The Stock Research Form is a tool for determining if an equity represents an advantageous opportunity to generate substantial gains in the market. To understand the background of investing, you must understand that the market operates through the efficient market hypothesis. This hypothesis states two things: 1. you can't beat the market (there is no free lunch) and 2. prices are "right."

The reality is that people are not rationale, and the efficient market hypothesis is false. Opportunities exist to make money in the market. More importantly, opportunities exist to beat the market average. The goal of this form is to help you begin identifying companies that have the possibility to win big. 

The rationale behind this method of analyzing stocks can be summed up fairly simply in two parts.

• 1. Companies that have performed exceptionally well over the past five to ten years can be expected to continue to perform well over the next five years.

  2. Determine a reasonable or fair price to pay for a stock with such prospects.

The Stock Research Form

This company profile details what the company does and the industry they are in. 

Sector & Industry (finance.yahoo.com)

• • Sector - A sector is one of a few general segments in the economy within which a large group of companies can be categorized. An economy can be broken down into about a dozen sectors, which can describe nearly all of the business activity in that economy. 

  • Industry - An industry, on the other hand, describes a much more specific grouping of companies with highly similar business activities. Essentially, industries are created by further breaking down sectors into more defined groupings.

Competitors (morningstar.com)

• • Within the industry, who are the key competitors that present a massive hurdle to the company. In addition, who are potential new entrants that could create a problem to the development of the company. 

Market Cap (finance.yahoo.com)

• • The market capitalization has been addressed at: Company 800 Market Cap

Industry Competitiveness (www.zachs.com)

• • This is much harder to analyze because every industry is different. There are a couple of variables to consider:

    • • How many competitors are in the industry? What is their market reach and how well are they positioned? 

      • Are there new entrants that have a unique technology or value proposition that will create new competitiveness?

Business Summary (finance.yahoo.com)

• • You can find a description on nearly any financial website. I have used yahoo. In theory, you could write your own but that seems a bit redundant. The hardest part about this section is reading the description and ensuring you understand what the company does. As it relates to Amazon, you would have to be able to articulate a number of activities ranging from Amazon Basics, Amazon third party sales and Amazon Web Services to name a few. 

Headlines and News (finance.yahoo.com)

• • In theory, there is not much news that would impact the long-term prospects of a company. In reality, the news plays a massive role in determine the price of stock and the value of a company. In one day in 2013, following the news of LULU leggings being too sheer, the stock dipped 17%. The fall to $68.50 cost LULU $500 million in market capitalization. This sparked a long-term decreased in the value of the stock as it was widely recognized after the event as being over valued. So yes, the news matters.

Insider Trading

• • Insider trading refers to the sales/purchases of stocks by executives. Who cares, right? At times this means very little to the over all health of a company. The seller of the stock could simply be looking to pay off her new Tesla or he could be paying down the vacation home on the cliffs of Laguna. That said, the executive could also have insider information to a company that is not as healthy as outsiders perceive it to be. This indicator shouldn't be looked at alone. However, where there is smoke, there is a fire. 

• • • This section has been addressed before in the financial strength portion completed prior to this lesson: Does the company have financial strength over the long run? 

Revenue Growth and Projection

Revenue Growth (www.morningstar.com)

• • The revenue should show an upward trend in growth. When compared to the Return on Assets (ROA) and Return on Equity (ROE), the revenue growth should display greater efficiency in the company.

Revenue Projection (www.nasdaq.com)

• • Many investors rely on earnings performance to make their investment decisions. Stocks are assessed according to their ability to increase earnings as well as to meet or beat analysts' consensus estimates. Growth estimates are based on the potential to increase market share through future development and additional products and services. Many other variables are considered.

Earnings Per Share (EPS) and Projection

Earnings Per Share (EPS) (www.nasdaq.com)

• • The net income  for a period divided by the total number of shares outstanding during that period. This number is critical to understand the value of a stock. Follow me down this rabbit trail a bit. Let's say there are two different companies that are competing. Both companies have $1B in Net Income. Company A has 1 billion shares available. Company B has 1 million shares available. Company A has an EPS of 1, while Company B has an EPS of 1,000. Obviously, Company B should have a far higher share price to purchase the stock. 

Earnings Per Share Projection (www.nasdaq.com)

Price/Earnings (P/E Ratio) and Projection

The P/E Ratio is somewhat similar to EPS in what it is communicating. The ratios formula is the current market price of a company share divided by the earnings per share of the company. I would argue that there is no greater indicator for determine the value of a company. I prefer to find what are considered value stocks, or stocks with a depressed or low P/E relative to the competition. 

• 1. High P/E stocks, growth stocks, have gone up  "too high", because investors have made overly optimistic forecasts of future growth rates.

  2. Low P/E stocks. value stocks, have sunk "too low", because investors are excessively pessimistic. 

P/E (http://financials.morningstar.com/)

P/E Ratio (www.nasdaq.com)

• • Form the data below,  we can assume that the EPS is expected to grow at a rapid rate, or that the Price of the stock is expected to decrease rather quickly. 

Total Return (www.morningstar.com)

Total return is the actual rate of return of an investment over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. What does this mean? The total return is the real number you are getting by owning the stock. It's how much you are making. 

You can see from this image that the year to date (YTD) for Amazon is beating the industry average. 

Share Price and Dividend & Share Price High and Low (www.nasdaq.com)

At this point, it is time to revisit the stock price and start making some decisions. Based on the projected EPS and P/E ratio, do you think this stock is work the buy. Take a look at the 52 week High/Low and you will see that Amazon was a great buy over the last year. At the right point in time, Amazon presented a near 25% return in one single year. 

Share Price High/Low Projections (www.nasdaq.com)

Currently, analysts have Amazon pegged at a $1,075 consensus value. If this is correct, Amazon presents a 11% profit opportunity in the short term. With that stated, you should know that analysts must be expecting massive earning growth to keep the P/E ratio down. 

Recommendation (finance.yahoo.com)

The consensus recommendation is naturally a buy based on the projected share value. 

Student Activity

There is no activity here. You simply need to follow the rules.