ch10_IND_4502.qxd 9/8/05 10:53 AM Page 277

INDEX

Abercrombie & Fitch, 109, buy-side, 100–101, 259 strategy, 98 114, 145 recommendations, 35–36 types of, 217 About.reuters.com, 120 reports, 40 Asset management firms, Accounting periods, 43 track record of, 120 41 Accounting systems, types Angel investing, defined, Auditor’s report, 60 of, 57–58 225 Audits, financial Accounts payable, 51–52, Angel investors statements, 61 273 characterized, 41–42 Automatic payment plan, Accounts receivable, 273 group meetings, as 17, 239 Acquisitions, 61, 76 information resource, Automobile industry, 156 Active management, 258 37–38 AutoZone, 126–127 Activity ratios, 66 Annual accounting period, Average annual returns, Actuaries Share indexes, 72 43 216 Additional paid-in capital, Annual reports, Average price, 174 273 information provided Aggressive growth, 19 by, 27, 40–41, 49, 53, Back-office systems, 110 Aggressive stocks, 224 56, 59–60, 96, 234 Bad debt, 112 Albertson’s, 134 Apple Computers, 132, 227 Bad news Alcoa, 108 Application forms, as buying opportunity, Allied Chemical, 253 dividend reinvestment 162–164 ALLTEL Corp., 82, 84 plans (DRPs), 179 impact of, 148 Alpha, 138 Applied Materials, 35, 108, Balance sheet Alternative investing, 22, 156 analysis of, 111–112, 151 225, 237–238, 258 Arbitrage, 258 annual, 50 Alternative minimum tax Ask, 25 assets, 51–52 (AMT), 258 Asset(s) cash, 53–54 Amazon.com, 132 allocation of, see Asset defined, 273 America Online, 119 allocation format of, 53 American Express, 68, 135 characteristics of, 51, 62, importance of, 55 American Stock Exchange 80 information provided by, (AMEX), 24–25COPYRIGHTEDclasses, 18–19, 213, 217,MATERIAL52–55, 62, 81–82 Ameritrade, 12, 16, 36 226 liabilities, 51–52 Amortization, in valuation information resources, limitations of, 55 process, 88, 91–92, 105 parts of, 51 259 quality, 68 purpose of, 50 Analysis, types of, see Asset allocation return on equity (ROE), Fundamental analysis; advantages of, 140, 217 80 Technical analysis purpose of, 220 shareholder equity, Analyst(s) risk management and, 51–52, 69 bias, 100–101 214 strong, 173

277 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 278

278 Index

Banking industry, 137. See defined, 259 Business trends, 20 also Financial services determination of, Business Week, 37 industry 151–152 Buy-and-hold strategy, 98, Bank loans, requirements implications of, 78, 117, 130–131, 161–162, for, 41 143 235, 252 Barron’s, 37, 173 Boom-bust cycle, 71 Buying below book strategy Basic earnings per share Borrowing, monitoring book value (EPS), 63–65 strategies, 112 determination, Bass family, 173 Boston Scientific Corp., 151–152 Baxter International, 158 204–208 case study, 152–153 Bear market, 133, 149, 161, Brand names, 174 checklist for, 154 222, 253 Breakup value companies, defined, 151 Behavioral finance, 153–155 Buying decisions 198–199 Bristol-Myers, 253 mistakes, dealing with, Bel Fuse, 24 Broker(s) 196 Berkshire Hathaway, 23, 26, commissions, see thesis statement 135 Commissions development, Beta, 138, 214, 258 discount, 16, 231, 241 186–189, 200 Bid, 25 full-service, 13–15, Buying opportunities, BJ’s Wholesale Club, 134 230–231 selection factors Blockbuster, 170 functions of, 12–14 intelligent investing, Block trade, 118, 259 licensure, 13 127–129 Bloomberg, 37 Brokerage accounts, types market capitalization, Bloomberg Television, 37 of, 268–269 124–125 Blue chip stocks, 157, 176, Brokerage firm(s) patience, 129–130 224. See also specific automatic payment per-share growth, companies plans, 239 126–127 Board of directors, discount, 12–14, 16, 20 Buy list, 147 functions of, 23, 259 dividend reinvestment Buy low, sell high strategy, Bogle, John, 27 plans (DRIPs and 156–157, 271–272 Bond(s) DRPs), 176–179 Buy side, defined, 259 advantages of, 136, 215 fees, see Commissions; Buy-side analysts, 100–101, buying process, 230–231 Fees 259 consistent income, 229 full-service versus diversification strategy, discount, 13–14, 16 Call options, 259, 267 223, 228 information resources, Call risk, 230 goal-setting, 230 15 Capital Cities/ABC, 27 issuance of, 51 minimum investment, 17 Capital expenditures, 91, maturity of, 54 selection factors, 15 135, 143–144 payable, 51 Broker-dealers, 24 Capital gains, 15, 197, 218, prices, influential Brown, John, 30 259–260 factors, 221 Buffett, Warren, 23, 26–28, Capitalizations, 253. See also risk management, 96, 98, 103, 135–136, Market capitalization 229–230 167, 250, 252, 255, 263 Capital preservation, 19, sell process, 230–231 Bull market, 116, 161, 168, 211 stability, 228–229 222, 232 Cash, see Cash flow; Cash taxation, 229 Business acumen, 98–99 flow analysis; Cash transaction costs, 231 Business cycles, 130 flow statement Bond funds, 21, 223 Business expansion, 148 asset conversion to, 151 Book value Business magazines, 37 conversion cycle, 66 buying below, see Buying Business plan, analysis of, implications of, 54 below book strategy 107–108 from investing, 56, 62 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 279

