INVESTMENT ANALYSIS

&
PORTFOLIO MANAGEMENT

Lecture # 6
Dr.Shahid A. Zia
 Fundamental Stock Analysis
• Valuation Philosophies
• Value Vs. Growth Investing
• Some Analytical Factors

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 Valuation Philosophies
• Investors’ Understanding of Risk
Premiums.
• The Time Value of Money.
• The Importance of Cash Flow.
• The Tax Factor.
• Tax privileges to Modaraba Companies.
• EIC Analysis.

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 Value Vs. Growth Investing
In value investing, we need to understand what
is the investment procedure for value investing.
We need to understand the difference between:
• The value approach to investing
• The Growth Approach to investing
• Value Stocks and Growth Stocks

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 Categories of Stocks
• Blue Chip Stocks
• Income Stocks
• Different Cyclic Stocks
• Speculative Stocks
• Defensive Stocks
• Penny Stocks

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 Value Investing
The value investors will wait for reaping
the benefits of investments, means he will
be patient.

A value investor believes that he must wait

for the stock to pay him a handsome
return in due course of time.

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 Values vs. Growth Investing
• The Value Approach to Investing.
• The Growth Approach to Investing.
• How Price Relates to Value.
• Values Stocks and Growth Stocks: How to
guess by looking.
• The Price to Book Ratio.
• The Price to Earnings Ratio.
• Differences between Industries.
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 Fundamental vs. Technical
• Fundamental analysts believe that securities are priced
according to fundamental economic data.
• Technical analysts think supply and demand factors play
the most important part.
• We cannot ignore Technical Analysis aspect of analyzing
a company.
• Technical Analysis compliment the Fundamental
Analysis.
• Fundamental Analysis is suitable for long term
investments.
• Technical Analysis is suitable for short term investments.

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 Value Investment
• A value investor believes that a security should
only be purchased when the underlying
fundamentals justify the purchase.
• The bottom line is value comes form utility; utility
comes form a variety of sources.
• Value investors are willing to wait. 
• Value investing means you buy nothing based
on future value… no bets on new products,
earnings or sales. You’re trying to buy a Rs.100
stock for Rs.50 today.

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 Growth Investment
• Investors want quick returns.
• A Growth investor seeks rapidly growing companies.
• Growth investors believe that a body in motion tends
to stay in motion. Strong companies tend to get
stronger.
• Growth company might not have historical
perspective in background but it will find a place in the
future depending on the product or industry to which it
belongs.
• Oil Exploration: It is one of the most key element in
progress in a country.

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 Some Analytical Factors
• Growth Rates.
• The Dividend Discount Model.
• Importance of Hitting the Earnings Estimates.
• The Importance of Dividend Discount Policy
(DDM).
• Caveats about the Dividend Discount Policy
(DDM).
• False Growth.

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 Some Analytical Factors
• Firms Cash Flows.
• Small-Capitalize Companies, Large Capitalize
Companies, Mid-Size Capitalize Companies &
Initial Public Offerings.
• Ratio Analysis.
• Juggling in the accounting procedure.
• Cooking the Books

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 Growth Rate
• Most investment research deals with
predicting future earnings.
• A future earning growth rate is
unobservable.
• Most analysts use several methods to
estimate this statistics to determine likely
range for the value rather than a single
number.
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 Time Value of Money
• The idea that money available at the present time
is worth more than the same amount in the future,
due to its potential earning capacity. 
• This core principle of finance holds that, provided
money can earn interest.
• Any amount of money is worth more the sooner it
is received. Also referred to as "present
discounted value".
• You will get something cheaper today but it will be
more of value in future.
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 The Dividend Discount Model
• Also called Gordon’s growth model.
• Can be used to value stock as a growing
perpetuity.
• The shareholders’ required Rate of Return RR.
• The Importance of Hitting the Earning Estimate.
• Whether growth rate is present or not and that is
something that is found out in the data provided
in the Balance Sheet.

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 The Dividend Discount Model
• You have current data of the year and then you
have past data of 10 years.
• The Multistage DDM.
• Shortfall of DDM.

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 Dividend Discount Model - DDM
• A procedure for valuing the price of a stock is
by using predicted dividends and discounting
them back to present value.
• The idea is that if the value obtained from the
DDM is higher than what the shares are
currently trading at, then the stock is
undervalued.

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 Dividend Discount Model - DDM
• This procedure has many variations, and it
doesn't work for companies that don't pay out
dividends.

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 Dividend
• Distribution of the portion of the companies profit
with the sock investors in the particular company.
• We can also discuss it in the term of percentile
yield. 10% or 20%.
• Dividends per share or DPS.
• It can also be quoted in terms of a percent of the
current market price, referred to as dividend yield.
• Dividends may be in the form of cash, stock or
property. Most secure and stable companies offer
dividends to their stockholders. Their share prices
might not move much, but the dividend attempts
to make up for this.

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 Discount Rate
• The interest rate that an eligible depository
institution is charged to borrow short-term funds
directly from a Federal Reserve Bank.
• The interest rate used in determining the present
value of future cash flows.

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 The Multistage DDM
• An equity valuation model that builds on the
Gordon growth model by applying varying
growth rates to the calculation.
• Under the multistage model, changing growth
rates are applied to different time periods.
• Various versions of the multistage model exist
including the two-stage, H, and three-stage
models.

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 False growth in earnings
• False Growth occurs anytime a firm acquires
another firm with a lower price-earnings ratio.

• When the asset is disposed off, than good

companies used at the superb area of the city.

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 Cash Flow
• Cash Flow from operations is a firm’s lifeblood
because the earning of that year is important.
They have to be understood what the profitability
have been all about.
• It is also important because we focus on cash
flows when we invest.
• But you should also see that in which type of
companies you want to invest.

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 Size of Company
• Large Capitalize Company
• Medium Size Capitalize Company
• Small Size Capitalize Company

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 Small-Cap, Mid-Cap, and Large-Cap

• Small-cap stocks : A firm with capitalization

less than $500 million.
• Mid-cap stocks: Capitalization between $500
million and $2billion.
• Large-cap stocks: Capitalization more than $2
billion.
These three companies are important because
synergy of large companies is different from
small companies.

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 Small-Cap, Mid-Cap, and Large-Cap
• Large capitalize company is a stable company.
All small capitalize company has less share float
in market.
• It is difficult to corner, to squeeze, to manipulate
a large capitalize company.
• Growth is going to be steady & slow in large
companies and growth in small companies is
quick.

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 Small-Cap, Mid-Cap, and Large-Cap

• When we do fundamental analysis, we do

relative strength valuations with industry.
• Lets say in stock market there are 500
companies, then you have ratios of total 500
companies.
Earning per share.
Price earning ratio.
Dividend yield.

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 Small-Cap, Mid-Cap, and Large-Cap

• Different industries have different synergies.

• In cement industry, during monsoon weather,
the production is less.
• Sales of air conditioners are more in summer
season.
• IPO's (Primary market sale to general public)
Buying IPO's is like trying to hit a million dollars
on the slot machines in Vegas. You’ll play many,
many times and hit nothing.

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