Security Analysis Report
The following outline gives you an idea of what should be included. The objective of this analysis is to help the investor make investing or trading decisions on a specific stock. All the statements in your analysis should be substantiated with specific evidence from identifiable sources or a logical argument of your own.
I. A general description of the sector/industry
Sector (select 3 from the list):
a. Identify the stock’s sector and describe how the sector is classified;
b. Describe the size (measured by market capitalization) and the growth in size of the sector and compare them with those of other sectors;
c. Describe the economic performance (revenue, profitability and their changes) and stock market performance of the sector over the past 2 years;
d. Determine and describe the stage of sector rotation based on macro-economic outlook (measured by Economic Indicators);
e. Describe the diversity in lines of business, i.e., the extent to which the industries in the sector share common driving forces.
Industry (select 3 from the list):
a. Identify the stock’s industry within the sector and describe how the industry is classified;
b. Determine and explain whether the industry is cyclical or defensive, i.e., the extent to which the industry’s performance depends on macro-economic conditions;
c. Determine and explain which stage of life cycle the industry is currently in based on the most recent 2 years’ industry economic performance (revenue, profitability and their changes) and if any, qualitative analysis;
d. Describe investors’ sentiment based on recent 2 years’ stock market performance of the industry;
e. Determine and explain whether the industry is dominated by a few large companies in terms of market shares;
II. An analysis of the key driving forces behind the performance of the industry
Find the economic driving forces for the industry. The analysis does not need to be long, but it needs to be meaningful and specific. Your analysis should include (select 4 from the list) but not limited to the following:
a. (Threat of substitute products) Determine and describe whether the customers in the industry have brand loyalty and whether substitute products/services are abundant;
b. (Intensity of Competitive Rivalry) Identify and describe the common strategies/tactics used by companies to compete, e.g., pricing, marketing innovation, product differentiation;
c. (Power of suppliers) Determine and describe whether companies in the industry share suppliers and whether they have the ability to switch suppliers or enter suppliers’ business;
d. (Threat of new entrants) Identify and describe investments need to be made for a new company to enter the industry;
e. (Buyer’s power) Determine and explain whether it would be costly for customers to switch products/companies;
f. Identify the trends in costs of the materials supplied by suppliers;
g. Determine the extent to which labor costs impact the operating margins of the companies in the industry and if the impact is significant, identify trends in such costs;
h. Determine and explain whether or not and how technology advancements and regulation changes have a significant impact on the individual companies in the industry and the industry as a whole;
i. Profile the typical customer of the industry and discuss how the growth of such customers will be influenced by changes in lifestyle (e.g., increasing awareness of eating healthy) societal concerns (e.g., increasing awareness of environmental protection).
Business profile and recent development (select 5 from the list):
a. Describe the company’s major product lines and name brands, if any;
b. If the company has multiple existing product lines or/and service types, describe how the company’s total revenues divide among them (measured in $ amount and %);
c. If the company currently sells products/service to multiple states/countries/geographical regions, describe how are the total revenues dividend among them (measured in $ amount and %);
d. Identify existing products that are in growth stage and those with market leader status;
e. If the company are engaged in R&D activities, identify them and their costs and discuss, if possible, how their success will impact the company’s revenue and profitability;
f. If there any recent or planned capital expenditures for geographical expansion or product line expansion, list them;
g. Identify two competitors with business most similar to the company;
h. Describe how the company’s products/services and customers differ from those of its competitors;
i. Identify any recent expansion/new product introduction/merger and acquisition activity by its competitors over the past 6 months;
j. Identify any recent change in the executive management team (e.g., CEO, CFO) and describe the extent to which the compensation structure provides incentives to the executives;
k. Identify any issue that may potentially prevent the board from working effectively.
Financial performance and valuation (select 2 from the list):
a. Determine the financial health of the company based on a review of major financial ratios;
b. Identify the company’s P/E, P/CF, P/B ratios and their trend over the past 2 years, and compare them with those of its competitors and the industry averages;
c. Use the relative valuation approach to estimate the stock’s intrinsic value;
d. Establish economic driver assumptions and use the DCF valuation approach to estimate the stock’s intrinsic value.
Stock market performance and Technical analysis (must respond to both):
a. Describe how well the stock performs in comparison to the sector, the industry and the company’s two competitors;
b. Select any two technical indicators and discuss whether they indicate an upward trend, a downward trend or no trend in the company’s stock price over the short-term (include price charts with discussed indicators).
Supplementary analysis (select 1 from the list):
a. Describe recent earnings surprise history and identify the anticipated earnings for the quarter;
b. Describe recent Insider trading activities and interpret their significance;
c. Describe recent Institutional investor trading activities and interpret their significance;
d. List analyst recommendations and interpret their significance.
Summary one piece of news that you believe to contain new information about the company’s fundamentals.
The basic news should be related to the stocks within this industry. This includes major announcements on earnings or surprise dividends payment. You can use the ticker symbols of the main companies to search the news. Also search for major changes in personnel (such as CEO and CFO), company structure (merger or spinoff), manufacturing locations, product lines, etc. Make a note on the implications of the news (good or bad for the company/industry)
Conclude with a set of observable factors that you recommend the investor to keep an eye on; give an instruction on what the investor should do as these factors change directions. Possible conclusions may include the timing to enter or exit a particular stock in the industry; the timing to enter or exit the industry; and the timing to rotate in or out of the sector.
You must include citations. Use any of the major styles that you are familiar with, such as APA, MLA, and Chicago.