Index 279

investments, advantages Circle of competence, Current assets, 53–54, 111, of, 216 26–27, 210, 227–228, 260, 267 net increase/decrease in, 254 Current debt, 52 56 Class A/Class B shares, 23 Current liabilities, 53, 55, portfolio diversification CNBC, 37 260, 267 strategies, 140 Coca-Cola, 27, 71, 89–90, Current price, 174 reserves, 43, 223 130, 135, 163, 165, Current ratio, 66, 69, 148, Cash-basis accounting 175, 176, 253 158, 173, 260 system, 58 Commissions, 13, 15, 131, Custodial IRAs, 22 Cash flow 175, 180, 239, 241 Customer franchises, 174 analysis, see Cash flow Commodity, 260 CyberOptics, 91 analysis Common stock, 22–23, 116, Cyclical approach, 156–157 free cash flow, 137, 222 Cyclical industries, 71, distinguished from, 87 Company analysis, 107, 201 148–149 importance of, 56–57, Company-sponsored DRPs, Cyclical opportunities, 99 143 177–178 Cyclical stocks, 156–157, multiples, 88 Comparables/comps, in 260 uses of, 88 retail industry, 110, valuation based on, 113–114 Day order, 269 87–88, 91 Competition, significance Dean Witter, 179 Cash flow analysis of, 158–159, 170, 196 Debt characterized, 87, 172 Compound annual growth bad/good, 112 discount, see Discount rate (CAGR), credit card, see Credit cash flow (DCF) 245–246 card debt analysis Compounding, 6–10, 216 level, 29, 38, 42–43, 51, Cash flow per share ConAgra, 148 76, 112, 135, 148, 160, calculation of, 87 Conferences, see Investment 163 defined, 260 conferences long-term, 112 Cash flow statement Consumer demand, 165 repayment, 55 example of, 57–59, 90 Continuing valuation, Debt to assets ratio, 66 format of, 56 93–94 Debt to equity ratio, 66, importance of, 59 Contrarian investing 68–69 income statement strategy, 140–141 Debt to total capital ratio, compared with, 56 Convertible preferred 66 information provided by, stock, 64–65 Deep Value investing, 140 55–56, 62 Corporate bonds, 222. See Defensive investors, 168 manipulation of, 88–89 also Bond(s) Deferred liability, 83 Cash-on-cash return, 82 Corporate raiders, 87, 173 Deferred taxes, 84, 131 Cash to debt ratio, 68 Cost of goods sold (COGS) Dell, 227 CBS Marketwatch, 37, 40, calculation of, 46–47 Department 56, 73–77 120, 246 defined, 44–45, 273 Depreciation Cedar Fair, L.P., 33–34 return on equity analysis, defined, 260 Certificates of deposit 81 expense, 44 (CDs), 12, 19, 222, 224 sample income impact of, 56, 87 Charge offs, 68 statement, 48 in valuation, 88, 91, 259 Charles Schwab, 16, 22 Cost of sales, 46 Derivatives, 233 Checking accounts, 43 Coverdell IRA, 21 Devine, Brian, 134 Chemical companies, 156 Covered options, 260 Diluted earnings per share Chiron, 26 Credit card debt, 51, 68, (EPS), 63–65 Chrysler, 174 177 Dilution, 260 Churning, 15, 260 Credit risk, 229 directinvesting.com, 176 Cincinnati Financial, 82–84 Currency risk, 219 Direct-purchase plans, 180 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 280

