Part 2: Investment Activities

To better manage the stocks of the two companies you selected in Assignment 2/3 Preparation, Part 2, you will prepare a “top-down” fundamental analysis following the steps below. The top-down approach refers to analyzing the economy and the industries in which the two companies are involved, as well as the companies themselves.

1. Analyze current and recent economic conditions. Provide a two-page (maximum) economic summary. Identify whether the economy is expanding (booming) or contracting (in recession). Justify your conclusion by citing economic statistics and trends over the past three years. You can obtain economic data from the Statistics Canada website. Analyze and interpret data trends (e.g., unemployment, inflation, real GDP, interest, housing starts) over the most recent three-year period to evaluate the economy and Canada’s current economic status.

2. Briefly describe political and social trends that might affect the success of your companies in the long term. How will these trends affect your companies’ stock values?

3. Describe the business sector or industry in which each of the two companies operates. Focus on information that helps you understand whether the industry is healthy or struggling. Try to find news stories about these industries in the media and other sources, including searching the Internet—good sources include The Globe and Mail and Financial Post. You can also access company news stories at the Globe Investor website by typing the name or trading symbol of a company into the Search box and scrolling to the Latest section. These news stories may be specifically about your company or about the industry and the company’s competitors.

4. For each of the companies you have selected, find financial statements at the company’s website or at SEDAR for the three most recent fiscal year ends. Then, for each company, perform the following steps

a. Table the revenue/sales dollar amounts and net income after-tax dollar amounts for at least a three-year period.

b. Calculate all of the ratios (liquidity ratios, financial leverage ratios, etc.) shown in the learning objectives in Lesson 3 for each of the companies for each fiscal year end over the past three years. If a ratio is irrelevant—for example, if there is no inventory in your chosen company (such as a bank or other service company)—then indicate “not applicable.” Be sure to show your complete calculations.

c. Identify the business/product cycle of your companies. Does the company introduce new products from time to time? Are current products still increasing sales, are they levelling off, or are they declining? How does this compare with competitors’ product cycles? Are each company’s business cycles cyclical, counter-cyclical, or non-cyclical?

d. Identify and explain the risks that apply to each of the two companies’ stocks.

e. Assess management’s abilities and strategies to the extent that information is available. (You can find management and strategy information by reading management reports in each company’s financial statements or at sites such as those indicated in Step 3 above.)

2. Incorporating the information gathered in the “top-down” fundamental analysis in
Steps 1 to 4 above, provide a one-page summary for each of your companies indicating

a. your projection of company performance and resulting stock prices over the short term (one year) and longer term (five years). Explain your thoughts and rationale for your projections.

b. how good a fit these equity investments are for you, given your analysis above and your personal risk tolerance (based on the assessment you completed for Assignment 2/3 Preparation, Part 1).

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