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SWC Investment Club

Investing in Stocks

Popular email circulated about the Internet in 2002:

“If you had invested $1,000 in Nortel Networks stock last year, you would have $50.

If you had purchased $1,000 of Budweiser beer, drank the beer and returned the cans, you would have $78.

Our stock tip for today is to start drinking heavily.”

In 2009, the same email was circulating, but Nortel Networks was replaced by AIG and Citigroup.

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Rolling 10-Year Period Returns

Source: Dow Jones Industrial Average, based on average annual compound returns over 10-year periods.

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Stock Analysis: Where do you start?

  • “Show me the numbers”
    • Benjamin Graham, Author of The Intelligent Investor
  • There are dozens and dozens of numeric measures
  • Some of the most popular over the years have been…
    • Capitalization
    • Book Value
    • Earnings per Share
    • Price / Earnings Ratio
    • Dividend Yield (aka Current Yield)

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Capitalization

  • Market Capitalization
    • The number of shares outstanding times the current price of the stock
      • What the company is actually worth (according to investors)
  • Large-cap stocks
    • Greater than $10 billion
    • “Mega cap” stocks – $100’s of billions (exp: Walmart)
  • Mid-cap stocks
    • $1 or $2 billion to $10 billion
  • Small-cap stocks
    • $50 million (“micro cap”) to $1 or $2 billion
  • Penny stocks
    • Typically sell from less than $1.00 to $5.00 per share

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Capitalization

  • Example:
    • Price $50.00
    • Number of Shares x 2,000,000

———————

    • Market capitalization = $100,000,000

​

    • This is a small-cap stock

The stock price is (for the most part) irrelevant. You must look at the market cap to see what the value of the company is. Examples follow when we get to numeric measures.

(continued)

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Numeric Measures to Consider �When Evaluating a Stock

  • Book Value
    • Net worth of company determined by deducting all liabilities from the corporation’s assets and dividing the remainder by the number of outstanding shares of common stock
    • It is rarely close to the stock price – often one-fifth or one-sixth less
      • Why? A successful business is worth much more intact than if it is liquidated
    • If the stock price is lower than the book value, then there is the danger of the company being “raided” for the assets and put out of business

Did you create a net worth statement in BUS-121?

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Numeric Measures to Consider �When Evaluating a Stock

  • Earnings Per Share
    • Corporation’s after-tax earnings divided by the number of outstanding shares of common stock
      • Look for growing earnings per share!
  • Price-Earnings (P/E) ratio
    • Price of one share of stock divided by the earnings per share of stock over the last 12 months
    • A low price-earnings ratio usually means the stock is a less risky investment

(continued)

Why would we want to own a business?

Because businesses are in business to earn money!

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Earnings Per Share

  • Example:
    • Earnings $2,500,000
    • Number of Shares 5,000,000

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$2,500,000

    • Earnings Per Share = ———————— =

5,000,000

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    • Earnings Per Share = $0.50

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Price / Earnings Ratio

  • Example:
    • Price $10.00
    • Earnings per Share $0.50

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$10.00

    • Price / Earnings Ratio = —————— =

$0.50

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    • Price / Earnings Ratio = 20
      • aka P/E, PE

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Price / Earnings Ratio

  • Historically
    • A P/E Ratio of 20 or above was considered high and reserved only for the fastest growing stocks
    • A P/E Ratio of 5 to 15 was considered average
  • Currently
    • For almost thirty years, a P/E Ratio of 40 to 50 was not uncommon among growth stocks (i.e. Telsa, Netflix)
    • Once during the Internet mania, eBay’s P/E was 10,000!
    • P/E’s ratios fall dramatically when the market falls
  • The P/E Ratio essentially tells you what the market believes the prospects for a company are
    • Also gives you an idea of how long in years it will take the company to earn its price
    • P/E of 20 means it will take 20 years to earn the price

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Dividend Yield

  • Dividend Yield
    • Yearly dollar amount of income generated by a stock divided by the current market price
  • Historically (review)
    • Dividend Yields were in the 4% to 6% range
  • Currently (review)
    • Dividend Yields are typically in the 2% to 3% range (Many are 0% − they pay no dividends)
  • The Dividend Yield allows you to compare stocks to other investments
    • Such as savings accounts or bonds

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Dividend Yield

  • Example:
    • Dividends per Year $1.50
    • Current Market Price $87.50

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$1.50

    • Dividend Yield = ——————— =

$87.50

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    • Dividend Yield = 0.01714286 ≈ 1.71%

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Numeric Measures Examples

Walmart versus Costco versus Target

Data as of February 29, 2024.

If you just looked at the price, you would think Costco is worth more than Walmart. We need to look at the market capitalization.

Are investors more excited about Walmart or Costco or Target?

(Hint: Look at the P/E ratios.)

​

​

Price

($)

Earn / Share

($)

​

​

P/E

Book Value

($)

Div / Share

($)

Div

Yield

(%)

Market

Cap

($)

Walmart

58.72

$1.91

30.7

$10.39

$0.83

1.39%

$473B

Costco

748.17

$14.66

51.0

$58.92

$4.08

0.55%

$332B

Target

152.26

$7.84

19.4

$27.11

$4.40

2.91%

$70.3B

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Numeric Measures Examples

McDonald’s versus Yum Brands

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Price

($)

Earn / Share

($)

​

​

P/E

Book Value

($)

Div / Share

($)

Div

Yield

(%)

Market

Cap

($)

McD

$291.93

$11.57

25.2

$-6.51

$6.68

2.3%

$211B

Yum

$138.16

$5.59

24.7

$-27.96

$2.68

1.9%

$38.9B

(continued)

Data as of February 29, 2024.

Yum Brands?! Who are they? Well, you know them as Kentucky Fried Rat, Taco Hell, and Pizza Crap. Ya’ know, there is a whole lot o’ money to be made selling people sugar, salt, and fat.

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Numeric Measures Examples

AT&T versus Verizon versus T-Mobile

(continued)

Data as of February 29, 2024.

Look at those dividends and dividend yields! AT&T and Verizon are paying more in dividends than most bonds now pay in interest. Are investors excited about the prospects for either of them?

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Price

($)

Earn / Share

($)

​

​

P/E

Book Value

($)

Div / Share

($)

Div

Yield

(%)

Market

Cap

($)

AT&T

$16.98

$1.97

8.62

$14.45

$1.11

6.5%

$121B

Verizon

$42.16

$2.75

15.3

$21.99

$2.66

6.6%

$177B

T-Mobile

$162.50

$6.93

23.4

$54.12

$1.30

0.8%

$193B

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Careers in Stocks

  • Registered Representative
    • aka Stockbroker, Financial Representative
    • Background check
      • No shenanigans with other people’s money
    • Must take Series 7 and Series 63
      • Series 7 is difficult, 6 hours, 2 months of studying
      • Series 63 is much easier, 2 to 4 weeks study
    • Must be sponsored by a brokerage firm
      • Many brokerage firms are reticent to hire someone until they know they can pass the Series 7
      • For this reason, FINRA now offers the Securities Industry Essentials (SIE) exam
        • Do not need to be sponsored to take the exam

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Interested? The Industry Needs You!

  • The Financial and Investment Services Industry is Immense
    • There is a tremendous need for new professionals
  • In the next ten years, tens of thousands of us will be retiring
    • Creating a huge opportunity for anyone interested in a career in the industry
  • There is a future for you!
    • If you have the desire, there is a position for you somewhere in the industry

We need more women, minorities, bilingual, and ex-military.

Southwestern Investment Club: Career Websites of Industry Companies

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