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Security Analysis and Business Valuation on Wall Street + Companion Web Site: A Comprehensive Guide to Today's Valuation Methods, 2nd Edition

ISBN: 978-0-470-60892-0
480 pages
April 2010
Security Analysis and Business Valuation on Wall Street + Companion Web Site: A Comprehensive Guide to Today
An insider's look at security analysis and business valuation, as practiced by Wall Street, Corporate America, and international businesses

Two major market crashes, numerous financial and accounting scandals, growth in private equity and hedge funds, Sarbanes Oxley and related regulations, and international developments changed security analysis and business valuation substantially over the last fourteen years. These events necessitated a second edition of this modern classic, praised earlier by Barron's as a "welcome successor to Graham and Dodd" and used in the global CFA exam.

This authoritative book shows the rational, rigorous analysis is still the most successful way to evaluate securities. It picks up where Graham and Dodd's bestselling Security Analysis - for decades considered the definitive word on the subject - leaves off. Providing a practical viewpoint, Security Analysis on Wall Street shows how the values of common stock are really determined in today's marketplace. Incorporating dozens of real-world examples, and spotlighting many special analysis cases - including cash flow stocks, unusual industries and distressed securities - this comprehensive resources delivers all the answers to your questions about security analysis and corporate valuation on Wall Street.

The Second Edition of Security Analysis on Wall Street examines how mutual funds, private equity funds, hedge funds, institutional money managers, investment banks, business appraisers, and corporate acquirers perform their craft of security analysis and business valuation in today's highly charged environment. Completely updated to reflect the latest methodologies, this reliable resource represents the most comprehensive book written by someone who has actually worked as an investment banker, private equity executive, and international institutional investor.

  • Shows the methodical process that practitioners use to value common stocks and operating companies and to make buy/sell decisions
  • Discusses the impact of the two stock market crashes, the accounting and financial scandals, and the new regulations on the evaluation process
  • Covers how Internet and computing power automate portions of the research and analytical effort
  • Includes new case study examples representative of valuation issues faced daily by mutual funds, private equity funds, hedge funds, institutional investors, investment banks, business appraisers, and corporate acquirers
  • Is a perfect tool for professors wishing to show their MBA students the essential tools of equity and business valuation


Security analysis and business valuation are core financial disciplines for Wall Streeters, corporate acquirers, and international investors. The Second Edition of Security Analysis on Wall Street is an important book for anyone who needs a solid grounding in these critical finance topics.

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Preface

What Is Security Analysis?

Recent Trends.

Why Study Security Analysis?

Overview of the Contents.

What's New in the Second Edition.

Part I The Investing Environment.

Chapter 1 Why Analyze a Security?

The Origins of Security Analysis.

No Profit Guarantee.

Day-to-Day Trading and Security Analysis.

Herd Psychology and Security Analysis.

Momentum Investors.

Game Theory and Security Analysis.

The Premise of Security Analysis.

Scientific Method.

Security Analysis Techniques.

Basic Valuation Approaches.

Other Valuation Approaches.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 2 Who's Practicing Security Analysis?

Securities Firms and Their Analysts.

Major Institutional Investors.

A Dying Art?

Index Funds and Exchange Traded Funds.

Small Money Management Firms.

Rating Agencies.

Individual Investors: A Special Category.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 3 Seeking a Level Playing Field.

Brief History of Securities Regulation.

The Chief Regulator—The Securities and Exchange Commission.

Sales and Trading Practices.

Margin Regulation.

The Life Cycle of a New Security Issue.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 4 Other Sources of Information.

The Business Media.

The Free Internet.

The Fee for Service Internet.

Trade Associations, Consulting Firms, Government Publications and Financial Organizations.

Credit Rating Agencies.

Securities Firm Research.

News Wires.

Independent Expert Services.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Part II Performing the Analysis and Writing the Research Report.

Chapter 5 Starting the Analysis.

The Security Analysis Process.

Model Research Report.

The Analyst's Responsibility.

The Cascade of Projections.

Selecting Stocks for Study: Top-Down vs. Bottoms-Up.

Limited Time and Resources.

The Margin of Safety.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 6 Industry Analysis.

Background.

Organizing an Industry Analysis.

Industry Classification.

External Factors.

Demand Analysis.

Supply Analysis in the Industry Study.

Profitability, Pricing and the Industry Study.

International Competition and Markets.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 7 Company-Specific Analysis.

Systematic Approach of a Business Analysis.

Overview and Business Description.

Products and Markets Section.

Production and Distribution.

Competition.

Other Topics Included in the Business Review.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 8 Financial Statement Analysis of an Established Business.

Beginning the Investigation.

The Raw Materials of an Analysis.

Evolution of the Approach to Financial Statements.