280 Index

Direct stock purchase plans Dollar cost averaging, Enterprise value, 101, (DSPs), 176–180, 239 161–162, 174–176, 239 103–105, 127 Direct-to-consumer Dot-com boom, 117, 125 Enterprise value-to- business, 49 Doubled stocks, 197 structural free cash Discount brokerage firms, Dow Jones Industrial flow ratio, 127 12, 20 Average, 28, 129 Entertainment companies, Discount brokers, 16, 231, DTE Energy, 137 174 241 Equipment purchases, 55 Discounted cash flow Early exercised options, Equity, 62 (DCF) analysis 260 ESL Investments, 126 case study, 92–94 Earnings, see also specific Established businesses, characterized, 92 types of earnings analysis guidelines, Discretionary account, 268 from continuous 108 Diversification operations, 261 E*TRADE, 12, 16, 22, 36 asset allocation, 214, 217, defined, 261 Excess returns, 183 221 growth, 29, 124, 146, Exchange-traded funds benefits of, 135, 213 160, 196, 243 (ETFs), 265 case study, 227–228 implications of, 55, 62, Expectations, 70 risk management, 214, 273 Expense ratio, 235 222–227 reports, 169 Expenses, as information strategy tips, 228 stability, 243 resource, 105. See also Dividend record, 243 Earnings before income specific types of Dividend reinvestment, 253 tax, 273 expenditures Dividend reinvestment Earnings before interest Expiration date, 261 plans (DRIPs/DRPs) and tax (EBIT), advantages/ 44–45, 68, 81, 91 Fair market value, 53 disadvantages of, Earnings before interest, Fair value, 105 176–177 taxes, depreciation, Falling comps, 114–115 characteristics of, 19, and amortization Family, as information 176–182, 236, 237, 240 (EBITDA), 87–88, 91 resource, 32–34 defined, 176 Earnings per share (EPS) Fannie Mae, 152 dividends on dividends, basic versus diluted, Fees 181–182 63–65 bond investments, 231 documentation, 179 defined, 261 brokerage firms, 12 dollar cost averaging, 175 growing companies, direct-purchase plans, examples of, 181–182 144–147 176–177 full enrollment, 181–182 importance of, 43, 62, Fidelity, 20 investing process, 89, 132, 273 Fidelity Investments, 20, 178–180 eBay, 125, 132 31 partial enrollment, 181 Economic conditions, Fifth/Third Bancorp, shares transfer, 179 impact of, 124, 82–84 types of, 177–178 148–149, 226 Fill-or-kill orders, 269 Dividends, 56, 68, 89, Economic forecast, Financial condition, 243 137–140, 149, 176, assessment of, 106 Financial magazines, 37 Documentation Economic indicators, 106 Financial media, 37, 148 requirements, 179, Economic value added Financial needs assessment, 265. See also specific (EVA), 88 10–11 forms and reports Edelman, Asher, 173 Financial News Network Dodd, David, 28, 98, 101, Edgerton, Jerry, 182 (FNN), 37 103 Educational IRA, 21 Financial newspapers, 37 Do-it-yourself investing, Emotional investments, Financial ratios 16–17 127–129, 185–186, 197 applications, 65, 68 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 281

Index 281

debt to equity ratio, determination of, General Electric (GE), 102 assessment of, 68–69 164–165 Generally accepted types of, 66–67 profiting from, 165–166 accounting principles Financial risks Frederick, Jim, 182 (GAAP), 61, 82, 92 impact of, 218–219 Free cash flow General Motors types of, 219–220 cash flow distinguished Corporation, 125 Financial services industry, from, 87 General partner (GP), 261 107 calculation of, 89 Giant cap stocks, 125 Financial statements defined, 89, 261 Gillette, 135 analysis of, 108 in dividends, 137 Goal setting, 10–11 audited, 61 indications of, 90–92 Going public, 261 balance sheet, 42–43, projections, 92 Goizueta, Roberto, 163 50–55, 62 underfollowed stocks, 159 Gold, 225 cash flow statement, 43, FreeEdgar Golden parachutes, 76 55–59, 62 (www.freeedgar.com), Goldman Sachs, 34, 101, date of, 42 60, 219 169 functions of, generally, Freetrade.com, 238 Gomez’ Discount Broker 40–41 Full-service brokerage Scorecard, 15 fundamental analysis, firms, 12, 20 Good debt, 112 96–97, 106–107 Full-service brokers, 13–15, Good ‘til cancelled (GTC) guidelines for 230–231 orders, 211, 270 understanding, 42 Fundamental analysis Goodwill, 53, 92 income statement, case study, 108–113 Google, as information 42–50, 62 components of, 201–202 resource, 168 purpose of, 41 do-it-yourself, 105–108 Government bonds, 222, required, 40 enterprise value, 229 sources of, 41–42 103–105 Graham, Benjamin, 27–28, terminology, 273 importance of, 117, 98, 101, 103, 117, 151, types of, 42–59 120–121, 131 153–154, 243, 250, 255 unaudited, 61 information resources, Gross margin Financial weakness, signs 105–106 calculation of, 46–47 of, 69 intrinsic value, 101–103 defined, 44–45 Financial World, 37 online research, 119–120 implications of, 66, 111 Financing, cash from, 56, 62 seven steps to, 106–108 Gross profit, 44 Finished goods, 111 stock market and, Gross profit margin, 63 First Share, 180 115–119 Growing companies, 529 plan, 22 strengths of, 98–99 identification of, Fixed costs, 163, 165 technical analysis versus, 144–147 Fixed-income securities, 34, 95–97 Growing comps, 110 231 weaknesses of, 99–101 Growth at a reasonable FLAVA23, 166 Fund of funds, 258 price, see GARP Forbes, 37 Funds from operations Growth earnings, 253 Ford Motor Company, 46, (FFOs), 137 Growth investing, 19, 98, 174, 272 Futures, 22 131–133 Foreign investments, 174 Growth-oriented Form 13D, 172–173 Gabelli, Mario, 27 opportunities, 99 Fortune, 37 Gap, 113–115 Growth stocks, 103 401(k) plans, 12, 22 GARP (growth at a 403(b) plans, 12 reasonable price) Hanes, 31, 33 Franchise value investing strategy, Hawaiian Electric, 137–138 case study, Starbucks, 134–135 Hedge funds, 18, 22, 225, 166–168 Gates, Bill, 132 258 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 282

