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Common stock valuation and analysis are not exact science. Mathematical and statistical analyses can only carry this process to a certain extend. Stock brokers usually would show the clients the past performance of a stock. These past performance may include 1-year and 5-year stock returns, the dividend, the P/E and P/S ratios, the beta of the stock, and some technical charts, etc. This collection of information may or may not be sufficient to make a good judge or prediction of the future performance of a stock. However, at the least, this can serve as the very beginning of the evaluation process. In the following, I use a certain set of evaluation tools, mathematical and statistical, to make an objective evaluation of the stocks. Of course, no one can have a crystal ball. But, I have certain degree of satisfaction myself following my own research. After all, just as Mr. Frank Sinatra once said, I do it my way. The steps of my research are presented in the following pages. They can only serve as reference. You are ultimately responsible to your own actions.
2. The and , the up market , and the down market : Beta can be estimated by regressing the excess return from the riskless holdings (generally the return of 3-month CD is used for this purpose) of the security on the excess return of the market by the following relationship: Excess Return of Stock = + Excess Return of Market. When a stock with more up-side than downside potential or vice versa, the usual estimate of would become misleading. Therefore, it is sometimes important to distinguish the Up-Market-Risk and the DownMarket-Risk of a security. This can be accomplished by the following estimation: Excess Return of Stock = + u Excess Return of Up-Market + d Excess Return of Down-Market. This companys alpha, overall beta, the up-market beta, and the downmarkets beta are shown in the following table. The estimates were based on the data of the past 10-years. In addition, using different statistical method may derive to a somewhat different results. Parameter Estimated Values Alpha 0.0008 Overall Beta 0.999 Up-Market Beta 0.528 Down-Market Beta 0.471
3. The earnings trend: Positive. 4. The revenue trend: Positive. 5. The free cash flow: The free cash flow is probably the most important measure of the profitability of the company from the shareholders point of view. The free cash flow can be defined as following: Free Cash Flow = Net Income + Depreciation and Amortization - Capital Expenditures - Change of Working capital The free cash flow of this company seemed to be in the up-ward trend
1996
1998 Year
2000
2002
11/10/2003
03/01/2004
06/21/2004
10/11/2004
01/31/2005
11/10/2003
03/01/2004
06/21/2004
10/11/2004
01/31/2005
Buy (Sell) signal when the histogram cross above (below) the solid line.
8. The relative strength: The relative strength of the stock measures the general move of the stock price in the past few weeks or days in a pre-specified time interval. It indicates over-bought or over-sold depending to whether it is above or below the upper dashed line or the lower dashed line, respectively. Some people use the 20% and 80% as reference lines. However, every stock has its own characteristics, therefore, the reference lines were statistically derived using the 90% and 10% percentiles of the RSI.
11/11/2002
06/02/2003
12/22/2003
07/12/2004
01/31/2005
Time in weeks
Values of RSI
11/11/2002
06/02/2003
12/22/2003
07/12/2004
01/31/2005
Time in weeks Values above the upper line (below the lower line) represent overbought (oversold)
9. The AIMS Index: The AIMS index is defined as the ratio of the mean volume of the upweek to the volume of the down-week. When this index is below the lower dotted line, it indicates the greater sale pressure. Again, the reference lines were statistically derived using the 90% and 10% percentiles of the AIMS index.
12/16/2002
06/30/2003
01/12/2004
07/26/2004
02/07/2005
Time in weeks
AIMS Index
1.2 0.8 06/03/2002 1.0
Values of AIMS
12/16/2002
06/30/2003
01/12/2004
07/26/2004
02/07/2005
Time in weeks AIMS is defined as the ratio of mean volume of up weeks to mean volume of down weeks
10. Performance from 52-week low: If you were to buy this stock at the 52-week low and hold it for one year. The historical returns after the holding of 1-year are shown in the following histogram. In average, you may have about 60% loss.
-0.5
0.0
0.5
11. The Value-at-Risk (VaR): A popular measure of risk recently is the so called Value at Risk or VaR. With a pre-specified likelihood (for example, 5% or 10%), this quantity measures the amount of capital one is risking to lose during a given time horizon. For example, this measure will try to tell you, with 5% chance, the value of your portfolio could lose x dollars in a month period of time during the normal market condition. This quantity is proportional to the amount of capital invested and the volatility of the returns of the underlying investment. It is defined as Value at Risk Amount of Capital Invested Standard Deviation of Returns.
-0.05
0.0
0.05
0.10
0.15
Vertical solid line is 0. There is 1% chance the loss will be greater than -0.075 Vertical solid line is 0. There is 5% chance the loss will be greater than -0.042
12. The stochastic: The traders may find stochastic as a reference for short term trading. However, for the long-term investors, this is probably not very meaningful.
09/16/2002
04/21/2003
11/24/2003
06/28/2004
01/31/2005
Time in weeks
Stochastics (K%D)
20 40 60 80 0 02/11/2002
Values of K%D
09/16/2002
04/21/2003
11/24/2003
06/28/2004
01/31/2005
Time in weeks Values greater (smaller) than the upper (lower) line represent over bought (sold)
13. The forecast of stock price: The short-term price forecast according to the Box-Jenkins method. The following graph indicates the forecasted price in the next couple of weeks. The upper and lower dotted lines are the 95% confidence interval boundaries.
50 Time
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