Rationale for Stock Selection
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Provide a rationale for the stock that you selected, indicating the significant economic, financial, and other factors that led you to consider this stock
I have chosen Procter and Gamble Company that operates globally, including in America, Asia, Europe, Pacific, Africa as well as the Middle East and founded in 1837 by James Gamble and William Procter. The firm has many employees and a net worth of above two hundred billion dollars. Currently, P&G is the 7th largest stock trading company globally and makes enormous profits. The location of the headquarters of P & G is in Cincinnati, Ohio, where it provides branded consumer packaged goods.
The focus of P & G is preserving resources, finding renewable solutions, and coming up with new ideas that reduce waste. P &G sustains the lifecycle of products from manufacturing up to delivery and conserves its resources. Water is significant and a precious resource where the company ensures it preserves it to avoid wastage. The redesigning of manufacturing processes maximizes the usage of water where new facilities for recycling water are available. P & G has many customers who have trusted the brand through health care, fabric care, beauty as well as grooming products.
The reason for selecting this stock is that it generates lots of finance, is economically stable as well as ethical. In the year 1914, the sales were $83.1 billion, while in August the same year; the focus was on 65 brands contributing to 95% of the total profits (Malhotra & Tandon, 2013).
The primary reason why the selected stock is a suitable investment for my client. Include a description of your client's profile
The reason why I choose P & G as a suitable investment for my client is since she is a financial analyst for a successful organization and understands how stock trades in the market at different times. At the Ford Motor Company where she works, she is among people who track the financial performance of the company, analyze markets conditions for forecasting as well as assisting the management with strategic decisions as well as preparing periodic reports. My client is a risk averter, close to retirement, and has some savings that she wishes to invest in a stock trading company.
P&G fits my client because its growth strategy will improve her life in a meaningful way every day. The P & G Company always does the right thing and has values as well as principals that guide decision-making that makes it successful. My client will never regret it because the company ensures that it is successful in the end, and employees are accountable for meeting business needs through current systems to improve effectiveness (Reddy & Zantye, 2016).
The rationale for choosing the company in which to invest
The stocks to invest in should be easy to understand where the business model for the company is straightforward. If you know a specific industry and it is clear to you as well as other investors find it complicated, these stocks are worth your investment.
The companies with well-established brands are the best to invest in, which are strong, and emerging. Stick to the brand that is highly admired and is worth your investment and follow other strategies to make decisions. Stocks that perform well in history have a tremendous brand and attract many customers.
The stock for investment should have a history of good performance in the past. It does not have to be the best over the last year, but the chart of performance, in the end, should be convincing. Consider investing in stocks that give shareholders good returns and have made them rich. The reserve should have good performance for a very long period, and the record of accomplishment creates value for the shareholders.
Consider investing in mid-cap as well as large-cap companies as well as avoid companies with small-cap names. The focus should be on companies with a history of paying dividends to the shareholders. Ensure that you invest in stocks from companies that pay quarterly dividends without failing, and the company should give maximum profits in the future (Brigham & Besley, 2011).
Ratio analysis
Ratio analysis involves analyzing different portions of financial information from financial statements. External analysts use ratio analysis when determining business solvency, liquidity as well as profitability. Past and current financial statements help analysts with data for evaluating how the company is performing financially. The data helps to determine whether there is a downward or upward trend of the financial health of a company for comparison with competing firms.
Uses of ratio analysis
Comparisons – Ratio analysis compares the financial performance of a company to forms, which are similar in the same industry for the understanding position of the company in the current market. Financial ratios from competitors such as price/earnings ratios compare to the company ratios for the management to identify gaps in the market. It helps to know a competitive advantage as well as its strengths and weaknesses. That information helps the leadership in the making of decisions for improving the performance of the company.
Trend line – these ratios help the companies to know financial performance trends. Collection of data from established companies from financial statements that cover different reporting periods assist with information about the change in the market. The trend is useful in predicting the future direction of financial performance as well as identifying future investment turbulence, which could have been difficult to predict by the use of ratio from a single reporting period (Jablonsky & Barsky, 2001).
Operational efficiency – the ratio analysis of finances is useful to the management in determining how efficient it is in managing assets and liabilities. When assets such as building and motor vehicles are in inefficient use, it results in unnecessary expenses. Financial ratios help in determining whether the available financial resources are either over-utilized or underutilized.
Categories of financial ratios
Liquidity ratios – this measures the ability of a company to meet debt obligations utilizing the current assets. A company that experiences financial challenges, and cannot pay the debts, end up converting the assets into cash to settle pending debts. Liquidity ratios such as current ratio, quick ratio as well as cash ratio when used by suppliers, creditors, and banks determine the ability of a client to honor his/her financial obligations.
Solvency ratios – this measures the financial viability of a company in the long-term by comparing a specific company to its annual earnings, assets as well as equity. Employees, governments, and institutional investors use solvency ratios such as interest coverage ratio, capital ratio, and debt ratio.