282 Index

Helix Technology, 35 selection factors, Interest rate risk, 220, 229 Hershey, 26 106–107 Interest rates, impact of, High-growth stocks, 172 significance of, 99 90, 106, 135, 221, 223, High-risk investments, 168 Industry risk, 220 229 High-risk opportunities, 99 Industry sectors, 72 Intermediate-term debt, 51 High-tech companies, Inflation, 130, 222 Internal growth, 147 171–172 Inflation risk, 219, 230 International investments, Historical data, 59, 136–137 Information resources, 15, 219 Historical returns, 21 29–38, 42, 168. See also Internet retailers, 99 Home equity loans, 223 Yahoo!, as information Internet stocks, 27, 90 Hooker Furniture, 141 resource In-the-money options, 262 Hoovers.com, 119 annual reports, 59–60 Intrinsic value, 101–103, Hormel Foods, 148 financial statements, see 115, 164, 262 Hostile takeovers, 87 specific types of financial Inventory Hot Topic, 145–146 statements and reports indications of, 43, 51, House money, 197 for fundamental analysis, 109, 112, 273 Hybrid brokerage firms, 16 105–107 management, 110 investor relations return on equity study, IBM, 46, 71 department, 41, 60 80–81 Icahn, Carl, 173 online research, 119–120 risk, 111–112 Income investing strategy press releases, 40, 61, 120 turnover, 144, 262 benefits of, 19, 136–137 10-K report, 60 Investment advisory fee, evaluation criteria, 10-Q report, 60–61 235 139–140 Web sites, 20–21, 40, Investment analysis, payout ratio, 137–138 119, 156 importance of, 129. Income-oriented Initial investment, 17, 177, See also Investment opportunities, 19, 99 231, 238–240 analysis form Income statement Initial public offerings Investment analysis form analysis guidelines, (IPOs) components of, 201–203 47–50, 63, 110–111 defined, 261 reasons for, 200 bottom line, 44, 62 evaluation of, 169–171 sample, 204–209 case study analysis, 47–50 going public process, Investment information provided by, 168–169 bankers/banking 43–44, 46–47, 62, 82 what to look for, 168 fundamental analysis importance of, 50, 273 “In play” stocks, 116 and, 101 layout of, 44–45 Insider activity strategy, valuation methods, 87 limitations of, 80 141–142, 149 Investment conferences, as reading guidelines, 44 Insider trading, illegal, 142 information resource, top line, 44, 62 Institutional investors, 148, 34–35 total revenue, 49 160 Investment love, 127–129 Income taxes, 45, 252 Insurance industry, 51 Investment opportunities, Indebtedness, 69. See also Insured investments, 222 evaluation of Debt Intel, 156, 176 bad news Index funds, 226–227, 240 Intellectual property, 46 announcements, Individual retirement Intelligent investing, 162–164 accounts (IRAs), types 127–129 buy and hold strategy, of, 21–22 Intelligent Investor, The 161–162 Industry analysis, 201 (Graham), 28, 103, buying below book Industry cycles, 156 241 strategy, 151–153 Industry group(s) Interest expenses, 45, 81 cyclical approach, information resources, Interest income, sample 156–157 107 income statement, 48 franchise value, 164–167 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 283

