Question

Ques: You are an investment analyst of a fundamental value investment. In view of the
prevailing disruptions caused by COVID-19, you are to present to the investment
committee on your quick overview of a Top-down analysis of the global economy and
then follow up with a more in depth Bottom-Up analysis on an Australian company (of
a Market Capitalisation not smaller than A$100 million) which you believe the
investment fund should over-weight in the near term (ie, in the next 6 months).

Note: could you please tell me how to approach this question this is my assignment I will be doing the second part that is The Bottom up analysis part could you please help me how should I approach it a proper outlay for this.

Answer 1

The top-down approach is when you first analyze the company and then the industry and then the company. The bottom up approach is where you start with the analysis of any individual company.

Since you are going to do bottom up approach, I would suggest you that you look for a company which is large cap and sustainable dividend paying company which has performed well but because of the spread of the epidemic the share price has fallen. What happens is no matter how strong the company fundamentals are if the overall market is not doing well then, the company will also not do well. Look for such types of companies and then look at their previous balance sheet for the last five years at least. Look for the consistency is profit margin, return on equity and then look for the dividend growth as to how much the growth has been and what is the reasonable growth rate expectation. This expectation you can find from the Management discussion and analysis (MD&A) of the financial report. You can also look at the technical indicators like 52 weeks low, support and resistance level. The reason why I advise you to choose large cap and sustainable dividend paying company is because normally these companies’ ability to bounce back from these events is higher than small cap companies. Look for stocks which have fallen in value significantly but still have strong fundamentals.

After the company analysis is done, you can do a broad research as to how that industry is expected to do. You can find information about that from that industry association websites. Normally every industry has certain group or association then you can go for the overall economy of the country.