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Applied Equity Analysis and Portfolio Management + Online Video Course: Tools to Analyze and Manage Your Stock Portfolio


Praise for Applied Equity Analysis and Portfolio Management

Professor Weigand’s book is the clearest description of how to evaluate and pick stocks that I’ve read. The professional tools he provides are useful, and accompanied by intuitive, commonsense explanations. Whether you want to talk more intelligently with your financial advisor, become one yourself, or just dabble in the stock market, this book will help you achieve your goals.

—Ken Kroner, Head and Chief Investment Officer of Scientific Active Equity, Blackrock, Inc.

I have been professionally practicing in the investment management business for 34 years. Many clients have asked my advice for a guide, a book to study that encompasses the essence of solid investment processes. Dr. Weigand’s book is that resource: it captures both the art and science of the discipline, while taking today’s demanding investment environment into consideration.

—William Greiner, CIO of Mariner Wealth Advisors and BusinessWeek’s 2005 “Stock Market Strategist of the Year”

Simply put, Rob Weigand’s Applied Equity Analysis and Portfolio Management is a masterful work. His “learning system” is a potential game changer for anyone who is serious about investing, including students, investment advisors, financial planners, and experienced investors. He writes with great clarity and provides a complete package to ensure a successful learning experience. Based on my analysis, this book is an unqualified “buy.”

—H. Kent Baker, CFA, University Professor of Finance, Kogod School of Business American University

I found Dr. Weigand’s learning system to be insightful, clear, and directive. His “learn by doing” style of teaching has not only captivated and inspired talented students, but has been very instructional for seasoned professional investors as well.

—Mayo Schmidt, Retired President and CEO, Viterra Corporation

ROBERT A. WEIGAND, PhD, is Professor of Finance and Brenneman Professor of Business Strategy at Washburn University in Topeka, Kansas. Previously, he was a faculty member at Texas A&M University, the University of Colorado, and the University of South Florida. Dr. Weigand is the author of over 40 scholarly articles and book chapters. His research has supported various innovations in the field of asset management, including Russell Investment’s CrossVol™ Volatility Indexes. He earned a PhD in financial economics from the University of Arizona in 1993.

Preface ix

Acknowledgments xv

Chapter 1 Perspectives on Active and Passive Money Management 1

Terminology: Investors, Investment Vehicles, Risk, and Return 1

The Top-Down Fundamental Analysis Process 3

The Record of Professional Money Managers 8

Market Efficiency, Behavioral Finance, and Adaptive Expectations 10

Additional Perspectives on Investing 18

Professional Investment Policy Statements 26

Summary 30

Questions 30

Answers to Selected Questions 32

References 33

Notes 34

Chapter 2 Analyzing the Macro-Finance Environment 35

Economic Analysis: The First Step of a Top-Down Fundamental Process 35

Data Considerations: Nominal and Real-Time Series 41

National Income, Corporate Profits, and Job Creation 41

Leading Economic Indicators 43

Coincident Economic Indicators 54

Lagging Economic Indicators 58

Supplemental Economic Indicators 64

Summary 67

Questions 67

References 69

Notes 69

Chapter 3 Valuation, Expected Returns, and the Dividend Discount Model 71

Finance Principle 1: Valuation 71

Finance Principle 2: Value and Expected Returns 77

Summary 88

Questions and Problems 88

Answers to Selected Questions and Problems 93

Reference 96

Note 96

Chapter 4 Historical Performance Analysis 97

Getting Started 98

Historical Stock Returns 100

Growth in Revenues, Profits, and Dividends 101

Gross, Operating, and Net Profit Margins 108

Relative Valuation 111

Liquidity and Debt 115

Profitability: ROA and ROE 118

NOPAT, Total Invested Capital, Free Cash Flow, and ROIC 122

Value Creation: Cost of Capital, EVA, MVA, and Intrinsic Value 127

Using Diffusion Indexes to Summarize Performance Analysis 134

Summary: Historical Performance Analysis 136

Appendix: United Technologies’ Financial Statement Highlights, 2009-2012 136

Questions 138

Answers to Selected Questions 139

References 142

Notes 142

Chapter 5 Financial Statement Forecasting, Financial Analysis, and Valuation 143

The Income Statement Forecast Worksheet 144

The Percent-of-Sales Forecasting Method 144

Forecasting MCD’s Income Statement 145

Forecasting MCD’s Balance Sheet 153

Pro Forma Analysis: MCD 159

Intrinsic Value Modeling 164

Financial Fitness and Probability of Bankruptcy Scorecards 170

Summary 171

Case Study 5.1: Two Perspectives on Valuation Analysis: The Curious

Case of Amazon, Inc. 172

Questions 175

References 208

Notes 208

Chapter 6 Analyzing Company Strategy and Identifying Catalysts 209

Sources of Information 212

Unique Capabilities Lead to Sustainable Competitive Advantage 212

Getting Started: Analyzing Strategy and Competitive Advantage 216

Porter’s Five Forces Model 223

SWOT Analysis 229

Catalysts 232

Summary 232

Questions 233

Answers to Selected Questions 233

References 234

Chapter 7 Portfolio Risk and Performance Attribution 235

Foundations: Risk and Expected Return 236

Statistical Representations of Macroeconomic and Firm-Specific Risk 240

Extending the Mean-Variance Framework: Beta 249

Performance Attribution: Sector Weights, Dividend Yield, Beta, and Style 255

Multifactor Models 262

Summary 266

Questions and Problems 267

Answers to Selected Questions and Problems 271

References 279

Notes 279


The Time Value of Money and the Basics of Valuation 281

Basic Terminology 282

The Basic Future Value Tool 282

The Basic Present Value Tool 285

Perpetuities 292

Calculating Average Annual Compound Rates of Return 293

Integrated Problems Featuring Multiple TVM Tools 293

Solving for the Number of Periods 294

More on the EAR-to-APR Conversion 295

Arithmetic versus Geometric Averages 296

Questions and Problems 298

Answers to Selected Questions and Problems 302

About the Online Video Course 309

About the Author 311

Index 313