How to Buy and Sell Stocks

How can I predict whether a stock will go up or down?

What determines the price of a stock? Where on the Internet can I get free

information about recent changes in real companies’ earnings prospects?

How Can I Predict Whether a Stock Will Go Up or Down?Stock market analysts use two

fundamentally different approaches to answer this question:

Technical analysts focus on recent trends in stock market prices.

They look for recurring patterns that can be used to make short-term predictions of whether a stock is about to go up or down.

How Can I Predict Whether a Stock Will Go Up or Down? Fundamental analysts on the other

hand believe the price of a stock responds minute-by-minute to changes in available information about that company’s earnings prospects.

They believe the smart investor should ignore irrational fear in the market and buy stocks that are undervalued relative to their fundamental value.

What determines a stock’s fundamental value? The net present value of all the

dividends a company COULD pay to its shareholders without shrinking

Approximately equal to the net present value of all future earnings per share

If correct, then new information relevant to future earnings per share should cause the stock price to change immediately.

Key Implications of Fundamental Value Theory Let’s review some of the key

implications of fundamental value theory.

In particular, let’s explore some of the things you can’t use to predict whether a stock is more likely to go up or down from its current value if fundamental value theory is correct.

1. Lower Priced Stocks are More Likely to Go Up Than Higher Priced Stocks Wrong. Just because Oracle’s price is

lower than WalMart’s doesn’t mean it has a greater likelihood of going up.

2. Stocks Whose Prices Have Dropped Recently are More Likely to Go Up Wrong. If fundamental value theory is

correct, a stock drops in price because, in the combined estimation of all buyers and sellers of that stock, the earnings prospects of that company have dimmed.

Only new information about this company’s earnings prospects can cause its price to rise again.

3. The stock of a company that has been more profitable in the past will go+ up faster than that of a company that has been less profitable

Not necessarily. Just because WalMart has been more profitable recently than Oracle doesn’t necessarily mean its stock is more likely to go up.

A company’s past profit is only relevant insofar as it can be used as a predictor of a company’s future profit.

4. The stock of a company that is expected to be more profitable in the future will go up faster than that of a company that is expected to be less profitable in the future Wrong. What we can predict is that its

current price will be higher, but we cannot predict that it will rise in price over the next year more than the stock of the less profitable company.

Cisco Systems Inc (CSCO) $18.45

Current Qtr

Next Qtr

Current Year

Next Year

5-Apr 5-Jul 5-Jul 6-JulAvg. Estimate $0.22 $0.24 $0.89 $1.01No. of Analysts 35 33 36 34Low Estimate $0.21 $0.22 $0.87 $0.95High Estimate $0.24 $0.25 $0.92 $1.08Year Ago EPS $0.19 $0.21 $0.76 $0.89

% return to stockholders: 4.8% 5.5%

Earnings Est

Wal-Mart Stores Inc (WMT) $51.60

Current Qtr Next Qtr

Current Year

Next Year

5-Apr 5-Jul 6-Jan 7-JanAvg. Estimate $0.57 $0.70 $2.73 $3.10No. of Analysts 25 23 28 21Low Estimate $0.56 $0.67 $2.70 $3.01High Estimate $0.58 $0.72 $2.76 $3.16Year Ago EPS $0.50 $0.62 $2.41 $2.73

% return to stockholders: 5.3% 6.0%

Earnings Est

So how do I predict whether a stock price will go up or down? What you want to look for is early

warning of changes in predicted future earnings of the company.

Kroger Loses $675.9 Million in Fourth Quarter on Writedown of 2 Brand Values; Shares Sink Tuesday March 8, 10:33 am ET

CINCINNATI (AP) -- Kroger Co., one of the nation's biggest supermarket operators, reported a $675.9 million loss for its fourth quarter as it wrote down the value of two of its grocery brands, Ralphs and Food 4 Less. Its shares fell more than 4 percent.

Kroger, which has operations in 32 states, said Tuesday the loss of 93 cents a share for the quarter that ended Jan. 29 included an $884 million after tax charge, or $1.21 a share, for writing down the value of the Ralphs and Food 4 Less operations in southern California.

Excluding the writedown, Kroger would have earned 28 cents per share for the latest quarter, 7 cents below estimates of analysts surveyed by Thomson First Call.

Kroger Co (KR) $15.97

Current Qtr Next Qtr

Current Year

Next Year

5-Apr 5-Jul 6-Jan 7-JanCurrent Estimate $0.34 $0.26 $1.20 $1.437 Days Ago $0.36 $0.25 $1.29 $1.4430 Days Ago $0.37 $0.24 $1.29 $1.4060 Days Ago $0.37 $0.24 $1.29 $1.4090 Days Ago $0.37 $0.24 $1.30 $1.40

EPS Trends

Chip Maker’s Profit Falls 17% on ChargesDOW JONES NEWSWIRESMarch 10, 2005 1:14 p.m.

SANTA CLARA, Calif. -- National Semiconductor Corp. (NSM) fiscal third-quarter net income fell 17% on a decline in sales and a charge of $20 million for severance costs.

