Stock Analysis and portfolio development
Stock analysis
The report focuses on five stocks to provide a comprehensive performance overview through various valuations models such as dividend valuation model, price to multiple models (earning or sales), or free cash flow model to equity evaluation model. Some of the stocks taken into consideration for analysis include IBM, BMY, NFLX, ORCL, and MMM.
Equity evaluation for each stock in the market
Cost of stock equity = risk-free rate + Beta*(Market Return – Risk-free rate)
- IBM = 0.75% + 0.86*(9% – 0.75%) => 7.845%
- BMY = 0.75% + 0.78*(9% – 0.75%) => 7.185%
- NFLX = 0.75% + 1.57*(9% – 0.75%) => 13.703%.
- ORCL = 0.75% + 1.1*(9% – 0.75%) => 9.825%
- MMM = 0.75% + 0.98*(9% – 0.75%) => 8.835%
The analysis of the cost of the stock value in the market for the selected stocks indicates that NFLX has the highest value in the market, followed by oracle. The information shows that stock with a high value of Beta has more value than stock with a lower value of beta in the market (Edwards, Magee & Bassetti, 2018). The investors need to be keen on the selection of a model for them to develop an appropriate mechanism that can lead to better service delivery. Don't use plagiarised sources.Get your custom essay just from $11/page
Rational for model
The model is ideal since it helps to understand the cost of equity in the market. Investors and managers need to understand the price of the stock in the market for appropriate action. The information helps to decide on the best stock to select for investment based on the amount of the capital available.
Price to multiple models (earnings or sales)
The analysis of stock through this model indicates critical aspect price to earnings ratio for stock selected varies, thus different in value of the stock in the market.
| Stock symbol | Value of the stock in terms of P/E ratio |
| IBM | 23.7 |
| BMY | 24.4 |
| NFLX | 52.5 |
| ORCL | 20.5 |
| MMM | 23.8 |
The information in the table shows a critical aspect of the stock in the market that investors need to be conversant when comparing the value of stock in the market. Netflix stock has a high value of P/E ratio in the market, followed by BMY from the stock selected in for analysis. The value of stock in the market is critical since they guide policies and mechanism that can lead to better service delivery.
Rational for model
The price of multiple models is ideal in analyzing the price of the commodities in the market for effective service delivery. Determine the stock is evaluated based on the price ratio in the market. The company’s management needs to have policies to assist in the evaluation of performance for effective service delivery. The model has policies and strategies that enable service delivery in the organization.
Dividend valuation model
It is a method used to predict the price of a company’s stock based on the present-day price. It is an approach used to compute the fair value of the stock in the market, thus provides evaluates the value of stock in both short-term and long-term positions (Bond, Strong, Burger & Weilant 2017). It helps to focus on the time value of the money by examining the net present value of stock presented on the stock exchange market for analysis. The management needs to have a strategic approach to values of the stock in the market.
| Stock symbol | 5-year dividend growth rate |
| IBM | 13.7 |
| BMY | 2.9 |
| NFLX | N/A |
| ORCL | 21.1 |
| MMM | 15.1 |
The analysis of the dividend growth rate in the market shows that ORCL stock has a higher dividend growth rate, thus ideal for selection for investment. The performance of the company depends on the evaluation of the growth rate in the near future. The dividend growth rate is used by an investor to determine the worthiness of stock in the market and appropriate policies and strategies that can enhance efficient service delivery in the economy.
Rational for the use of the model
Dividend growth rate helps to estimate the value of the stock based on the rate at which the stock grows in the market. The value of the stock grows faster, especially when there is a high demand from many stakeholders in the market.
The expected return for each stock
| Stock symbol | The expected return for each stock |
| IBM | 8% |
| BMY | 13% |
| NFLX | 18% |
| ORCL | 2% |
| MMM | 6% |
Portfolio development
Client 1
List of assets provided
Basic salary for year = $70,000
Living expenses = $4800Wedding expenses average =$12500
401k plan saving = $15,000
Cash saving $20,000
Windfall promotion = $60,000
Stock valuation = ($70,000- $12500 -$4800 – $15,000 -$20,000 + $60,000) => $77,700.
Expected portfolio return
Average amount expected to loss => (30% +40%)/2 = 35%.
Expected return using beta model => (100%-35%) x $77,700 = $50,505.
Client 2
Earning for the couple $275,000 and after tax earnings = $190,000
Saving from accumulated savings = $900,000
Portfolio retirement
Average saving for retirement = (3% + 5%)/2 = 4%
Expected portfolio return
Savings for retirement = (4% x$190000)*13 = $98,800
The analysis of the portfolio, it is better for the client to select investment portfolio higher than expected portfolio to maximize on available resources.
References
Edwards, R. D., Magee, J., & Bassetti, W. C. (2018). Technical analysis of stock trends. CRC press.
Bond, C., Strong, A., Burger, N. E., & Weilant, S. (2017). Guide to the Resilience Dividend Valuation Model. RAND.