil

• Developed from studies on greatest
  stock winners of all time
• Provides solid guidelines to prevent
  subjectivity
  • Combination of growth, fundamental,
    technical analysis
C = Current Quarterly EPS

• Bottom line counts - major % increase
  in current quarter EPS (25% or more)

• Look for accelerating growth
  • What does this mean?

• Should be supported by sales growth
  (revenue) – Why?
C = Current Quarterly EPS
Examples



• Cisco Systems – EPS gains of 150%
  and 155% in 2 quarters prior to
  1467% run-up over next three years

• AOL – EPS gains of 900% and 283%
  before rising 557% in 6 months

• Dell – 74% and 108% before rising
  1780% in 27 months in November
  1996
Resource for Quarterly Earnings: MSN Money




 Revenue Figures
 (Calculate growth
 rates yourself)




                                             EPS Growth Rates
                                             (Year over Year)
                                             (Eg. Q1 ‘04 vs Q1 ‘05)
A = Annual Earnings

 • Annual earnings growth 25% or
   more over past 3 – 5 years
   • ROE at least 17% or higher

    As O’Neil says, "who wants to own
    part of an establishment showing
    no growth"?

    Why is annual growth vs. quarterly
    growth important?
A = Annual Earnings
Example



Xerox
• earnings growth rate 32% before
  soaring 700% in 1963-1966

Wal-Mart
• 43% annual EPS growth before
  rocketing 11,200% from 1977 to 1990

Cisco (257%) and Microsoft (99%)
Resource for Quarterly Earnings: MSN Money




               Annual
            Earnings Per
               Share
N = New products, management, highs

• Takes something new to produce
  startling advances in price of stock
  (ideas, products, services, etc.)

  • Apple
  • Abercrombie
  • Cisco
  • Charles Schwab
  • Taser
  • Sunpower
N = New products, management, highs

• Buy stocks when emerge from
  consolidations patterns and make
  new highs (technical analysis)

        “Buy low, sell high”

               vs.

        “Buy high, sell higher”
Sources for “New”
S = Supply and Demand

• Law of supply and demand
  determines price of almost
  everything
 This is where technical
 analysis comes into play

 Want to buy stocks that are
 being bought by institutions
 (importance of volume)
Sources for “S”
L = Leader or Laggard

• Narrow down selection to best
  industries / sectors of stock market
  • Narrow further by selecting best
    companies in the industry


• Best doesn’t mean
  the biggest or
  most well-known
L = Leader or Laggard

• New leaders every cycle
  • 1999-2000         Tech, Telecom
  • 2002-2004         Real Estate, Energy, Retail
  • 2004-Present      Foreign, Commodities

• Look for companies that withstand
  downturns in market the best
     • What does this mean?

• Criteria:
  • Earnings / sales growth, ROE, margins, etc.
A Tool for Industry Research / Rankings: Stockcharts.com Industry Tool
<http://stockcharts.com/charts/performance/perf.html?$BKX,$XAU,$SOX,$OSX,$DRG,$GSPM
S,$DOT,$BTK,$XBD>
A Tool for Industry Research / Rankings: Investor’s Business Daily
A Tool for Industry Research / Rankings: Prophet.net




Rank Industries
by Performance
 over Various
    Periods




                                                       Click on the chart
                                                       box to get charts
                                                       for all companies
                                                           within the
                                                            industry
I = Institutional Sponsorship

• Want to own stocks significantly owned
  by top institutions
  • Institutions: mutual funds, pension funds,
    hedge funds, banks, universities
  • Can account for up to 70% of trading
    activity
I = Institutional Sponsorship


                            Institutional
                              Investors
                           - Mutual Funds
                           - Hedge Funds
    Individual
    Investors              - Pension Funds
-   You                    - Educational
-   Me                       Institutions
-   Parents                - Bank Trusts
-   Uncle Joe              - Insurance
A Tool for Institutional Sponsorship: MSN Money
(http://moneycentral.msn.com/ownership)




     Mutual Fund
     Ownership

     Ownership
      Activity


      Specific
    Mutual Funds
     Ownership
    (with links to fund
         quotes)
M = Market Direction




• You can be right about everything,
  but if you’re wrong about where
  market is heading…

   Why?
M = Market Direction

• Importance of following the market
  • It can be done! (Next lecture)
  • Bull market vs. Bear market



• 33% loss requires 50% gain to break even
• 50% loss requires 100% gain to break even
M = Market Direction

• Stay out in cash during bear markets
  and invest during bull markets
  • In practice: pretty difficult


• How to do this? (next lecture)
CAN SLIM Overall Strategy

• Narrow your selection (watch list) of
  stocks through fundamental analysis
  • Use technical analysis (charts) to
    determine when to buy into stock and sell
    out

• Don’t buy stock just b/c of low price
  • You don’t make money on how many shares you
    own, but by how much money is invested

• Do not let small losses turn into large
  ones (cut losses early)
Walking Through IBD

• http://investors.com/
Homework / Reading

• Reading:
  • Investopedia. Introduction to Support &
    Resistance