CSR 342 Week 3 - Lecture notes week 3 PDF

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CSR 342 Week 3 - Lecture notes week 3...

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CSR 342 Week 3 

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The Stock Exchanges; Tickers o New York Stock Exchange (NYSE) o Up to 3 letters long  LMT, CAR, GE o National Association of Securities Dealers Automated Quotations (NASDAQ*) o National Market System (NMS) stocks have 4 letters  CSCO, ORCL, SIRI o Small cap stocks have 5 letters  USWCO, MNTEF  There are a few exceptions (FB) Another puzzling story o Sears (NYSE: S) switched from NYSE to NASDAQ  Midlife crisis?  The change occurred when Sears and K-Mart merged in 2004-05  Essentially saying: “we (Sears) are an old company, but we’re beginning the new gym.” – Charles Geisst, Wall Street Historian Stock splits o Ownership of the company doesn’t change o But the number of shares held increases o Why split shares? o Signal of future profitability o Gain liquidity o Psychological effect Here’s what Research Suggests o Stocks tend to split when they’re doing well, and they usually do well after the split, too o Many companies report higher earnings or dividends at the same time Reverse Stock Splits o Both NASDAQ & NYSE require a minimum share price of at least $1.00/share o Companies can reverse split to get their shares above $1.00 in order to prevent becoming unlisted o May 2009: GM announced a 1:100 reverse stock split…and then went bankrupt o They reorganized and became re-listed on the NYSE 18 Nov 2010 Pricing: o Rational Expectations o Under the rational expectations assumption, the current stock price is the present value of all future cash flows associated with the underlying company, discounted by the appropriate rate o This idea can be generalized to price an item After All is Said and Done

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o Stock prices deviate around some unobservable true value o When more people want to buy than sell, prices go up (and vice versa) o Additionally, institutional factors, exogenous shocks, natural disasters, wars and coups, fads and trends, even sporting events What do we do? o Look at important ratios o No such thing as good or bad numbers o Compare prices with peers or industry cohorts o We’ll discuss each of these in next:  Price/earnings  Dividend yield  Price/Book  PEG ratio Dividend yield Price/Book Value o This metric compares a company’s book value to its current market price o P/B = (Stock Price) / (assets – liabilities) o P/B value is compared to competitors and the industry o A lower P/B ratio might imply:  Undervalued stock  Something fundamentally wrong with the firm Price/Earnings Growth – PEG o PEG is a commonly used indicator of a stock’s potential value, which accounts for growth  PEG = P / E / (Earnings per share growth) o Intuition behind PEG:  A company that’s valued fairly will have its earnings growth equal its P/E ratio o Rule of thumb:  PEG > 1 implies an overvalued company  PEG...