Tag Archives: earnings per share

The benefits of an economic recession and how to prepare for one

Bear market

I recently read an interesting article about the potential upsides that accompany a recession. With much talk of a recession in the coming months in Australia and one already on the cards in the USA, I thought it may be worthwhile to outline some of the positives that accompany the fear associated with a recession.

Ultimately, a recession will bring a slowdown in spending, a tightening in the job market and an increase in corporate restructuring and lay-offs. This, most people are aware of.

However, for those willing to use sound financial and business analysis, a recession can bring a wealth of opportunities and provide the necessary timing to enter a number of markets.

I like to think of a recession as a time where almost everything goes on sale because this outlines the number of opportunities that are available to the everyday person or investor.

I have outlined 2 main investment related benefits of a recession below and then summarised a few common benefits after that: Continue reading The benefits of an economic recession and how to prepare for one

Stock market beginners – What moves the stock market and stock prices?

what drives the stock market ?

What factors move the stock market? What about individual stocks? How do interest rates affect the stock market and what does this have to do with the Consumer price index and inflation?

Many people know that economic factors such as corporate profits and interest rates tend to influence the movement of the broader stock market. However, I found it particularly interesting to actually analyse how these factors move the market and whether one should follow such trends when purchasing individual stocks.

Corporate profits and GDP

A drop in the Gross domestic product (GDP), the market begins to fear a recession and a subsequent drop in corporate profits. With worsening economic conditions, the market may enter a recession resulting in reduced demand for many company’s products.

Following on from this, many company’s earnings will be affected and the corresponding company stock price will fall (rationale outlined below). Thus, when the GDP and corporate profits fall, the market will suffer.

Continue reading Stock market beginners – What moves the stock market and stock prices?

9 key definitions to understand the valuation and earnings of companies

learning goggles - key valuation definitions

Valuation of Companies and 9 key definitions

After skimming through The Fast Forward MBA in Finance, Second Edition by John Tracy, a few key concepts (such as EPS, ROE, market capitalisation and P/E) kept coming up again and again when dealing with the value of companies. When read in combination with Joel Greenblatt’s book, The Little Book That Beats the Market which simplifies things to some degree, an understanding of these concepts is required to begin understanding whether a company is undervalued or overvalued on the stock exchange and hence whether you should invest in the company.

It is important to firstly recognise that the value of a company’s shares on the stock exchange is only a representation of what the public will pay at any particular time for a stake in the company and is not a direct representation of the company’s true value per se. This fact is actually why smart investors should always be able to make money investing the stock market. For example, if an investor is able to identify a under or overvalued company, they can make the appropriate decision to either buy the stock if it is undervalued or sell the stock (we’ll come to how you can sell stock you don’t have later) if it is overvalued. Over time, whether it is overnight or over 5 years, the market will correct itself and the investor will profit from his analysis of the companies true value compared with the market’s perception of its value.

In later posts, I will describe how Greenblatt’s book proposes a magic formula strategy for identifying undervalued companies based on a company having a high earnings yield and a high return on capital. Firstly, however, this post will aim to explain these concepts so that we can get familiar with them first. Some of the definitions below are drawn from Tracy’s glossary in The Fast Forward MBA in Finance, Second Edition.

Continue reading 9 key definitions to understand the valuation and earnings of companies