Index 283

growing companies, short selling, 142 Liquidity, 69, 231, 262 144–147 value strategy, 133 Liquidity ratios, 66 high-tech companies, Investment thesis Liquidity risk, 220 171–172 development of, Long position, 271–272 initial public offerings 186–189, 200 Long-term, generally (IPOs), 168–171 investment analysis form, assets, 56 low price-earnings ratios, 202, 206–207 capital gains, 197, 218 147–151 Investor(s), generally debt, 52, 66, 68, 85 profitable, identifying, conservative, 65, 241, 243 defined, 262–263 25–38 defined, 116 financing, 55 small-cap stocks, 157–160 institutional, 148, 160 investments, 215–216, takeover targets, 172–174 sentiment, 97 255 underfollowed stocks, Investor relations investors, 97 157–160 department, functions liabilities, 53 undervalued breakup of, 41, 60 Look-through earnings, value companies, Investor’s Business Daily 263 153–156 (IBD), 31, 37, 174 Low-risk opportunities, 99 undervalued stocks, Investors Alliance, 271 Lynch, Peter, 28–29, 31–33, 162–164 InVision Technologies, 141 250, 255 Investment options, selection of, 19–22 JAKKS Pacific, 32 Macroeconomic analysis, Investment performance, Janus, 20 201 calculation of JetBlue, 168, 170 Magazines, as information compound annual Jobs, Steve, 132 resources, 37 growth rate (CAGR), Johnson & Johnson, 158 Magellan Mutual Fund, 28, 245–246 J. P. Morgan, 34 31 total return, 244–245 Junk bonds, 224 Management, generally Investment process, outline changes, 196 of, 212 Keiretsu Forum, 37–38 compensation, 75–76 Investment research, 14. See Keynes, John Maynard, 73 decisions, 44, 55 also Research Kiplinger’s, 37 quality of, 107–108, 139, Investment strategies Kmart, 126 144, 163, 233–234 buy and hold approach, Kohlberg, Kravis and Margin(s), 46 130–131 Roberts (KKR), accounts, 263, 268–269 contrarian strategy, 173–174 calls, 263, 269 140–141 Kroger, 134 Market capitalization, 35, direct stock purchase 85, 104, 124–125, 160, plans (DSPs), 176, 239 Labor expenses, 110 163, 263 dividend reinvestment Lampert, Edward, 126 Market conditions, impact plans (DRIPs), Large-cap investments, 18 of, 139 177–182, 239–240 Large-cap stocks, 19, 125, Market downturns, 216, dollar cost averaging, 233 221 174–176 Leverage, 69, 233, 262 Market forecasting, 255 GARP (growth at a Leveraged buyouts (LBOs), Marketing expenses, 111 reasonable price) 87–88, 262 Market makers, 24–25 approach, 134–135 Liabilities, 51, 62, 81, 105. Market orders, 25, 270 growth strategy, 131–133 See also specific types of Market risk, 220–221 income strategy, 136–140 liabilities Market share, 124 insider activity strategy, Limited partner (LP), 262 Market timing, 98, 141–142 Limit orders, 270 123–124, 131, 161, market timing, 131 Liquid assets, 52–53, 223 233, 263 quality strategy, 135–136 Liquidation value, 55 Market value, 83, 85 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 284

284 Index

Mars, 26 buy and hold strategy, 235 Newspapers, as information Mattel, 130 buying shares, 234 resources, 37 Mazda, 174 diversification strategies, New York Stock Exchange MCA, 174 223–226 (NYSE), 24–26, 168, McCaw Cellular, 170 fees, 235 263–264 McDonald’s, 130, 176 fund families, 234 New York Times, 37 Medical Action Industries, managerial quality, Nifty Fifty, 71 158–160 233–234 Nike, 109, 145, 166, 271 Medium/mid-cap stocks, redeeming shares, Noncurrent assets, sale of, 125 234–235 55 Merck, 159 reporting requirements, Noncyclical opportunities, Mergers, 87 233 99 Merrill Lynch, 12, 34, 36, selection factors, Northern Pipe Line, 28 101 232–235 Northwest Airlines, 173–174 Micro-cap stocks, 125 services, 234 Notes payable, 51 Microsoft, 132 stock investments versus, Microsoft Money, 246 236–237 Offering prospectus, 96, 168 Millionaire Next Door Mylan Labs, 157 Oil industry, 107 strategies, 238–241 One-year holding period, Minimum investment Nabisco, 174 198 amounts, 17, 177, 231, Naked option, 263 Online brokers, 238 238–240 Nasdaq (National Online discount brokerage, Mistakes, dealing with, 196 Association of 12 Mitsubishi, 174 Securities Dealers Online research, 119–120 MobileMan, Inc., 168–169 Automated Online trading, 16 Momentum, 263 Quotations), 24–25, Opening an account Money, 20, 37 168, 263 automatic monthly MoneyCentral, 40, 119, Nasdaq 100 trust, 266 deposits, 17 156, 246 National Association of broker/brokerage firm Money management Securities Dealers selection, 12–15 compounding, 6–10 (NASD), 264 minimum investment, getting started, 17–25 National Investors 17, 177, 231 goal-setting, 10–11 Association Operating costs, 111 identifying profitable Corporation (NIAC), Operating earnings, 44, 80 investment “Own a Share of Operating expenses, 44–45 opportunities, 25–38 America” program, Operating losses, 55 information resources, 180 Operating margins, 79–80, 30–38 Natural resource 110, 135 importance of, 5–6 companies, 156 Operations, cash from, 56, needs assessment, 10–11 Neff, John, 250 62 opening an account, Negative comps, 114 Opportunities, 99 12–17 Net income buying, see Buying time value of money, 6 characteristics, 43–45, opportunities, Money market accounts, 55, 261, 273 selection factors 19, 140, 223 per share, 45 income-oriented, 19, 99 MoneyPaper, “Temper of sample income investment, see the Times” service, 180 statement, 48 Investment Money purchase plans, 22 Net margins, 66, 111 opportunities, Morgan Stanley, 12, 36, 169 Net profit, 261 evaluation of Mortgages, 51 Net profit margin, 67 profitable, identifying, Mutual funds New businesses, analysis see Profitable advantages of, 19–21, guidelines, 108 opportunities, 217, 231–232, 236–237 New products, 72 identification of ch10_IND_4502.qxd 9/8/05 10:53 AM Page 285

