Stock Market Valuation Valuing Individual Companies

What is company worth? Company A Company B 15 Years in business Paper Cup producer Profits $1.5 million for past 5-years 3 Years in business Technology Company Profit or Loss: -100K, -300K, +1.0 million

2 Goals of a Company 1) Maximize Profits (each year) 2) Grow Profits (over time) have the best stock performance Companies that grow PROFITS the fastest

Top 10 things to know about Stocks

Growth Rates Investors care about how FAST companies can GROW profits P.E. ratios reflect GROWTH rate expectations The HIGHER the P.E. => the FASTER the market expects Profits to Grow –SP500 Average = 20 P.E. –Below 10 P.E. => considered low (less risky, less potential) –Above 35 P.E. => considered high (more risky, more potential)

Analysis of 2 Companies Current P.E. Ratio Current Market Cap: Profits per year: N/A (losing money) $33 Billion Loss of $294 million 15 p.e. ratio $58 Billion Profit of $4 billion

Key Stock Indices S&P 500 Index –Largest 500 companies by $ value Dow Jones Index –30 very large American companies Nasdaq Index –primarily technology stocks WHY INDICES: There are over 5,000 stocks! A stock index provides the average return of a basket of stocks ETF’s = exchange traded funds a way to invest in various stock indices by purchasing 1 stock Example: SPY = SP500 index MDY = midcap index IWM = smallcap index

BULL or BEAR MARKET?.. A Stock Market goes through the business cycles too

SP500 Historical Returns Stock market hit a high in March of 2000 –3 years of negative returns followed [2000,2001,2002] 2003 SP % 2004 SP % 2005 SP % 2006 SP % 2007 SP % % % % % % % % Market recovery Great Recession Market recovery

SP500 Average PE is Stock market PE = 20 20

Sectors of Stock Market Technology Transportation Retail Financials Energy Health Care Defense New Industries (looking to the future…) Industry Type

Stock Market Sector Handout

Calculating PE Ratios Price to Earnings Ratio: Price of Stock / Earnings per share –Stock Price currently = $20 per share –Earnings equal $1 per share –PE ratio = $20/$1 = 20 –If earnings fall to $0.50 per share => PE = 40