VCE Summer Internship Program 2023

Smart Task Submission Format

Intern’s Details
Name Mohammad Hamza

Email-ID mohammadhamza563@gmail.com

Smart Task No. 1

Project Topic Equity Research (Stock Market)

Smart Task (Solution)

Task Q1: What is fundamental analysis? Why is fundamental analysis relevant for investing?
How to use PE/PB charts to identify fundamental opportunities?

Task Q1 Solution:

(i). What is fundamental analysis?

Fundamental Analysis is a process of analysing a security in order to determine its fair value (also
known as intrinsic value), by evaluating relevant economic, financial, non-financial and other
quantitative and qualitative factors.

In other words, a fundamental analyst evaluates the health and performance of any company by
observing the crucial numbers and major economic indicators. The end goal is to determine a
number that an investor can compare with a security's current price to see whether the security is
undervalued or overvalued by other investors.

Analysts typically study:

 The overall state of the economy

 The strength of the specific industry
 The financial performance of the company issuing the stock

(ii). Why is fundamental analysis relevant for investing?

Fundamental analysis is relevant for investing because it helps investors make decisions based on
the underlying value of an asset. The investor analyse the factors such as financial statements,

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industry trends, competitive advantages, and management quality, investors can assess the true
worth of a company or asset. This analysis provides a long-term perspective and helps investors
identify undervalued or overvalued opportunities. If the fair market value is higher than the market
price, the stock is deemed undervalued, and a buy recommendation is given. If the fair market value
is lower than the market price, the stock is deemed overvalued, and the recommendation might be
not to buy or to sell if the stock is held.

(iii). How to use PE/PB charts to identify fundamental opportunities?

Price-to-earnings (PE) ratio is a measure of the valuation of a company’s stock. It has price in the
numerator and earnings in the denominator. The higher the PE ratio, the more expensive the stock
or index is and vice-versa. You can figure out how expensive a stock is by comparing its PE with
other similar companies or its own historical PE. To use PE charts effectively:

 Look for companies with lower PE ratios compared to their industry peers.
 Compare the current PE ratio with the company's historical PE ratio to identify any significant
deviations.
 Consider the company's growth prospects and industry trends while interpreting the PE ratio.

2. The price-to-book (PB) ratio compares the price of the stock with its book (accounting value). The
higher the PB ratio, more expensive is the stock and vice-versa. It gives you an idea of the assets
backing the price of the stock in question. This measure is more commonly used for banks but does
not work very well with asset-light companies such as those in the information technology sector. To
use PB charts effectively:
3.
 Look for companies with lower PB ratios compared to their industry peers.
 Consider the company's growth potential, profitability, and asset quality while interpreting the
PB ratio.
 Compare the current PB ratio with the company's historical PB ratio to identify any significant
deviations.

 Price to Book Value = Current Market Price / Book Value per Share

 Book Value Formula = (Total Assets – Liabilities – Intangible Assets) / Number of

outstanding shares

500 Words (Max.)

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Task Q2: How to do Financial Statement Analysis on stocks? Elaborate key points on the
following:

Task Q2 Solution :

(i). How to do Financial Statement Analysis on stocks?

Financial statement analysis is the process of analyzing a company’s financial statements for
decision-making purposes. External stakeholders use it to understand the overall health of an
organization and to evaluate financial performance and business value. Internal constituents use it
as a monitoring tool for managing the finances.

(ii). Elaborate key points on the following:

(a). Annual Report key points:

An annual report is a document that public corporations must provide annually to shareholders that
describes their operations and financial conditions. The front part of the report often contains an
impressive combination of graphics, photos, and an accompanying narrative, all of which chronicle
the company's activities over the past year and may also make forecasts about the future of the
company. The back part of the report contains detailed financial and operational information.

(b). Balance Sheet Analysis:

The term balance sheet refers to a financial statement of the company which shows assets, liabilities,
and shareholder equity at a specific point in time. Balance sheets provide the basis for computing
rates of return for investors and evaluating a company's capital structure. Short-term assets such as
cash and accounts receivable can tell a lot about a company’s operational efficiency; liabilities include
the company’s expense arrangements and the debt capital it is paying off; and shareholder equity
includes details on equity capital investments and retained earnings from periodic net income.
The balance sheet is one of the three core financial statements that are used to evaluate a business.

(c). Cash Flow Statement Analysis

The cash flow statement is the statement which show the cash inflow and cash outflow of the cash
and cash equivalents from the investing, operating and financing activities. This financial statement
complements the balance sheet and the income statement. The two different accounting methods,
accrual accounting and cash accounting, determine how a cash flow statement is presented.

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(d). Profit & Loss statement Analysis

The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs,
and expenses incurred during a specified period.

The P&L statement is one of three financial statements that every public company issues quarterly
and annually, along with the balance sheet and the cash flow statement.

500 Words (Max.)

Task Q3 : Understanding following approach and suggest some stocks which follows the approach,
a) Benjamin Graham and Buffett approach
b) Peter Lynch Approach

Task Q3 Solution: (a) Benjamin Graham and Buffett approach:

The Benjamin Method refers to the original value investing philosophy created by Benjamin
Graham in the 1930s.Graham focused on long-term investment in companies based on
fundamental analysis of financial ratios and rejected short-term speculation. Legendary value
investor Warren Buffett has credited the Benjamin Method with his success.

Example Stocks:
Apple Inc. (AAPL): Apple has a strong brand, a loyal customer base, and a track record of
innovation. It has consistently delivered strong financial performance and has a low P/E ratio
compared to its industry peers.