Index 285

Optimism, benefits of, 72 Pilgrim’s Pride, 149 Presidential Life, 152–153 Optional cash purchase Pixar, 32 Press releases, as plans (OCPs), 177 Portfolio information resource, Options, 22, 264 conservative, 65, 241, 243 40, 61, 120 call, 259, 267 construction of, see Price, Michael, 27 covered, 260 Portfolio construction Price fluctuations, sources early exercised, 260 defined, 264 of, 116–117 exercising, 64 diversification, see Price to assets ratio, investment, selections of, Portfolio moderate, 243–244 19–22 diversification Price-to-book stocks, 152 in-the-money, 262 manager, see Portfolio Price to earnings growth out-of-the-money, 264 manager(s) ratio (PEG), 134, 145 put, 264, 265 monitoring system, 246 Price to earnings (PE) ratio stock, 60, 64–65 overweighted, 193–194 calculation of, 70 underwater call, 267 rebalanced, 217 forecasting applications, writer, 267 Portfolio construction 72–73 Order placement, types of, alternative investments, GARP strategy, 134 269–271 237–238 growth strategy, 132 OTC Bulletin Board, 24 asset allocation, 213–217 high, 147, 171 Outback Steakhouse, 133 bond investments, impact of, case study, Out of favor stocks, 133 228–231 73–77 Out-of-the-money options, case study, 249–255 indications of, 18, 49, 263 diversification, 223, 69–72, 103, 125 Overhead costs, 110 226–228 initial public offerings, Over the counter (OTC) model portfolios, 168 market, 24–25, 264 241–249 low, 147–151, 157 Overvalued stock, 117 mutual funds, 231–237 moderate, 243 Overweighted portfolios, risk management, normal behavior of, 193–194 217–225 71–72 Owners’ equity, 68, 83–84 sample mixes for different price increases, 72 age groups, 242 purpose of, 70–71 Pacific Sunwear, 145 Portfolio diversification as red flag, 71, 75 PaineWebber, 101 financial inventory, Price-to-free cash flow ratio Passively managed sample, 247–248 (P/FCF), 89 accounts, 264 investment performance, Price to sales ratios (PSRs) Patents, 174 244–246 calculation of, 85–86, Patience, importance of, reviews, 249 171 129–130 Portfolio manager(s) indications of, 85–87, Payables turnover, 66 functions of, 1 137, 171–172 Paychex, 92–94 fundamental analysis, do- low, 172 Payout ratio, 137–138 it-yourself guidelines, uses of, 86–87 Penny stocks, 90, 259 105–113 Prime lending rate, 90 PepsiCo, 166, 240, 246 income statement Principal, defined, 264–265 Perelman, Ronald, 173 analysis, 63 Principal risk, 220 Performance, importance information needed by, Private companies of, 232–233 42 defined, 265 Per-share growth, 126–127 information resources, 41 information resources, 42 Pessimism, impact of, 72 unemotional Private equity, 18–19, 22, PETCO, 134–135 investments, 127 26, 225, 258 PETsMart, 134 Powerade, 165–166 Private equity firms, 41–42 Pharmaceuticals, 156 Preferred stocks, 138 Privately held companies, Philanthropy, 254 Premium, 264 22. See also Private Pickens, T. Boone, 173 Prepaid expenses, 51 companies ch10_IND_4502.qxd 9/8/05 10:53 AM Page 286

