Voice Bruno Santos is an equity analyst with a regional investment bank. Santos reviews the growth prospects and quality of earnings for Phoenix Enterprises, one of the companies he follows. He has developed a stock valuation model for this firm based on its forecasted fundamentals. His revenue growth rate estimate is less than that implied by the market price. Phoenix's financial statements over the past five years show strong performance, with above average growth. Santos has decided to use a lower forecasted growth rate in his models, reflecting the effect of "regression to the mean over time. He notes two reasons for his lower growth rate forecast: Reason 1: Successful companies tend to draw more competition, putting their high profits under pressure Reason 2 Phoenix's intellectual property and franchise agreements will be weakening over time Santos meets with Walter Hartmann, a newly hired associate in his department. In their conversation, Hartmann states, "Security analysts forecast company performance using both top-down and bottom-up analysis. I can think of three examples: 1. A restaurant chain forecasts its sales to be its market share times forecast industry sales 2. An electric utility company forecasts that its sales will grow proportional to increases in GDP 3. A retail furniture company forecasts next year's sales by assuming that the sales in its newly built stores will have similar sales per square meter to that of its existing stores." Hartmann is reviewing some possible trades for three stocks in the health care industry based on a pairs-trading strategy. Hartmann's evaluations are as follows: HG Health is 15% overvalued. Sorgent Cell Sciences is 10% overvalued. Johnson Labs is 15% undervalued. 4. Based on Santos's revenue growth rate estimate the shares of Phoenix are most likely: (3 points) A undervalued B. fairty valued C. overvalued Voice Bruno Santos is an equity analyst with a regional investment bank. Santos reviews the growth prospects and quality of earnings for Phoenix Enterprises, one of the companies he follows. He has developed a stock valuation model for this firm based on its forecasted fundamentals. His revenue growth rate estimate is less than that implied by the market price. Phoenix's financial statements over the past five years show strong performance, with above average growth. Santos has decided to use a lower forecasted growth rate in his models, reflecting the effect of "regression to the mean over time. He notes two reasons for his lower growth rate forecast: Reason 1: Successful companies tend to draw more competition, putting their high profits under pressure Reason 2 Phoenix's intellectual property and franchise agreements will be weakening over time Santos meets with Walter Hartmann, a newly hired associate in his department. In their conversation, Hartmann states, "Security analysts forecast company performance using both top-down and bottom-up analysis. I can think of three examples: 1. A restaurant chain forecasts its sales to be its market share times forecast industry sales 2. An electric utility company forecasts that its sales will grow proportional to increases in GDP 3. A retail furniture company forecasts next year's sales by assuming that the sales in its newly built stores will have similar sales per square meter to that of its existing stores." Hartmann is reviewing some possible trades for three stocks in the health care industry based on a pairs-trading strategy. Hartmann's evaluations are as follows: HG Health is 15% overvalued. Sorgent Cell Sciences is 10% overvalued. Johnson Labs is 15% undervalued. 4. Based on Santos's revenue growth rate estimate the shares of Phoenix are most likely: (3 points) A undervalued B. fairty valued C. overvalued
