Evaluating stock price performance

Investors consider several factors when deciding to buy or sell stock. It is these factors that are used to evaluate the performance of a stock. There are several metrics and tools for analyzing stocks. It is easy to be overwhelmed by the mammoth information and choices available. Students often look for finance assignment help when then encounter such questions during their course of study. However, there is no perfect tool or analysis that can truly predict the performance of a stock. Investors rely on simple strategies to analyze stocks to make an informed investment decision. The strategies are diverse because every investor has risk tolerance, goals and diversification.

Stock analysis provides investors with meaningful information they can use to determine if a stock is overvalued, undervalued, or has a fair market price. Stock valuation saves investors from making wrong investment choices. Ideally, it helps them make a profit. Analyzing stock price performance is not a walk in the park. The stock evaluator should consider factors that affect investment performance like:

  • Government policies
  • Changes in demand and supply
  • Changes in interest rates
  • Confidence of consumers
  • Inflation

Examining the total returns over the correct period

Regardless of what you are looking for in a stock's performance, there are specific variables that you must consider. To understand stocks properly, you must place stock performance in the correct context. For example, seeing that a stock has returned 20% when comparing the starting and ending prices may seem significant. However, it would be best if you dive deep. You need to ask yourself questions like if the stock was abnormally depressed on the first day. Depression could throw the numbers off. Most investors often consider the stock's total returns to counter this. In addition to the price return, total returns include all interest payments and dividends. It is essential to examine the performance of a stock over some period. Also, check on how the stock has progressed year to date (YTD). Lastly, it would help if you also looked at the average annual return of the stock. If you are considering a long-term investment, you should consider the five- and ten-year average annual returns.

Putting it in perspective

Benchmarking is one of the best ways of evaluating a stock. Checking the performance of your stock against a benchmark may provide some critical insights. While you may be satisfied that your stock has generated a 10% return over the past year, a benchmark may have returned a few times that amount. You can compare the performance of the stock using various market indexes such as:

  • The NASDAQ composites
  • Dow Jones Industrial Average
  • S&P 500

You can use the indexes mentioned above as a benchmark against which you compare the performance of your investment. It is essential to choose a suitable benchmark for your investment. For example, The S&P 500 market index only has large-cap stocks listed on reputable stock exchanges. As a result, it is not the right tool for benchmarking small speculative penny stocks. Moreover, you may also want to study how the economy has faired within the same period. You can consider factors like the rise in inflation and the wider economic considerations.

Looking at competitors

A stock could be outperforming its market but underperforming in the industry. A stock’s performance should be relative to similar-sized companies in its industry and primary competitors. For instance, it may not be fair to directly compare the stocks of a small technology startup with those of an established company like Intel, even though both companies make competing products. While comparing the two may give you insights into how the small startup is doing compared to its renowned competitor, looking out for competitors in the same stages of their business life cycles is essential. Doing this will give you a greater perspective.

Not every company within the industry can make a good comparison. It would be best if you consider companies that have similarities with the company of interest. You can look at companies that have been around for almost the same amount of time or those that are the same in size. Companies with unique assets, new manufacturing techniques or excellent distribution are most likely guaranteed success in the industry. Although no one can predict a company's future, paying attention to any red flags is essential.

Ratios to look at when evaluating a stock

Several ratios are used to evaluate stocks. Some of the most common and popular stock analysis ratios include:

  1. Price to earnings ratio (P/E): It is the most widely used ratio for analyzing stock performance. P/E compares the share price with earnings per share. Price to earnings shows if a company has the funds to back up a shoot in stock prices.
  2. Price to sales (P/S): To calculate the price to sales, divide the firm's market capitalization by its 12-months revenue. Experts recommend buying stocks of a company with low price to sales compared to their competitors.
  3. Price to earnings growth ratio (PEG): While PEG is another helpful ratio, it doesn't consider growth. It looks at the share price, growth, and earnings altogether. PEG is calculated by dividing the price-earnings ratio by the rate of growth of the company's earnings. A stock with a PEG greater than 2 is overpriced. On the other hand, if PEG is under 1, the stock is underpriced.
  4. Dividend yield: It is used to calculate the percentage return of the price of a stock. This ratio is unsuitable for long-term investments because it can change anytime.
  5. Price to book: It compares the stock price with the company's book value. It estimates the company's value if it shuts down or ceases to operate immediately.

Bottom Line

Analyzing the price of a stock without considering other factors is a naïve approach to evaluating a stock's performance. To assess appropriately, you should know that everything is relative, and returns must be compared. There are several factors that you should consider when evaluating the performance of a stock. Apart from looking at the company's total returns, it would help if you also weighed them with those of competitors within the industry the company is operating.


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