RSM330H1 Lecture Notes - Lecture 2: Business Cycle, Peg Ratio, Contrarian Investing
Document Summary
Sensitivity of a firm"s earnings to business cycle determined by: a. Do sales come from necessity or discretionary spending b. Degree of operating leverage = % change in profits% change in sales = 1 + fixed costs/profits. Sector rotation: shift portfolio more heavily into sector expected to outperform based on assessment of business cycle. Passive management: does not attempt to outperform market, can execute passive management strategy through, replicate index, buy indexed mutual fund or index-tracking etf, value/growth. Growth investors end up owning high p/e stocks because growth stocks have high p/e, Growth tends to outperform coming out of a recession, but value stocks outperform but do not intentionally screen for high p/e at outset. Active management: top down, bottom up historically, large cap/small cap, garp, should not exceed 1. Small caps tend to outperform except during recessions. Look for high and increasing roe, positive cash flow, positive earnings momentum. Must assess earnings quality and ability to support dividend.