Illustration of the Basic Approach.

Review of Neiman Marcus Financial Analysis.

Management's Projections.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 9 The Limitations of Accounting Data.

Basic Accounting Issues.

Global Issues.

Company-Specific Accounting Issues.

The Fundamental Objective of Public Companies.

Case Study: Stability Corp.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 10: Financial Analysis and Company Classification.

Company Classifications.

The Mature Company.

The Growth Company.

The Cyclical Company.

The Declining Company.

The Turnaround.

The Pioneer.

Financial Games.

Extra Shares Outstanding?

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 11 Financial Projection Pointers.

The Cascade of Projections.

The Typical Financial Projection.

Alternate Means of Forecasting.

Critiquing the Huntsman Chemical Projection.

Preparing Projections.

Cyclical Company Forecast.

Hockey Stick Phenomenon.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Part III Valuation and the Investment Decision.

Chapter 12 Valuation Methodologies

Assessing Each Methodology.

Applying Multiple Methodologies.

Summary.

Questions and Short Problems.

Chapter 13 Intrinsic Value and Discounted Cash Flow.

Issues in Applying Discounted Cash Flow.

Discounted Cash Flow vs. Relative Value.

Discounted Cash Flow and the P/E Ratio.

The Discounted Cash Flow Valuation Process.

Summary.

Questions and Short Problems.

Chapter 14 Discounted Cash Flow:  Choosing the Right Discount Rate.

Beta.

The Buildup Method for the Equity Rate of Return

Special Cases.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 15 The Relative Value Approach.

Real Estate Analogy.

What's the Right P/E Ratio?

Case Study: Temporary Staffing Services.

Valuing an Initial Public Offering.

Balance Sheet Items and Relative Value.

How High is Up?

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 16 Marginal Performers.

Defining the Problem Company.

Small Companies and Relative Value.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 17 The M&A Market, Security Analysis, and Valuation.

Understanding Leveraged Buyouts.

LBO Mechanics.

Case Study: Keane, Inc.

How Much Can the PE Firm Pay?

LBO Valuation and the Security Analysis of a Publicly-Traded Company.

Strategic Takeover Values.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 18 Sum-of-the-Parts Analysis.

Background.

Taxes Favor Spin-offs vs. Cash Sales.

Sample Sum-of-the-Parts Analysis.

Business Division Valuation.

Non-Operating Corporate Assets and Liabilities.

Unlocking Sum-of-the-Parts Values.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Chapter 19 The Investment Recommendation.

Summary Top-Down Analysis.

Discounted Cash Flow Valuation.

Relative Value/Sum-of-the-Parts Valuation Approach.

Acquisition Value.

Leveraged Buyout Method.

Investment Recommendation.

Summary.

Questions and Short Problems.

Adopt-a-Company Exercises.

Part IV Special Cases.

Chapter 20 Private Equity.

Industry Segmentation.

One Trillion Plus Funds Under Management.

Private Equity Fund Investors.

Fee Structure.

Other Fees Charged to Clients.

Private Equity Does Not Beat the S&P 500.

Private Equity Funds and Information Collection.

Similar Accounting Information.

Private Equity Changes to the Public Company Valuation Methodology.

Liquidity and Control Adjustments.

Summary.

Questions and Short Problems.

Chapter 21 Natural Resource Companies.

General Methodology.

The Financial Reporting of Natural Resource Companies.

Case Study: Encore Acquisition Company.

Mining Companies.

Summary.

Questions and Short Problems.

Chapter 22 Financial Industry Stocks.

Product Lines.

The Nature of Financial Assets.

Two Sets of Skills.

Lending.

Large Commercial Banks.

Summary.

Questions and Short Problems.

Chapter 23 Insurance Companies.

General Background.

Principal Functions of an Insurance Company.

Insurance Company Regulation.

Financial Statement Analysis: P&C Company.

Financial Statement Ratios.

Life Insurance Companies.

Summary.

Questions and Short Problems.

Chapter 24 Highly Speculative Stocks.

Background.

Discounted Cash Flow.

Alternative Assumptions for Ballard Stock.

Summary.

Questions and Short Problems.

Chapter 25 Distressed Securities and Turnarounds.

Investment Opportunities.

Screening Technique.

Recognize the Options of an Unsuccessful Turnaround.

Financial Analysis of Company with Leverage Problems.

The Investment Decision.

Evaluating Turnarounds.

Liquidations.

Summary.

Questions and Short Problems.

Chapter 26 International Stocks.

The Role of Security Analysis.

American Depository Receipts.

Developed Country Markets.

Relative Value Multiples.

Summary.

Questions and Short Problems.

Chapter 27 The Emerging Markets.

