Your value - oriented investment management fi rm recently hired a new analyst, Bob Westard, because of his expertise in the life sciences and biotechnology areas. At the firm’s weekly meeting, during which each analyst proposes a stock idea for inclusion in the firm’s approved list, Westard recommends Hitech Clothing International (HCI). He bases his recommendation on two considerations. First, HCI has pending patent applications but a P/E that he judges to be low in light of the potential earnings from the patented products. Second, HCI has had high relative strength versus the S & P 500 over the past month.
A. Explain the difference between Westard’s two approaches — that is, the use of price multiples and the relative - strength approach.
B. State which, if any, of the bases for Westard’s recommendation is consistent with the investment orientation of your firm.