However, the results beat analysts’ expectations, and the company’s stock rose nearly 6%.

National Semiconductor Corp (NSM) $20.82

Current Qtr Next Qtr

Current Year

Next Year

5-Feb 5-May 5-May 6-MayCurrent Estimate $0.17 $0.19 $0.86 $0.897 Days Ago $0.16 $0.19 $0.85 $0.8830 Days Ago $0.16 $0.19 $0.85 $0.8860 Days Ago $0.16 $0.19 $0.85 $0.8790 Days Ago $0.16 $0.18 $0.82 $0.86

EPS Trends

What Constitutes Early Warning of a Change in Future EPS? When interest rates go up, the

earnings of banking and mortgage stocks tend to go down.

Such as Citigroup J.P. Morgan Chase Bank of America Fannie Mae and Freddie Mac

What Constitutes Early Warning of a Change in Future EPS? When oil prices go up, the earnings of

companies that have large amounts of proven oil reserves go up, such as Exxon-Mobil: up 40% since Apr-04 Royal Dutch/Shell: Up 26% since Apr-04 British Petroleum: Up 21% since Apr-04 Andarko Petroleum: Up 18% since Apr-04

What Constitutes Early Warning of a Change in Future EPS? When oil prices go up, the earnings of

oil exploration equipment companies also tend to go up, such as Baker Hughes, Inc: up 44% since June-04 Halliburton: up 59% since Aug-04 Global Sante Fe Corp: up 55% since

June-04

What Constitutes Early Warning of a Change in Future EPS? Increased oil and natural gas prices

negatively affect: Aluminum manufacturers Electricity generating companies such as

Calpine Airlines, and many more.

Surging Fuel Costs Hit Struggling Airlines HardAugust 19, 2004

The global airline industry, already hobbled financially, is struggling to cope with the surge in oil prices, and some carriers are running out of options.

Around the world, airlines need the oil from which jet fuel is made to be priced within a range of about $31 to $33 a barrel to break even. The price of U.S. benchmark crude-oil futures for September reached another high yesterday on the New York Mercantile Exchange, rising 52 cents to settle at $47.27 a barrel. Many analysts believe the price won't ease much from the high levels of recent weeks anytime soon.

"It's going to be a disaster for the industry," said Anthony Concil, spokesman for the International Air Transport Association, the global industry trade group.

Since 2001, the airline industry world-wide has incurred losses of around $30 billion, industry groups estimate. Early this year, many airline executives had hoped for modest profits or at least to break even. Now experts predict huge losses.

IATA calculates that the international airline industry breaks even on flights when European benchmark Brent North Sea crude oil, which is a few dollars less expensive than the U.S. benchmark, trades at $33 a barrel.

U.S. airlines would need $31 a barrel based on U.S. benchmark prices to break even if other factors, such as fares and cost structures, remain the same, said John Heimlich, chief economist for the U.S. industry group Air Transport Association.

Through July, Brent averaged about $34 a barrel, Mr. Concil said. At a full-year average of $39, the global industry's loss would hit $10 billion -- nearing the sector's record loss of about $13 billion in 2001.

High fuel prices sock airlines with a one-two punch. The first is a big rise in carriers' second-largest expense, after labor: fuel accounts for about 15% of airlines' total costs. Jet-fuel prices are now 48% above year-earlier levels and up 11% in the past three months.

The second hit comes on the revenue side, if soaring petroleum prices prompt a broader recession. If fuel prices choke economic growth, air traffic would probably decline sharply, analysts predict. Oil price increases similarly affect:

Aluminum manufacturers such as Alcoa Energy supply companies such as

Calpine Delivery service providers such as

Federal Express and United Parcel Service

Auto manufacturers, and others

What Constitutes Early Warning of a Change in Future EPS? Pharmaceutical company good news:

FDA approval of a new drug Clinic trials that show effectiveness in

treating disease of a new drug Pharmaceutical company bad news:

Newly-discovered serious side-effects of one of their most profitable medicines

Abandonment of a drug in development due to serious side-effects being discovered during the testing process

A Few of the Largest U.S. Pharmaceutical Companies Pfizer Merck Johnson & Johnson Bristol-Myers Squibb Abbott Laboratories Eli Lilly & Co.

What Constitutes Early Warning of a Change in Future EPS?

Bad news for a company in any industry Reports that they have recently come under

investigation by the Federal government for possible illegal activity

One of its competitors announces a new line of products that offers substantially better price performance because it uses the latest generation of computer chips, which are more powerful and cheaper to manufacture.

One of its competitors announces substantial cuts in the prices of its products.

What Constitutes Early Warning of a Change in Future EPS? Retail Industry Good News:

An increase in consumer spending An increase in (U.S. consumer) jobs and/or

income A decrease in consumer taxes (which

increases consumer disposable income) An increase in year-over-year “same store

sales”.

A Few of the Largest U.S. Retailers Wal-Mart Home Depot Kroger Target Sears CostCo Albertson’s Safeway

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