Question

1. What is the advantage of using a composite of indicators (such as the 10 leading indicators) over simply using an individual indicator?


2. Do leading indicators tend to give longer warnings before peaks or before troughs? What is the implication for the investor?


3. Comment on whether each of the following three industries is sensitive to the business cycle. If it is sensitive, does it do better in a boom period or a recession?
a. Automobiles
b. Pharmaceuticals
c. Housing


4. List the five stages of the industry life cycle. How does the pattern of cash dividend payments change over the cycle? (A general statement is all that is required.)


5. Why might a firm begin paying stock dividends in the growth stage?


6. If the investor does not correctly identify the crossover point between growth and expansion, what might happen to the price of the stock?


7. Suggest two companies that have continued to grow in nongrowth industries, and explain why.


8. What are the five competitive forces that affect prices and profitability in an industry?

9. As a follow-up to question 8, give two examples of powerful suppliers.


10. Who has the greater advantage for research and development in the pharmaceutical industry, large drug companies or smaller ones?


11. What is meant by the concept of rotational investing?


12. Explain why low interest rates make housing stocks and other related stocks attractive.


13. If an investor fears higher inflation, what possible industries might he or she choose for investment?

Answer 1

1. The composite of indicators help in giving a holistic picture about the product of scenario while an individual indicator can just portray a single dimension. The future trends can be easily depicted with the help of a composite of indicators.
2. The warning signals are usually longer before a peak rather than a trough. Investor gets better time to prepare for the peak. While for trough, the warning signal is before a very shorter period. Hence the investor can’t do much preparation for a trough.
3. Automobile sector gets deeply affected in a recession period. There are usually greater sales in this industry in the end of the year. However in recession, as automobile is considered as a luxury, there is very less or no demand of the products. Usually in recession, the consumers tend to curtail on luxury needs

Pharmaceuticals sell medicines, which can be critical for anyone and at any instant. So, any recession or boom period does not affect the demand of pharmaceuticals.

Housing is again a luxury as it is critically dependent on the economic stability of the consumers. Hence the demand for housing gets affected due to variations in the market.

4.The various stages of industry lifecycle and the pattern of cash dividend payments in the respective stage are:

1. Development stage: No cash dividend
2. Growth stage: Stock dividends start getting accumulated
3. Expansion stage: The business gets payments in form of stock dividends and splits
4. Maturity stage: High payout ratio pertains to business
5. Decline stage: the business has high dividend payout ratio

5.In the growth stage, the business starts accumulating stock dividends. The dividends are paid out by business to encourage investments in the company.

6.The crossover point between growth and expansion phase is critical for business. It serves as an indication to the investors that growth rate for the company has slowed down and so, they will tend to pay lower price-earning ratio for the shares and thus the price of products will fall.

7.Two companies that have continued to grow in non-growth industries are Nike and McDonalds. For both the businesses, the domestic industry had exhausted, so they turned to international markets and have been fairing well in the global market.

8.The five competitive forces that affect prices and profitability in an industry are:

1. Competitive rivalry
2. Bargaining power of customers
3. Bargaining power of suppliers
4. Threat of substitutes
5. Threat of new entrants

9.Bargaining power of suppliers is high when it is able to have significant impact on the business of the product. Two of the powerful suppliers are:

1. DeBeers in Diamond industry
2. Suppliers in any kind of fast food industry

10.Large drug companies have a sustained advantage over smaller ones because they have sufficient capital to invest in R&D and implement the changes/modifications suggested by R&D accordingly in their business.

11.Rotational investing is the concept employed as an investment strategy. It involves the movement of money and capital from one sector to another with the objective of beating the market.

12.In housing sector, the capital of expenditure involved is quite huge. Higher interest rate on such stocks lead to a considerable increase in the cost of mortgage for consumers. Hence, they become reluctant to buy such a stock. If the interest rate goes low, it becomes less heavy on the pockets of the consumers, and then they can employ their expenditure in such stocks

13.If the investor fears high inflation, he can spend his capital as investments in stocks as the stocks do not get impacted by the rate of inflation.