Brief Historical Overview

To describe stock prices as a random walk suggests that price movements cannot be expected to follow any type of pattern. Or, put another way, price movements are independent of one another. In order to find a theory for such behavior, researchers developed the concept of efficient markets. As we discussed briefly in Chapter 7, the basic idea behind an efficient market is that the market price of securities always fully reflects available information. This means that it would be difficult, if...

So Who Is Right

Some type of fundamental analysis probably has a role in the stock selection process, for even in an efficient market, there is no question that stock prices reflect a company's profit performance. Some companies are fundamentally strong and others fundamentally weak, and investors must be able to distinguish between the two. Thus some time can profitably be spent in evaluating a company and its stock to determine, not if it is undervalued, but whether it is fundamentally strong. The level of...

Valuing a Company and Its Future

Thus far, we have examined several aspects of security analysis economic and industry analysis, and the historical (company) phase of fundamental analysis. It should be clear, however, that it's not the past that's important but the future. The primary reason for looking at past performance is to gain insight about the future direction of the firm and its profitability. Granted, past performance provides no guarantees about future returns, but it can give us a good idea of a company's strengths...

Case Problem 82 An Analysis of a High Flying Stock

Glenn Wilt is a recent university graduate and a security analyst with the Kansas City brokerage firm of Lippman, Brickbats, and Shaft. Wilt has been following one of the hottest issues on Wall Street, C& I Medical Supplies, a company that has turned in an outstanding performance lately and, even more important, has exhibited excellent growth potential. It has 5 million shares outstanding and pays a nominal annual dividend of 5 cents per share. Wilt has decided to take a closer look at C&...

Some Alternatives to the DVM

The variable-growth approach to stock valuation is fairly compatible with the way most people invest. That is, unlike the underlying assumptions in the standard dividend valuation model which employs an infinite investment horizon , most investors have a holding period that seldom exceeds 5 to 7 years. Under such circumstances, the relevant cash flows are future dividends and the future selling price of the stock. There are some alternatives to the DVM that use such cash flow streams to value...