How to Pick a Stock

How to Pick a Stock

• Example: Nike – You like their shoes. Is it a good company to invest in? Let’s see

• Yahoo Finance (Free)

• Business Summary – What does the company do i.e. what are their sources of revenue?

Business Overview

Competitive Landscape

• Is the company gaining or losing market share? Is the whole sector on the rise or tanking?

• Who are the company’s main competitors?

Risk Factors

• Ex: Is this a legitimate concern for Nike?• “Failure to maintain our reputation and brand

image could negatively impact our business.”• No… Nike is the dominant company in the space

and the likelihood of damage to the brand image in the short run is unlikely

• “If we (Nike) are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our net revenues and profits.”• Yes… Real concern because consumer tastes change

Is the Company Going to Stay Relevant in the Future?

• Quality/style of clothing – Why do you wear Nike?

• Do you see the quality increasing over time?• Further potential for success in the future?

Management

• Research management – Past experience?• How long have they been with the company?• How did the company perform during their

tenure?

• Go to investor relations website and look for the executives and corporate governance section• Surprise! We found Tim Cook (Apple CEO) on

the board of Nike – we don’t know we feel about this yet

The 10-K

• What is it?• Annual financial statement – Free and public• Access from SEC website or company Investor

Relations website

• Key considerations• Business Overview• Risk Factors• Financial Statements• Management’s Discussion and Analysis

(MD&A)• Notes to Financial Statements

Industry Comparisons

Historical Performance

Catalysts

• Think about the drivers or the events that will make the stock go up (increase demand for the stock)

• This is referred to as a catalyst

• If there is no catalyst, then why own the stock?

• Ex for Nike: • Release of new product lines (Flyknit and Free

running shoes)• Expansion into new markets (international)• Company recently held an investor conference at

which they raised their annual profit expectations

To Invest or Not to Invest?

• Take a holistic view of the factors identified so far as positive or negative and evaluate net impact

• If positives outweigh negatives, buy!

Importance of Diversification

• Do not put all your money into one stock or sector

• Do not want the driving factors of all of your investments to be the same!• Ex: Price of oil drives oil and gas companies• Ex: Financial regulations on banks (Basel III)• Ex: Unusual weather patterns and apparel

companies

• You don’t want to be too diversified though… otherwise your returns may begin to decline

Options

• Call option: The right (but not the obligation) to buy a stock at a certain price in the future

• Put option: The right (but not the obligation) to sell a stock at a certain price in the future

• Must specify an expiration date and strike price for the option

Facebook Option

• Ex: Facebook ($49.50)• To buy 100 shares it would cost $4950• A call option on Facebook would only cost you

$482 for the 100 shares (because of leverage)• As you can see, you can buy more options

contracts for less money, BUT they are riskier

Options Terminology

• Strike price- Price that an owner of an option can purchase (call) or sell (put) the underlying stock

• In the Money- Strike price is lower (call)/higher (put) than the market price of the underlying stock

• At the Money- Strike price is identical to the market price of the underlying stock

• Out of the Money- Strike price is higher (call)/ lower (put) than the market price of the underlying stock

• Delta- For every $1.00 move in the stock, the value of the option will change proportionally• Delta of 0.5 means that if the stock price goes up by

$1.00, the value of the option will go up by 0.50