Emerging Markets and Security Analysis.

Stockpricing Guidelines.

Financial Projections.

Emerging Market Equity Discount Rate.

Relative Value in the Emerging Markets.

Summary.

Questions and Short Problems.

Part V In Conclusion.

Chapter 28 Asset Booms and Busts.

The 2008 Crash: Contributing Causes.

Collapse of the U.S. Housing Bubble.

Failure of the Referees.

The Certainty of Another Crash.

How Might Security Analysis and Business Valuation Change?

Summary.

Questions and Short Problems

Chapter 29 Closing Thoughts.

Notes.

About the Author.

Index.

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JEFFREY C. HOOKE is a Managing Director at Hooke Associates, LLC, a valuation firm, and FOCUS, LLC, an investment bank. He was formerly director of Emerging Markets Partnership (a $4 billion fund focusing on emerging markets), principal investment officer of the World Bank Group, and an investment banker with Lehman Brothers and Schroder Wertheim. Hooke is also the author of M&A: A Practical Guide to Doing the Deal and Emerging Markets: A Practical Guide for Corporations, Lenders, and Investors, both from Wiley.

Visit www.wiley.com/go/hooke

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Praise for the First Edition

"A cross between a textbook for analysts-in-training and a tell-all expose of the analyst profession."
Business Week

"Hooke has written a step-by-step explanation of how to analyze stock. He takes the reader from the basic yardsticks used to judge companies -- intrinsic value, relative value and acquisition value - and goes all the way to analyzing stocks in emerging overseas markets."
—ABC News.com

Advance Praise for the Second Edition

"A welcome successor to Graham and Dodd's Security Analysis."
Barron's Advance Praise for the Second Edition

"Jeff Hooke has written an excellent overview of the process of valuing individual equities and entire companies. It is useful for a variety of readers, ranging from active investors, to financial advisors, to principals of companies contemplating a sale or public offering. It has a tremendous amount of material between the covers of a single volume."
—William H. Heyman, Vice Chairman and Chief Investment Officer, The Travelers Companies, Inc.; and former director, Division of Market Regulation, U.S. Securities and Exchange Commission

"The Second Edition is released at a propitious time. As we recover from the worst financial crisis in recent memory, the need for thorough analysis is critical. Hooke's primer is readable and easily understood, even by those without CFA credentials. It should help practitioners avoid the mistakes of casual decision making."
—Dennis Flannery, retired executive vice president, Inter-American Development Bank

"This book is more than a textbook for anyone who wants to make a living as a valuation expert or securities analyst —it is a living, breathing, 'how to' guide on the latest methods, with plenty of real-life examples that hit home."
—Ron Everett, Managing Partner, Certified Business Appraiser, Business Valuation Center

"The financial crises of the past decade highlight the imperative for disciplined valuation. Hooke provides a broad array of concepts and tools to achieve this. He goes beyond a purely formulaic approach to focus on idiosyncratic characteristics in both public and private equity contexts."
—Alex Triantis, Chair, Finance Department, Robert H. Smith School of Business, University of Maryland

"This book represents an impressive effort to offer comprehensive coverage of business valuation. It combines the deep insight of an insider with the rigor of top academics. Jeff is not shy about giving his opinion, which makes the reading experience unique and exciting."
—Ludovic Phalippou, Professor of Finance, University of Amsterdam

"This is an invaluable reference for the M&A professional. Hooke provides a view of the forest, in giving the rationale for the methods in use and how they compare with each other. The text is punctuated by his own wry commentary and frequent examples."
—Gary Nelson, Chairman, Sigma Federal, former vice chairman of SRA International

"This book is a highly useful resource for any existing or soon-to-be professional in the financial analysis field. It is a must-read presentation of the valuation methodologies utilized in the private equity business."
—Matt Newton, Partner, Columbia Capital

"Hooke's book provides an insightful approach to both financial analysis and business valuation. It should be required reading for anyone involved in the securities industry, from money managers to investment bankers."
—George Konomos, Senior Advisor, Latigo Partners

“The new edition of Jeffrey Hooke’s (Hooke Associates and FOCUS, LLC) Security Analysis and Business Valuation on Wall Street contains fresh insights and updates on the fundamentals of security analysis and business valuation, new case study examples, and four new chapters.

Among other reasons, Hooke points out why experts should read this practitioner-oriented book: "Two market crashes -- and the attendant fallout -- suggest that business appraisers consider the use of higher discount rates, the need for recessions in many forecasts, and the inclusion of political risk in certain US business evaluations…The validity of each methodology -- be it guideline companies or discounted cash flow, to give two examples -- has to be cross checked against its counterparts now more than ever, or the appraiser can get false readings.”
Business Valuation Review, May 5, 2010

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