Profitability ratios – these ratios measure the ability of a business to profit relative to the expenses for operations. When the profitability ratio is higher than the previous financial period, it implies that there is an improvement of the business financially. A comparison of profitability ratio with a similar firm determines how profitable it is regarding the competitors. The most commonly used profitability ratios return on assets, gross margins, profit margins, as well as return on equity ratio.
Efficiency ratios – these ratios measure the proper utilization of business assets and liabilities in generating sales as well as earning profits. There is a calculation of the use of inventories, equity, machinery as well as the turnover of liabilities. The significance of the ratios is that as efficiency improves, it results in the generation of more revenues as well as profits. Some of the efficiency ratios are inventory turnover, fixed asset turnover, and working capital turnover.
Coverage ratios – measures the ability of a company to make payments of interests as well as obligations resulting from debts. That includes the debt-service coverage and times interest earned ratios.
Market prospects ratios – these are used in fundamental analysis and include earnings per share, P/E ratio, and dividend yield as well as dividend payout ratio. Investors in predicting earnings as well as performance in the future, use the metrics (Reddy & Zantye, 2016).
Stock price analysis
The investment strategy known as value investing involves choosing stock in the market that trades at an amount less than book value. Value investors buy a stock whose cost is low due to the belief that the market is overreacting to the bad or good news. The result of this is that stock price movements fail to correspond to the long-term fundamentals of the company. The overreaction provides an opportunity to obtain stocks at a discount that results in a high-profit margin.
The concept of value investing that is in use every day is straightforward. The moment you know the actual worth of the stock, you increase your savings once you buy it on sale. The cost of stock of a company can be different, as the valuation remains the same. That depends on the willingness as well as the ability of investors to buy, which makes the prices fluctuate. In value investing, detective work involves secret stock sales where you buy at a discount in comparison to the value in the market. When investors buy and hold the value stocks, in the future, they get high returns.
The intrinsic value uses financial analysis in studying the financial performance of a company, cash flow, revenue earnings, target market, as well as competitive advantage (Amiri & Khodamipour, 2020).
Metrics for stock price analysis
Price–to–book, also known as book value, shows the value of the assets of a company and compares them to the price of the stock. If the payment of the stock is less than assets value, there is an undervaluation of stock with the assumption that the company is in good financial performance.
Price-to-earnings shows a record of accomplishment of the earnings of a company. That determines the undervaluation of stock that does not reflect all its actual proceeds.
Free cash flow is the money from operations as well as the returns of the company, after subtracting the expenses. A company that generates free cash flow will have enough money to invest in future businesses, reward shareholders, issue share buybacks, and pay dividends.
Price-to-earnings Growth Ratio includes the historical growth rate of earnings of a company and shows the performances of one company and comparing it to another. PEG ratio is computed by the P/E ratio, dividing it by the rate of growth of its earnings every year. When the value of the PEG ratio is lower, the deal is better for the future estimated income of a stock.
The dividend yield shows the payday you get for the money you invest. The percentage of the calculation is by dividing annual dividends of stock by the price. That percentage is the interest on the money you invested with a chance for growth once the stock appreciates. However, if there is a suspension of dividends or inconsistent payments, it means the dividend yield cannot be available (Malhotra & Tandon, 2013).
The margin of safety involves some error when estimating the value basing on tolerance to risks. That is bargaining stock when buying to increase the chances of intensifying profit later after selling. The margin of safety helps to secure you against losing money if the commodities do not perform according to your expectation. For example, if the stock is worth $110 and you buy it for $70, the $40 profit is because of waiting for the price to appreciate to $110, which is its literal value. That will make the company grow and increase in value, which makes the stock price to raise more. Value investors buy a stock because of its actual value and have ownership of a certain percentage in the company. They consider the sound principles and financial position of a company overlooking what other people say or do. When estimating the value of the stock, it also involves subjectivity where two different investors analyze similar valuation data and make different decisions about the same company.
Recommendations
When an investor is ready to start an investment, he/she should know that it is better to have a low P/E ratio comparing with a higher P/E ratio. A company whose balance sheet has more money is superior to one with many debts, and it’s better to diversify a portfolio across many sectors. The recommendation is that you decide what your portfolio will achieve and do not change your mind. Select a company that you think is best for you and read about trends and news that makes it successful. It is better to identify companies that lead the others in terms of satisfactory financial performance and high-profit margin in the end (Faello, 2015).
The investors should decide in advance, about what their portfolios intend to achieve and stick to it. They should get updates from daily news about the trends, as well as events that drive the company and the economy. The knowledge and goals should help to make decisions on when to buy or sell stocks by the use of different strategies.
The investors who need to generate income should focus on purchasing the stocks and holding them to receive dividends regularly. Those who invest to save their wealth do not tolerate risks due to their circumstances. The recommendation is that they invest in corporations that are stable, such as blue-chip corporations. These investors should not engage in initial public offerings but prefer companies that do well all the time. The investors who need their capital to appreciate should consider stock in companies that are in the early years of growth. They prefer to buy stocks that are riskier to have a chance for substantial gains (Brigham & Besley, 2011).