Monday, September 25, 2017

How to Pick the Right Stock

Picking the right stock is always based off of many factors and statistics. If the markets went up in the past week, it would be a good idea to find which sectors are performing well, and which ones aren’t. For example, in the past two months the semiconductor sector has been phenomenal in comparison to the overall market. After finding the sector in which you are interested in, find out how the sector is doing. Semiconductors did exceptionally well in the last two months because of both the increase in price and demand of DRAM and NAND chips. In the semiconductor index I picked out three stocks that are worth taking a look at.

After determining which stocks are available in the sector of your interest, you should study each stock independently, in comparison to the industry, to see how each individual stock is performing. Some examples in the semiconductor sector that are outperforming the market, are NVIDIA, AMD, INTC, and MU. Some things to look at are: market capitalization, analyst’s price targets, earnings reports, whether or not they have been beating past projections, partnerships the company has made, and how the company is evaluated.

Market Capitalization

The market capitalization should give you a measure of how risky, or how volatile, the stock is. Any stock below a $3 Billion market capitalization involves significant risk, since the company is still growing versus a company with a $400 billion market capitalization. Market capitalization is split into three categories: Large cap, medium cap, and small cap:

Large cap companies have a market cap of $10 billion or more.

Medium cap companies have a market cap between $2 billion and $10 billion.

Small cap companies have a market cap between $300 million to $2 billion.

Analysts Price Targets

In this example, NVIDA’s stock price moved up a lot in the last two months, and it isn’t projected for further growth, as it has already reached the price targets set by analysts. But a company like MU, which has high price targets from analysts, and a strong core business selling DRAM chips, has undervalued stock, leaving room for stock price to move higher.

Company Earnings Reports

The company’s earnings reports can be used as a measure of how the company performs, based on its expectations by analysts, and their forecasts. When a company beats expectations it means the company’s growth is on track, and well above Wall Street forecasts. This stock may be good for both short and long term investments, given that the stock has beaten projections, guaranteeing long term growth. One more thing to pay attention to is how the price of the stock moves around earnings announcements, to see any trends. Earnings are released on a quarterly schedule.

Partnerships & Reputation

A company’s partnerships are very important, as they signify trust and reputation in the industry. When other company’s see a huge company like Amazon promoting a much smaller company, it shows that Amazon believes in the company’s potential, and recommends it to people requiring the same work. For example, Twilio Inc. is a company that offers IT & cloud services to Amazon. When their partnership was announced a few months ago, the stock market reacted positively driving the stock up, because it help set the company up for future partnerships, clients, and success.

How The Company Is Evaluated

Knowing the breakdown of a company’s earnings is really important. If a company makes 80% of its profits from only one product, then you should research the demand of the product, and why it is successful, and pay attention to potential competitors. For example, let’s just make believe that it was three months from now, and the product’s demand was decreased by 50%. If the demand was decreased by that margin, then we can also infer that the company’s earnings are going to decrease heavily, since most of their revenue is from that one product.

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