Daniellejinadu

Franz Kafka, 1912

✨I am the Best Series✨

Finance Month: Investing Pt. II

Introduction:

This week we're diving a bit deeper into the world of investing. Now that you guys have a solid understanding of what investing is and how to start doing it, I want to discuss what one should look for in a competitive stock, and share an example stock analysis. My hope is that by the end of this lesson you guys not only will be able to discern the difference between a bad and good stock but will also leave feeling comfortable picking out a couple of stocks for your own portfolio. So let's get into it:

What should you be looking for in a stock?

A company/industry that you resonate with: It's much easier to research an industry you're genuinely interested in, so look to stocks that are a reflection the things you actually like. For example, if you're interested in socially responsible investing, look for companies that focus on ESG (Environmental, Social, Governance).

A good price-to-earnings ratio (P/E Ratio): A P/E ratio determines whether a company is a good value compared to others in the industry. In more basic terms, a P/E ratio determines how much investors are willing to pay for each dollar of annual earnings. So if a ratio is 20, that means investors are willing to pay $20 on every $1 of annual earnings. Stocks with P/E ratios below 15 are considered cheap (which is good) and those with ratios above 18 are considered expensive.

Checkpoint: As you can see from the AAPL's stock chart, its P/E ratio is 38.82. What does that mean?

A Low Beta: Generally, beta measures a stocks volatility compared to the S&P 500. Generally, beta above 1 is considered volatile (not good) and below 1 stable (good). When looking at beta however, it's good to have perspective. A stock that has a high beta that has been outperforming the S&P 500 will likely yield higher returns over a shorter period of time. So while this could be good for your portfolio in the short-run, it could cause issues further down the line. So if you're risk-averse like me, you want to go for a lower beta.

A High Dividend: Basically, Stocks that pay dividends will give you an extra payout on top of the potential depreciation price. Therefore a high dividend yield will likely give you more solid income from a single stock. However, there's a balance to strike. Yields that are too high are often temporary because often times companies that are facing financial challenges will issue high yield to attract investors. So look for stocks with dividend yields of approximately 5% to 8%.

Checkpoint: Based on this graph, which stock would you be most willing to invest in based on it's 2020 dividend yield?

A balanced chart: It's very important to understand how to read a stock chart. A stock chart will tell you basically everything you need to know about a particularly stock, so being able to navigate one is essential. Stock charts appear in the form of line, bar,  and candlestick charts and are used by both fundamental and technical analysts.

Checkpoint: Take a look back at Apple's stock chart above. Looking at it's P/E ratio and Dividend Yield. Based on these numbers, would you say it's a viable stock?

Example stock analysis (what I look for in a stock and how I assess it):

**Before going into my stock analysis I want to make it very clear that I am by no means encouraging anyone to invest in the LULU. Please do your due diligence and research your own stocks. This is just an example of how I go about assessing a "good stock" and what I look for.

Lululemon Athletica Inc. (NASDAQ: LULU):

Industry Overview: Health and fitness equipment industry revenue has more than doubled, to $2.3 billion, from last March to October, according to NPD retail data. Sales of treadmills soared 135 percent while those of stationary bikes nearly tripled, depleting inventories.

Low vertical cost capabilities: Cheap production offers higher margins for LULU. LULU’s 21% profit margin vs NKE’s 12%.

Strong Brand Reputation: The brand has cemented its reputation and prices as just as fixed.

International Opening: LULU has only started to establish the international component of its business. Overseas presents less image challenges regarding gender.

Financials: LULU has a very healthy balance sheet primarily financed through equity with 4 billion worth of assets and 1.2 billion in working capital.

Business Overview: As of June 2021, LULU allows customers to resell their clothing back to the brand at a discounted price. These clothes are in turn resold back to the consumer with all profits being investing into circular design and renew and recycle programs. With no dividend yield, the company is focusing on strong growth which has been exceedingly successful. The past 4 quarters, LULU has beat earnings expectations even with the struggles retail stores have faced.

Competitive Advantage: The field of athleisure is extremely dense. While companies like Nike, Gap, and Under Armour dominate the field, none of them have seen revenue growth like Lululemon. The main drivers of their boom come from the relatively low cost to make their products. Vertical distribution allows their products to be moved without drawing additional cost within the movement process.

Recommendation: BUY.

Conclusion:

I hope you guys enjoyed learning a bit more about investing this week! While the stock analysis may seem daunting, you certainly don't need to go that deep. As long as you understand your stocks' chart and what's going on with the company in the news (like if the CEO just got fired for sleeping with his secretary, you probably shouldn't buy that stock), you should be fine. Understanding how to pick and analyze a stock is not easy and takes a good amount of time to get used to (I have years of experience, which is why I'm able to do so pretty quickly), so don't get discouraged by the process. Take it in strides, and of course, if you have any questions feel free to reach out! Next week I'll be discussing some of my favorite financial literacy/investing resources!

Lovingly,

Elle

Aube Jolicouer by Anthony Maule for Instyle US Magazine , January 2022

Shannon Thornton

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