Question

please discuss- thank you

Week 3 Discussion Ascording to the efficient market hypothesis, stock prices fully reflect available information about the value of the firm, and there is no way for individuals or mutual funds to car excess profits or outperform the market. But, is it true? We will play a simple investment game to test this hypothesis. In this week's discussion, you are asked to recommend at least ONE Mock you would like to hold throughout the semester to maximize your return. Based on your recommendations and the class discussions, I will select the top 20 most recommended stocks to form a class portfolio with hypothetical $1,000,000 in week 4. We will use this portfolio to find out if it is an efficient investment to outperform the market. For each stock's recommendation, you should act like a stock analyst to provide rationales about why investors should hold this stock. You are NOT required to write up a whole page research report to explain your reasons in detail, but you need to summarize some key a cts of why you pick up this stock. For example, you can talk about a company's unique strategies, business model, new product development, customer satisfaction, te that you believe it would drive up the stock price. Some data, including PE ration, EPS, ROA, ROE, or statistics from the technical analysis, would be helpful for your classmates to understand the stock better Please create a new thread with the name of the company as the topic for each stock you want to discuss recommend. Please present your points in a logical order. All thoughts, words, and ideas that are not your own must be referenced appropriately. You could cite references from magazines, newspapers or books to build stronger arguments

im not sure about investments and so i just posted the question in general, lets go with investing in Apple..?

Answer 1

Efficient Market Hypothesis works on the assumption that everyone has access to similar information and that there is no 'information asymmetry' in the market. However the real world situation is usually different as a lot of insiders will have access to information which will not be available to the normal public.

Probably, this will be presented to you during course of time, once the game is played to test the hypothesis. Hence, in interest of the question asked, lets go ahead with the factors to be considered by the investors before investing in any stock , lets assume Apple in this case :

We'll break this down into Qualitative and Quantitative factors, as follows

Qualitative :

1. Stability of Management : The management forms most crucial part in ensuring any company's success and hence its imperative to ensure that the top management of the firm should be stable and competent. Apple scores well in this area and promotes a culture of innovation which indirectly helps in selling of products at a much higher premium.

2. Competitive Standing : Apple is the market leader in its segment and stands relatively stronger with respect to its competitors. This is important since a strong incumbent can directly impact the investor sentiments towards the stock.

3. Product offerings : The product offerings of the firm should have a competitive edge, which should not only be scalable but should be difficult to copy/emulate as well. This is usually ensured by various patents and copyrights by the companies as well as a culture of innovation to ensure that the firm always remains ahead of its peers in the industry. Apple is the perfect example here ensuring that its product offerings remain relevant to the market it caters to.

Quantitative :

1. Stability of earnings : The earnings of the company should be stable and not dwindle too much, so as to avoid any major troughs in the stock prices.

2. Revenue and earnings growth over years : Apple has had a revenue and earnings growth of 5.2% and 10.8% respectively, in the last 3 years as per various market reports, thereby supporting the case for investment.

3. P/E ratio : Price to earnings ratio implies how much price the investors are willing to pay for 1$ of earnings made by the company. Currently the PE ratio for Apple's stock is around 20 which is quite high compared to its peers like Samsung, Dell, HP, etc. A higher PE ratio indicates the optimism of the investors that the company will outperform the market/peers and hence they are ready to pay a higher price to obtain the stock.

4. Various other ratios like Debt/equity ratio, Return on asset ratio, return on equity ratio, etc can help in determining the relative strength of the company over a period of time. However, it is important to note that this should always be compared among the companies in the similar industry. Since some industries have the characteristic which require large amounts of debt on balance sheet or higher inventory or higher asset utilization etc. Comparing them with the whole market index is a wrong way to judge the stock of a company.