Equity Markets and Portfolio Analysis

CHAPTER 13 Market and Industrial Analysis: Top-Down Approach

Introduction

In the last chapter we examined how the values of stocks can be estimated using the multiplier and discounted cash flow models. Our analysis, however, was company/ stock specific, with no considerations given to the influences that the overall economy and industry have on a company's stock value. Analysis based just on company analysis is sometimes referred to as bottom-up analysis. Many fundamental stock analysts, however, incorporate a top-down, three-step approach, in which economic and industry analyses are used as inputs in evaluating a stock. This approach starts with an analysis of the aggregate economy: future gross domestic product, or GDP (aggregate output), ...