Johnson & Johnson (JNJ): Johnson & Johnson is a diversified healthcare company with a long
history of success. It has a strong balance sheet, consistent earnings growth, and a solid dividend
track record.

The Coca-Cola Company (KO): Coca-Cola is a global beverage company with a strong brand and
a dominant market position. It has a stable business model, generates strong cash flow, and pays a
reliable dividend.

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(b) Peter Lynch Approach:

Peter Lynch is one of the most successful and well-known investors of all time. Lynch is the
legendary former manager of the Magellan Fund at the major investment brokerage Fidelity.
Lynch’s Love for investing begin in his early years working as a caddy. His approach is based on
the idea that individual investors can achieve superior returns by investing in companies they
understand and by conducting thorough research.

Lynch suggests that investors should focus on industries and companies they are familiar with. By
investing in companies they understand, investors can make better-informed decisions.

Example Stocks:
1. Amazon.com, Inc. (AMZN): Amazon is a global e-commerce and technology company with a
strong track record of growth. It has disrupted multiple industries and continues to innovate. The
company has a reasonable valuation considering its growth prospects.
2.
3. Alphabet Inc. (GOOGL): Alphabet is the parent company of Google and other subsidiaries. It
dominates the online search market and has a strong position in digital advertising. The company
has a solid growth outlook and a reasonable valuation.
4.
5. Nike, Inc. (NKE): Nike is a leading global sports apparel and footwear company. It has a strong
brand, a loyal customer base, and a history of innovation. The company has a positive growth
outlook and a reasonable valuation.

500 Words (Max.)

Task Q4 : Understand following types of stocks and suggest some stocks of each type;

Task Q4 Solution :

(a) Multibagger Stocks: Multibagger stocks are equity shares of a company that generate returns
of more than 100% and multiple times. These stocks were first invented by Peter Lynch, published
in his book ‘One Up on Wall Street’.

(b) Magic Formula Stocks: Magic formula investing refers to rule based investing strategy which
teaches people to selecting stocks based on their high earnings yield and high return on capital.

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Some examples of magic formula stocks include Apple (AAPL), Microsoft (MSFT), and Johnson &
Johnson (JNJ).

(c) Wide Moat Stocks: Wide Moat Stocks are those stocks that have sustainable competitive
advantage over there competitors. These companies have their strong barriers for their competitors
to entry in the industry. Examples of wide moat stocks include Coca-Cola (KO), Visa (V), and
Procter & Gamble (PG).

(d) Defensive Stocks: Defensive stocks are those which provide constant returns in the form of
dividends regardless of the fluctuations in the stock market. Because of the constant requirement of
these products, defensive shares tend to remain stable during various phases of business cycles.

(e) Value Stocks: Value stocks are those shares that are trading at a discount. These stocks are
often associated with companies that have low price-to-earnings (P/E) ratios or low price-to-book
(P/B) ratios.

(f) Momentum Stocks: Momentum Stocks are the stocks which constantly grows upwards trend in
their price movement. These stocks are often associated with companies that are experiencing
strong growth or positive market sentiment.

(g) Low PE and High EPS stocks: Low PE (price-to-earnings) and high EPS (earnings per share)
stocks are stocks that have a low valuation relative to their earnings. These stocks are often
considered undervalued and may present investment opportunities.

(f) Bear Cartel Stocks: Bear Cartel Stocks are those who identify problematic companies and
short-sell them. These stocks are often associated with industries that are highly sensitive to
economic conditions, such as travel and leisure or luxury goods.

(g) Bull Cartel Stocks: Bull Cartel Stocks are those Stocks which are expected to perform well
during the growth of economy. Examples of bull cartel stocks include Apple (AAPL), Amazon
(AMZN), and Google (GOOGL).

500 Words (Max.)

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Task Q5 : Understand and Explain following discounting methodology:

Task Q5 Solution :

(a) CAGR: Compound annual growth rate, or CAGR, is the mean annual growth rate of an
investment over a specified period of time longer than one year. It represents one of the most
accurate ways to calculate and determine returns for individual assets, investment portfolios, and
anything that can rise or fall in value over time.

(b) CAPM: Capital Asset Pricing Model shows the relationship between the risk and the expected
return of investing in the securities. The model is based on the relationship between an asset's
beta, the risk-free rate (typically the Treasury bill rate), and the equity risk premium.

Formula of CAPM:

ERi=Rf+βi(ERm−Rf)

where:
ERi=expected return of investment
Rf=risk-free rate
βi=beta of the investment
(ERm−Rf)=market risk premium

(c) CRP: Country Risk Premium (CRP) is the additional return or premium demanded by investors
to compensate them for the higher risk associated with investing in a foreign country than in the
domestic U.S. market.

(d) WACC: The weighted average cost of capital is the rate that a company is expected to pay on
average to all its security holders to finance its assets. The WACC is commonly referred to as the
firm's cost of capital.

(e) Buffett & Munger Approach for Discounting: Warren Buffett and Charlie Munger are one of
the greatest investing and business pairings of all time. Buffett developed his value-investing
philosophy under the aegis of Benjamin Graham. On the other hand, Munger (a Harvard Law
graduate) decided to switch to this profession after meeting Buffett. Although both looked at
investing from the lens of discount to intrinsic value, their philosophies differed significantly. While
Buffett preferred to buy cheap businesses irrespective of their quality.

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