Eco358 Trading Project Information
The goal is to place you in the position of stock managers who invest in companies on the basis of stock evaluation models such as the dividend growth model. Students should form groups consisting of at least five people, though you may form larger groups. Each group will manage an imaginary amount of capital which will be invested in stocks. The amount of capital to be invested is one million Canadian dollars. You may invest in Canadian or foreign companies, though consider investing in both.
A number of sites for obtaining free stock quotes are found below. You can find corporate reports, dividend histories, returns on major stock market indices, company betas as well as risk free interest rates by doing a Google search. These are all the variables you need for the stock evaluation models. If you invest in foreign companies you will need to convert Canadian dollars to a foreign currency to make your purchase. An internet site for exchange rate quotes as well as information on converting currencies is found below.
Stock prices respond to expected profits, which is reasonably reflected by the dividend growth model. However, anything which happens that may raise a company¡¯s profits causes its share price to rise immediately. It might be potential profit increases are reflected in expected dividend increases as in the model, or that investors impute a value to retained earnings. Any rise in profits gets built into the share price, perhaps not with the exactness of the mode, but it¡¯s there. For example, if oil prices rise the oil companies will have greater profits so their share prices rise. Likewise if something happens that may lower a company¡¯s profits its share price falls immediately.
Events that affect earnings basically cause a reconsideration of expected dividends via the model and resulting changes in the stock price. Microeco- nomic events like product development and changes in demand or costs affect profits and therefore stock prices. Macroeconomic events affecting GDP can affect stock prices because profits are positively correlated with the business cycle. Your task is to link current economic events with finance models when making investment decisions. Connect current events with potential future dividends, price the stock via the Dividend Growth Model and buy the stock. Of course you can use past dividends to predict future dividends but your dividend forecasts should reflect current circumstances as well.
A report must be submitted at the end of the term describing the overall strategy and reasons for key trades. It should include statements of trading profits/losses in Canadian dollars. The package should be approximately 10-
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15 pages in length. It is possible to obtain capital gains by trading stocks at high frequency. The goal is keep informed of price movements in financial markets and current events such as a possible renewal of US-China trade war to ensure the best possible trades. To make the project manageable write up the reasons for trades and the results as they occur instead of waiting to the end of the course to compile results.
Explain why unexpected events cause investors to reassess stock values. This is a key part of the project. The models give investors a prediction for the stock price but release of new information will cause changes in the price during the term. Explaining these changes is important.
Every student in the group will receive the same grade. The grade will be determined by the quality of analysis rather than overall profitability. The point is to apply finance models taught in the course to motivate the purchase of companies. Using cur- rent events and economic analysis predict stock price movements. Micro and macroeconomics affect asset prices so the objective of the project is to use economics together with finance theory to construct investment portfolios. When a trade generates a loss the goal is to explain why it happened using the models. For instance, suppose the release of economic data causes depreciation of a stock you are holding. Explain why the data caused the price fall and why this did not conform to previously held expectations. High quality analysis will generate a high grade. A sample of the kind of analysis required is found on Quercus in the sample trade file.
Stock and Foreign Exchange Quotes: There are several websites useful for accessing financial quotes free of charge.
1. Exchange Rate quotes are accessed via The Bank of Canada (bankof- canada.ca/rates/exchange/). Select the Daily Currency Converter. Select the foreign currency in the box marked ¡±From¡±. Select the Canadian dollar in the box marked ¡±To¡± and press the box marked ¡±Convert¡± to obtain the Canadian dollar price of the foreign currency.
2. Stock quotes:
a. Nasdaq quotes (www.nasdaq.com/): Select ¡±quotes¡± and key in the stock symbol or company name in the seach box to access a quote.
b. finance.yahoo.com. Type the stock symbol or company name into the ¡±search finance¡± box to access a quote. This can be used for NYSE stocks.
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c. Toronto Stocks (Get Quotes-TMXmoney): There is a box where you can enter the company name or stock symbol to access a quote.
d. London stock quotes: londonstockexchange.com lists companies quoted on the London Stock Exchange alphabetically and provides price quotes free of charge.
Possible Companies and Information Sources
1. Major companies are posting their corporate reports on their websites. You can use these as a source for earnings data.
2. You might also look at Canadian banks and foreign banks or brokerage houses with large international operations. Examples are JP Morgan, Chase, CitiBank, Deucshbank, Royal Bank, TD, CIBC.
3. Mining, railway and oil companies are involved in production in one way or another. You might consider Barrick Gold, Exxon, BP, Royal Dutch Shell, CP Rail, Amtrack.
4. Luxury goods, fashion companies and cosmetic companies have great interests in trade. You might look at Moet-Hennessy, Chanel or major dis- tillers.
5. Agricultural or consumer products firms like Coca-Cola, PepsiCo, Monsanto, Procter and Gamble, Merck, MacDonald¡¯s operate in interna- tional markets. MacDonald¡¯s produces locally in many countries; in effect this US firm has exported its product by producing it locally worldwide.
6. You should rely on sources other than the internet for current events and analysis of these events. Try The Wall Street Journal, The Economist, The Financial Times or The Report on Business in The Globe and Mail. The reason is that there¡¯s more analysis in these periodicals than internet sites. But the internet is good for stats on corporate earnings etc. The U of T library gets many periodicals electronically.
General Points
1. Provided you can obtain information and price quotes for companies traded on Continental European and Asian stock exchanges you are welcome to include those in the project. Using North American or UK companies is fine. Report profits and losses Canadian dollars. If you buy a foreign com- pany you need to buy the currency in which it is priced first. The exchange rate is the Canadian dollar (CAD) price of 1 unit of foreign currency. For
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example, suppose you need 100,000 US dollars (USD) to buy some shares on the NYSE. If the exchange rate is 1.3 CAD per USD you will spend 130,000 CAD to get the 100,000 USD. Consider reporting profits in CAD. Multiply your total portfolio value in foreign currency by the exchange rate after clos- ing out your position. So if you sell your stocks for 105,000 USD and the exchange rate is 1.32 CAD you receive 105,000¡Á 1.32 CAD as a total return.
2. Cite all sources of corporate earnings. inflation rates, GDP statistics etc. Sources for lesser known facts about corporate strategies should be cited as well. The sample trade shows you one method of citation though any method is fine. Also you can use the style in the sample trade for the bibliography. Note when presenting stats in the body of the paper you must cite the source there. Essentially you note the source for the stats which appears in the bibliography directly in the body.
3. Be creative in your choice of companies.
4. Do not direct most of your presentation to motivating trades. Instead, spend time discussing why the trades succeeded or failed. When analyzing these reasons pay attention to current events linked to trade. Using macroe- conomic as well as microeconomic factors is fine but keep these as an input into the finance models you use in the portfolio analysis.
5. The Dividend Growth Model gives analysts a stock price for the present time based on annual growth of dividends. Comparing the price generated by the model to the observed price gives a sense of whether the stock is over or undervalued at present. You can use this model as a base and combine it with economics to what might happen to the stock over a year. This is especially true if you adjust dividend growth for current events. In any case prices may start to change significantly while the course is running. It¡¯s invariably the case stock prices move daily because of changes in investor sentiment as new information is released. Using the model to make a decision if a stock is a good buy is important. The second part of the assignment is explaining why changing circumstances affect prices. This is a key part of the assignment where combining economics and finance will be essential. The posted example trade will help you appreciate how the models can be applied.
6 Certain companies have been analyzed too often in eco365. Do not buy the following companies: Toyota, Huawei, Tesla, Amazon
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