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A firm with the management ability and the opportunities to consistently make investments that yield rates of return greater than the firm’s required rate of return.

A stock with a higher expected rate of return than other stocks in the market with similar risk characteristics.

Future earnings are likely to withstand an economic downturn.

One would expect them to have relatively low business risk and not excessive financial risk.

(fast food chains or grocery stores—firms that supply basic consumer necessities.)

Rate of return is not expected to decline during an overall market decline, or decline less than the overall market. 

A stock with low or negative systematic risk (a small positive or negative beta), because its returns are unlikely to be harmed significantly in a bear market.

Sales and earnings will be heavily influenced by aggregate business activity.

(steel, auto, head machinery)

Changes in rates of return greater than changes in overall market rates of return.

Stock of any company that has returns that are more volatile than the overall market (high-beta stocks that have high correlation with the aggregate market and greater volatility.)

Assets involve great risk but that also has a possibility of great gain.

Oil exploration

High probability of low or negative rates of return and a low probability of normal or high rates of return.

(Overpriced, leading to a high probability that during the future period when the market adjusts the stock price to its true value, it will experience either low or possibly negative rates of return.)

Appear to be undervalued for reasons other than earnings growth potential.

Low price-earning or low price-book value.

Positioning the firm to deflect the effect of the competitive forces in the industry.

(Investing in fixed assets, technology)

Attempts to use its strengths to affect the competitive forces in the industry.

Strength (internal) - customer service, quality products, brand, reputation, R&D, loyalty

Weaknesses (internal) - competitors have potential to exploit the firm

Opportunities (external) - growing market, shrinking competition, favourable exchange rate shifts

Threats (external) - slow economy, regulations, new entries, new technology

• The firm’s product is not faddish; it is one that consumers will continue to purchase over
• time.

The company has a sustainable comparative competitive advantage over its rivals.

The firm’s industry or product has market stability. Therefore, it has little need to innovate or create product improvements or fear that it may lose a technological advantage.

Market stability means less potential for entry.

The firm can benefit from cost reductions (e.g., a computer manufacturer that uses technology provided by suppliers to deliver a faster and less-expensive product).

The firm buys back its shares or management purchases shares, which indicates that its insiders are putting their money into the firm.

Firm’s expected rate of growth of earnings per share

Stock’s required rate of return

Firm’s dividend-payout ratio.

• A major difference in the risk involved (the low P/E high-growth company is much
• riskier).

• Inaccurate growth rate estimates. You may want to reexamine your growth rate estimate
• for the firm with the higher P/E ratio; that is, could it be higher or should the growth esti-
• mate for the low P/E stock be lower?

• The stock with a low P/E ratio relative to its expected growth rate is undervalued. (Before
• you accept this possibility, consider the first two factors.)

• The stock with a high P/E and a low expected growth rate is overvalued. (Before this is
• accepted, consider both its risk and your estimated growth rate.)

The analyst must have expectations that differ from the consensus

The analyst must be correct.

The present value of cash flow

The analysis of relative valuation ratios.

• The market value of any good or service is determined solely by the interaction of supply
• and demand.

• Supply and demand are governed by numerous rational and irrational factors. Included in these factors are those economic variables relied on by the fundamental analyst as well as
• opinions, moods, and guesses. The market weighs all these factors continually and
• automatically.

• Disregarding minor fluctuations, the prices for individual securities and the overall value of
• the market tend to move in trends, which persist for appreciable lengths of time.

Prevailing trends change in reaction to shifts in supply and demand relationships. These shifts, no matter why they occur, can be detected sooner or later in the action of the market itself.

They lack a great deal of information needed by security analysts (information related to sales, earnings, and capital utilized by product line and customers.)

• According to GAAP, corporations may
• choose among several procedures for reporting expenses, assets, or liabilities. (Notably,
• these alternative procedures can produce vastly different values for expenses, income, return on assets, and return on equity, depending on whether the firm is conservative or aggressive)

Many psychological factors and other non quantifiable variables do not appear in financial statements.

Mutual Fund cash positions

Credit balances in brokerage accounts

Investment advisory opinions

Chicago Board Options Exchange (CBOE) Put-Call ratio

Futures Traders Bullish on Stock-Index futures

Confidence Index

T-Bill Eurodollar Yield Spread

Debit balances in brokerage accounts (margin debt)

Breadth of market

Stocks above their 200-day moving average

Dow Theory

Importance of Volume

Support and Resistance Levels

Moving-average lines

• Relative strength
• Bar charting

Candlestick charts

Multiple-indicator charts

Point-and-figure charts

Dow described stock prices as moving in trends analogous to the movement of water.

- Major trends that are like tides in the ocean 

- Intermediate trends that resemble waves 

- Short-run movements that are like ripples.

Contrary-opinion rules

Follow-the-money tactics

Momentum indicators

Stock price and volume techniques