Stock prices affect how you can take out loans and what interest rates you might pay for those funds. This link is a guide to concepts discussed in this article.
A bullish market means that the current stock price is likely to rise in the future. Investors in Dubai look for stocks with high or increasing earnings per share (EPS) growth because this shows that the company’s management can increase profit margins. The EPS growth rate is determined by looking at the change in net income divided by shares outstanding minus dividends paid out to shareholders each year.
Bullish market example
An example of a bullish trend would be Alphabet/Google 2015-2017 years. Their last quarter results were soaring compared to previous quarters’ revenue and earnings per share (EPS). The number of advertisers grew from 400k to 2 million marketers between2014 and 2016. While advertisers’ average spend was $25 in 2014, it grew to $50 in 2016. As a result, their annual revenue growth is speeding up at an increasing rate.
A bearish market implies that the price of a stock is likely to go down in the future. When analyzing securities, you want to avoid companies whose earnings are declining because they have lower profitability. Their stocks are more risky investments than those with higher EBITDA levels [earnings before interest, taxes, depreciation and amortization] growth.
Bearish market example
An example of a bearish trend would be RGR/Sturm Ruger 2015-2017 years. Their last quarter results were declining compared to previous quarters’ revenue and earnings per share (EPS). The number of firearms manufactured declined from 1 million to 280 thousand between 2014 and 2017, while EPS numbers are harmful because of the rise in expenses. Sturm Ruger’s management expects prices for raw materials to decrease in the future because of its oversupply, which will negatively affect their future profitability.
Methods for assessing stocks
One popular method that individual investors use when deciding whether a stock is over or underpriced is the P/E ratio. A high price-to-earnings (P/E) ratio shows that investors think the company’s earnings growth potential will be better than those of other companies in the same industry, but sometimes this is not always true. For example, if a particular sector has recently experienced rapid revenue and earnings growth, it is overvalued and would not likely continue to experience such a powerful performance. Stocks with low P/Es could present value opportunities for investors even if there is no apparent reason these companies should perform better than others in their sector. So before you make an investment decision based on the P/E ratio alone, make sure you know why the P/E is high or low.
The other method that individual investors use to decide whether a stock is over or underpriced is the DCF (discounted cash flow). Discounted cash flow analysis involves forecasting future free cash flows and then discounting them back to present value using an appropriate discount rate. Since we cannot predict the future with certainty, this valuation technique can give unique values depending on our assumptions for future free cash flows and the required rate of return. The assumption regarding growth rates affects the calculation significantly because they will influence short-term earnings growth and long-term free cash flow potential. A minor difference between assumed growth rates results in a higher valuation.
Price-to-earnings ratio example
SRG, the stock we discussed earlier for its bearish market trend, had a very low P/E of 7 because of its negative earnings. I expect if EPS turns positive in the future because management predicts that this industry’s bubble will burst within two years, then SRG’s stock price would decrease as well. However, such analysis requires predicting the future, which is difficult, so you should remember that past performance does not guarantee future results. Bear markets can be hard to identify because it is difficult to tell whether a stock has entered the bear market’s downward trend.
The critical thing to remember is that you will want to reevaluate your holdings frequently and cut any underperforming investments rather than ride out the bear market, which could take longer than expected.
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