Many individuals think about investing profit a significant global economy like the US. This can be carried out with the S&P 500 stock index of over 500 first-class US companies. That doesn’t seem just like a lot compared to the roughly 5,000 stocks traded on the US market. However, these 500 companies account fully for around 80% of the total capitalization of the US stock market.
The Standard & Poor’s 500 is the principal US stock indicator. Its performance influences the GDP of exporting countries and wage growth along with many derivatives. The whole world tracks the index daily.
When it comes to companies (components of the S&P 500 index), everyone understands and uses the services or products of these companies, those types of are Microsoft, Mastercard, Google, McDonald’s, Apple, Delta Airlines, Amazon and others. In the event that you purchase securities of such major US companies, it could be the best investment you can make.
Could it be difficult to construct a profitable stock portfolio all on your own?
Indeed, it will seem something unattainable for a non-professional. Anyone desiring to start investing will need more money, understand and read company reports, regularly make appropriate changes in their portfolio, monitor market share prices, and most importantly, decide which 500 companies to get in the beginning of the journey being an investor. Yes, there are some issues, but they’re all solvable.
Share price. This is the price tag on a company’s share at a spot in time. It can be quite a minute, one hour, each day, a week, monthly, etc. Stocks can be a powerful instrument. Industry is unstoppable, and price will soon be higher or lower tomorrow than it is today. But how do guess what happens price is adequate to get, whether it’s expensive or not or perhaps you should come tomorrow? The answer is simple, you can find financial models for determining what’s called fair value. Each investor, investment company and fund has a unique, but at the heart of these complex mathematical calculations is usually a DCF model. There are many articles explaining DCF models and we will not get into the calculations and examples. The main goal is to find a currently undervalued company by determining its fair value, which will be later changed into a price per share. We make daily calculations and find out the fair prices of all components of the S&P 500 Index based on annual reports, track changes in the index and update the data.
For the forecasting model to work well, we want financial data from companies’ annual reports. We process this data manually, without needing robots or automated systems. Like that, we dive into the companies’ financials completely, read and discuss the report, then feed that data into our forecasting model, which determines the fair price. It is important to have at the least 5-year data and look closely at the dynamics of revenue, net income, operating and free cash flow. The very decision to possibly choose company comes only after determining the company’s current fair value and value per share. We consider companies with a possible greater than 10% of fair value, but first things first.
Beginning. So, the company’s annual report arrives today. The report should be audited and published by the SEC (Securities and Exchange Commission). Based on section 8 of the report, we make calculations inside our model, substitute values, calculate multipliers, and finally determine the fair value. By all criteria, the organization is undervalued and right now the share value is a lot below the calculated values, let’s go deeper into the report.
Revenue. Let’s look at revenue dynamics (it is really a significant factor). Revenue has been growing for the last 3-5 years, it would be ideal if it has been increasing year after year for a decade, nevertheless the proportion of such companies is negligible. We give priority to revenue inside our calculations—no revenue – no need to include the organization inside our portfolio. We pay attention to possible fluctuations. As an example, through the pandemics (COVID-19), many companies from different sectors have suffered financial losses and the revenue decreased. This is someone approach, with respect to the industry. The very best option: revenue growth + 5-10% over the last 5 years.
Net profit. We consider the net profit figure, and it is good if in addition, it grows, however in practice the web profit is more volatile. In this instance the important factor is that company has q profit, rather than loss, which will be 10-15% of revenue. Of course, a solid decline in profit would have been a negative aspect in the calculations. The very best option: a profit of 10-15% of revenue over the last 5 years.
Assets and liabilities. We go to the total amount sheet and observe that the company’s assets increase year after year, liabilities decrease, and capital increases as well. Cash and cash equivalents are increasing. We pay attention to the company’s overall debt, it will not exceed 45% of assets. On one other hand, for companies from the financial sector, it is not critical, and some feel more comfortable with 60-70% debt. It is all about someone approach. We consider only short-term and long-term liabilities, credits and loans, leasing liabilities. The very best option: growth of company assets, total debt < 45% of assets, company capital more than 30%.
Cash flow. We’re immediately interested in the operating cash flow (OCF), growing year by year at a rate of 10-15%. We look at capital expenditures (CAPEX), it could slightly increase or remain the same. The primary indicator for all of us will soon be free cash flow (FCF) calculated as OCF – CAPEX = FCF. The very best option: growth of cash flow from operations, a slight upsurge in capital expenditures, and most importantly, annual growth of free cash flow + 10-15%, which the organization can devote to its further development, or for example, on repurchasing of its shares.
Dividend. Besides the rest, we have to pay attention to the dividend policy of the company. All things considered, we like it when profits are shared, even just a bit, for our investments in the company. If the dividend grows from year to year, it only pleases the investor. Furthermore, the entire return on investment in companies with a dividend should increase. Many investors prefer a “dividend portfolio,” investing in 15-20 dividend companies with yields of 4-6%, as well as the growth in the worthiness of the shares themselves. The very best option: annual dividend and dividend yield growth, dividend yield above the common yield of S&P 500 companies.
Multipliers. Moving forward to the multiples of the organization, they’re all calculated using different formulas. When calculating exactly the same multiplier, you need to use two or three formulas with a different approach. We often lean toward the average. The critical indicators are the 3, 5 and 10-year values. The index for a decade has the best influence in the calculations along with the annual. In today’s economy, we consider 3 and 5-year indicators to be the main ones. what is the best stock to buy right now
How many multiples is enormous and it makes no sense to calculate every one of them. We must give consideration simply to the major ones. Among them are Price/Earnings ratio (P/E), Price/Cash Flow ratio (P/CF), ROA and ROE, Price/Book (P/B), Price/Sales, Enterprise Value/Revenue (EV/R), Tangible Book Value, Return on Invested Capital (ROIC). It is necessary to check out these indicators in dynamics over 5-10 years. The very best option: price/profit and cash flow ratios are declining or are at exactly the same level (these ratios should be less than 15), efficiency ratios are increasing year by year and moving towards 30, other ratios are above average in this sector.
This is a small set for investors. Of course, there are many indicators in a company’s annual report, the important ones include operating profit, depreciation, earnings before taxes, taxes, goodwill and many others. We prepare the important thing and most significant financial indicators, you can save plenty of time and research all companies in the S&P 500 Index.
Now we have a broad idea concerning the financial health of the company. We made some calculations inside our financial model, where we determined the percentage of undervaluation right now and determined whether to get shares of the corporation or not. You can find no impediments. Allocate 5-8% of one’s available budget and purchase the stock. Remember to diversify your portfolio. Buy undervalued companies, 1-2 in each sector. You can find 11 sectors in the S&P 500. Choose only those companies whose business you realize, whose services you employ or whose products you buy. Don’t rush the calculations in your model, if you are not sure, don’t purchase this company.
Surprisingly, an undervalued company may not reach its value for a long time. The dividend paid will increase the situation. Avoid companies with information noise. Usually, they talk a whole lot but don’t do much.
The S&P 500 index of companies has been yielding the average annual return of 8-10% for many years. Of course, there has been bad years for companies, but they’re recovering even more quickly than their “junior colleagues” in the S&P 400 or 600. Have a good and profitable investment.