286 Index

Private placements, 266 Real estate investment importance of, 213–215 PRNewswire.com, 120 trusts (REITs), 137, risk, defined, 217 Product analysis, 170 215–216 risk aversion, 218 Product development, 85 Rebalanced portfolios, 217 risk/reward analysis, Profitability, 42 Receivables turnover, 66 221–223 Profitability ratios, 66–67, 97 Recession, 148–149 tax consequences, Profitable opportunities, Recommendations, 29 218–219 identification of Red flags, 69, 71, 75 types of risks, 219–220 familiar companies, Red herring, 168 Risk minimization 26–27 Reg D, 266 strategies, 97 information resources, Rent, 51 Risk/reward analysis, 29–38 Research 221–223 public versus private information-gathering, Risk/reward ratio, 198 companies, 26 39–40 Risk tolerance, 99, 132, Profit and loss statement, 46 online, 119–120 211, 215 Profit margin, 67, 80, 172 sources of, 36–38 determination of, 17–18 Profit sharing plans, 22 Research analysts, functions Rollover IRAs, 22 Property, plant, and of, 13 Roth IRA, 21 equipment (PP&E) Retail industry Rumors, trading on, 1, 72 expenses, 51, 53, 91 characteristics of, 107 Russ Berrie and Co., 152 Prospectus, 234, 265. See fundamental analysis also Offering case study, 108–113 Sale of stock, 68 prospectus observation of, 109 Sales, general, and Proxy, 265 industry group selection, administrative Prudential Financial, 12 107 (SG&A) costs, 110 Publicly traded companies same-stores sales, Sales revenue, 43–45 annual reports, 59 113–115 Sanderson Farms, 149–150 financial statement Retained earnings, 68 Savings accounts, 54, 222, requirements, 40, 62 Retirement plans, 22 224, 255 initial public offerings Return on equity (ROE) Savings and loan crisis, 162 (IPOs), 168–171 calculation of, 78–79 Scheiber, Anne, 249–255 Pulte Homes, 128 case study, 79–82 Schering-Plough, 251 Putnam, 20 defined, 266 Schultz, Howard, 132, Put options, 264, 265 distributions and, 77 166–167 high, 78, 143, 163 Schwab.com, 12 QQQ, 18 indications of, 29, 66, 77, Sears, 126 QQQQ, 265–266 85, 93, 135, 138 Secondary equity offerings, QRP/Keogh plans, 22 shareholder equity, 77–78 64 Quality investing strategy, Return on invested capital Secondary markets, 231 135–136 (ROIC) Securities and Exchange Quantitative analysis, 105 case study, 82–85 Commission (SEC) Quarterly accounting high, 143 documentation period, 43 indications of, 82 requirements, 265 Quarterly reports, 41–42, Revenue(s), 43–45, 62, 105, earnings reports, 169 56, 61, 96 273 filing requirements, 40, Quick assets, 151 Rising comps, 114 50, 56, 60, 119, 265 Quicken (Intuit), 246 Risk aversion, 218 functions of, 50, 266 Quick ratio, 66, 69 Risk management Reg D, 266 diversification strategies, 13D filings, 172–173 Rate of return, 63 222–227 Web site, 60 Real estate investments, dollar cost averaging, 175 Security Analysis (Graham/ 173–174, 223, 225 financial risks, 218–219 Dodd), 27, 101, 103 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 287

Index 287

Selection bias, 36 Short position, 272–273 classification of, 23–24 Self-directed IRAs, 21 Short sales/short selling, commodity nature of, Sell criteria, 200 22, 31, 142 115, 117–118 Sell high, buy low strategy, Short-term, generally common, 22–23, 116, 272–273 bias, 214 137, 222 Selling, general, and admini- defined, 266–267 convertible preferred, strative (SG&A) debt, 52, 66, 273 64–65 expenses, 47 investments, 54 cyclical, 156–157, 260 Selling decisions investors, 97 doubled, 197 based on changes, Six Flags, 33 giant cap, 125 194–195 Size of enterprise, 243 growth, 103 based on fundamentals, Small-cap stocks high-growth, 172 192–193 characteristics of, 19, 24, “in play,” 116 fulfilled premises, 198 35, 125 Internet, 27, 90 impact of, 185–186 defined, 157 investments, see Stock overweighted portfolios, evaluation criteria, 160 investments 193–194 Smithfield Foods, 149 large-cap, 19, 125, 233 price targets, 191–192 Solvency ratios, 66 medium/mid-cap, 125 reasons for, generally, Southwest Airlines, 44 micro-cap, 125 196–198 Specialists, 24–25 mutual funds, 20. See also simple test for, 192 Specific time order, 270 Mutual funds thesis-based, 189–191 Speculation, 72–73, options, 60, 64–65 Selling strategy 116–117, 173 out of favor, 133 improved judgment, Speculators, defined, 269 penny, 90, 259 199–200 SPiDERs, 18, 153, 267 pickings strategies, 96 investment analysis form, Spread, 25 preferred, 138 200–208 Standard & Poor’s (S&P) price-to-book, 152 investment transaction Depository Receipts, 267 prices, see Stock prices, information template, 500 Index (S&P 500), 30, influential factors 210 84, 138, 148, 240 purchase provisions, risk tolerance, 211 Large-Cap, Mid-Cap, and 176 transaction synopsis, 210 Small-Cap Guides, 29 repurchase, 90, 126, 163 uncertainty in, 198–199 Small Cap index, 159 selection guidelines, 20, unemotional, 198–199 Starbucks, 49, 113–114, 130. See also Selloffs, 147 132, 147, 166–168 Investment strategies Sell ratings, 35–36 Start-up companies, 169 small-cap, see Small-cap Sell side, defined, 266 Statement of cash flows, 53 stocks Sell-side analysts Statement of financial splits, 61 defined, 266 condition, see Balance takeover, evaluation recommendations from, sheet checklist, 155 35–36, 101, 160 Statement of operations, trading process, 24–25 Semiconductor industry, 46, 82 types of, 22–23 107–108, 156 Steinberg, Saul, 173 underfollowed, 157–160 Sensitivity analysis, 100 Steve Madden, 141 undervalued, see SEP-IRAs, 22 Stock(s) Undervalued stocks Service analysis, 170 aggressive, 224 volatile, 197 Shaklee, 174 asset allocation Stock exchanges, 24 Share, defined, 266 strategies, 223 Stockholders’ equity, see sharebuilder.com, 176 blue chip, 157,176, 224. Shareholder equity Shareholder equity, 51–53, See also specific companies Stock investments 68–69, 77–78, 91, 143, characteristics of, advantages of, 236 273 generally, 19–20 disadvantages of, 236 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 288

