Project 2: Pick a stock and write a recommendation based on Value Line information. Due 10/29/20
Choose a stock from the Dow stock Jones Industrial Average. www.Dow30companies or Dow30 Investopedia. Find its stock symbol and where it’s traded (Nasdaq, NYSE etc.) Google Value Line’s website, enter the stock symbol, (upper right) choose the pdf format. Or, just google research.valueline.com then the stock name and choose pdf. Print out the Value Line report (1 page.) This project shows you how the financial statement data and ratios help forecast the value of the stock you picked and your recommendation about whether to 1) buy the stock, 2) hold it if you already own it, or 3) sell it.
Remember that when you recommend a stock or if the demand goes up without your recommendation and the stock price goes up, the company doesn’t receive any money. The money goes to the stockholders who sell the stock. Why do managers want the stock price to go up if the company doesn’t get any money when the price goes up? Because the purpose of the company is to increase the wealth of the shareholders. The shareholders vote for the Board of Directors and the Board chooses the top managers. Also, top managers get stock and stock options as part of their compensation, so they want the stock price to go up. The skills introduced in this project will be valuable if you choose a career in finance.
On the one page printed PDF, use a highlighter pen to show the past ten years and the estimate of the future two years of:
- Total sales (omit if your co. is a bank) 7. ROE
- EPS 8. The trend in the stock price
(look at the graph) & current price
- Dividends per share (actual in $) 9. P/E
- Income tax rate 10. Net income (net profit)
- Number of shares outstanding
In trillions, billions and millions 11. Beta
- Profit Margin 12. Dividend yield in %
On a separate page, make a recommendation about investing in that stock. Recommendations take the form of Buy, Hold, or Sell. Show the most current data for each of the 12 pieces of information above and explain why the data are important for making your recommendation. Keep it to one page.
1 – I chose Johnson & Johnson. Its sales at the time were $70,074,000,000. That’s $70.07 billion. If sales are rising over the years, that’s good. For this company, total sales and sales per share have been rising over the last 10 years and are expected to rise in the next two years and that is a positive for a “buy” recommendation.
2 -EPS was $5.48/share. Comparing EPS this year to previous years we can see that it was high for 2 years and then its EPS declined. That’s not a positive sign for this stock.
3 – Dividends per share tells us the dollar amount of the dividends actually distributed. It’s in the lower left-hand box on the Value Line page. It was $2.95 per year. Investors who are interested in dividends (the dividend clientele) will be happy that the dividend has been rising for the past 5 years. This is a positive for a “buy” recommendation.
Dividends per share are not the same as the dividend yield which is Dividend/Current Price and is in percentage form. The dividend yield changes all day because the price of the stock changes all day. Currently, the dividend yield is 2.4%. This is a positive for a “buy” recommendation because it’s higher than the yield on long term Treasury bonds.
9 – . We can estimate the fundamental intrinsic value of stock using the P/E ratio approach. Use the average P/E ratio of the industry and multiply that by the EPS to put a value on your stock. The P/E ratio for this company is above the average. The average P/E is about 16 (it’s different for different industries.) For the pharmaceutical industry, the average P/E is 88. The P/E ratio for J&J was 271 which is out of line with the market. This is a negative for a “buy” recommendation because it means that the stock price is already high. The price of the stock is high even though EPS is low. Investors are paying a high price because they expect EPS to go up soon based on new drugs under development. That’s why the P/E ratio is so important.
My recommendation for the stock is hold. The company is being sued for its addictive opioid drugs that were presented as non-addictive. The stock price already dropped. If you buy it now, you’re buying a risky stock. It will have large legal fees and probably punitive damages to pay.
Follow my example for each of the 12 financial items for the company that you selected. (Some companies don’t have all of the 12 items listed above. For example, a bank stock doesn’t show sales revenue. So, if the performance measures don’t apply, just highlight the ones that DO apply.) Then, write why you recommend this stock to ‘buy’ ‘hold’ or ‘sell,’
Buy means that investors who have extra money should buy this stock because the stock price is likely to go up. Hold means that if the investor already owns the stock they shouldn’t buy more or sell any of it. Sell means that if investors own the stock, they should sell it because it’s likely to go down in price.
Make sure you put your name on both sheets. You can write your name on the pdf first sheet but please type your name on the second sheet.
You may send this to me as an attachment. Put F345 on the subject line as well as the words Project 2.
The highest grade is 10 and it’s based on the professionalism of your presentation. There is no extra credit for handing in 2 pages of explanation. Instead, I will send it back and ask you to do it over to fit the assignment. You will enjoy this project and you’ll learn from it as well.