288 Index

Stock investments (cont.) Tax rates, 197 Uncertainty, 198–199 purchase, terminology Taxes payable, 51 Underfollowed stock for, 269–271 TD Waterhouse, 16 case study of, 158–160 speculation versus, Technical analysis, 95–97, evaluation criteria, 160 115–117 131 Underlying stock, 267 trading process, 24–25 Technology companies, 35 Underperforming Stock market Tele-Communications, Inc., securities, 124 auction metaphor, 88 Undervalued breakup 117–118 Telecommunications companies, crashes, impact of, 28, industry, 107 identification of, 222, 253, 269 Television programs, as 153–156 volatility, 115–116, 138, information resources, Undervalued securities, 219, 268 37 115, 117, 124, 133 Stock prices, influential 10-K report, 40–42, 53, Undervalued stocks factors 60–61, 119, 257 buy signals, 162–164 company changes, 115, 10-Q report, 40–41, 53, identification of, 149 118 60–61, 119, 257 Underwater call options, industry group, 99 Terminal value, 52 267 temporary company Teva, 157 Underweighted asset problems, 115, Theoretical value, 55 classes, 217 118–119 Ticker symbol, 267 Underwriters/underwriting, Stock purchase plans Timberland, 144–146 101, 267 (SPPs), 177 Time horizon, 177, United Airlines, 162 Stock-specific risk, 220 217–218, 231 Upticks, 267 Stop-limit orders, 270 Times interest earned ratio, USA Detergents, 79–82 Stop-loss orders, 211 68 Utilities, 137–138 Stop orders, 270–271 Time value of money, 6, 267 Utility bills, 51 Strike price, 264, 267 Time Warner, 88 Strong comps, 110 DC Comics, 166 Valuation Stryker Corporation, 30–31 Toll Brothers, 128 cash flow-based, 87–94 Success factors, 254 Top-performing funds, continuing, 93–94 Supply and demand, 105 20–21 fundamental analysis Synovus Financial, 137 Total asset turnover, 66 limitations, 99–101 Systematic risk, 221 Total return, 244–245 influential factors, 72 Total revenue/sales, 49 revenue, 85–87 Takeover stocks, evaluation Trademarks, 174 significance of, 182, 197, checklist, 155 Traditional IRA, 21 202 Takeover targets, Trailing P/E, 137 types of, 135 identification of, Tranches, 267 Value, generally 172–174 Transaction costs, 15 creation, 127 Tangible shareholder Transfer agent-sponsored -driven opportunities, 99 value, 53 DRPs, 178–179 investing, see Value Target prices, 271 Treasury bills, 224 investing; Value Taxation Treasury bonds, 230 investors, case alternative minimum tax Trend(s) illustrations (AMT), 258 identification of, 201 plays, 133 capital gains, 15 long-term, 98 spotting, 98 deferred, 84, 131 T. Rowe Price, 20 underfollowed stock impact of, generally, 218 True value, 55 evaluation, 159 income taxes, 45, 252 Turnarounds, 141, 158 Value investing, see Buffett, Tax brackets, 19, 197, 218 12b-1 fees, 235 Warren; Graham, Tax-exempt bonds, 253 Tyson Foods, 149 Benjamin ch10_IND_4502.qxd 9/8/05 10:53 AM Page 289

Index 289

characteristics of, 98, 133 Wall Street Wizards, 175 Wrigley, 130 sell signals, 195 Wal-Mart, 43, 47, 113–114, Writer, options, 268 Value investors, case 134, 163 Wyeth Labs, 159 illustrations, 27–28 Walt Disney Company, 33, Value Line Investment 104–105, 174 Yahoo!, as information Survey, 30–31 Warrants, 64–65 resource Venture capital, 258 Washington Post Company, Finance, 20–21, 40–41, firms, 41 The, 135 167 Venture capitalists, 42, Washington Post, The, 27 Web site, generally, 97, 132–133 Web sites, as information 119, 156, 246 Volatile stocks, 197 resources, 20–21, 40, Yellow flags, 75 Volatility, 115–116, 138, 119, 156 Yield, 139–140 219, 268 Week order, 271 Wells Fargo, 162 Zero plus tick, 268 Wages payable, 51 Wendy’s, 130 Wall Street Journal, The, 37, Wolverine World Wide, 145 72, 156, 174 Working capital, 69, 81 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 290