Today I am going to continue in m series about the best investment choice individuals can make during this time where the uncertainty of stock market is high and the risk that can be taken is quite unknown.
General Dynamics (GD) is a global aerospace and defense company. From Gulfstream business jets and combat vehicles to nuclear-powered submarines and communications systems, people around the world depend on its products and services for their safety and security.
By analyzing the financial statement of GD I found that the company considered one of the best choice that individual can made based in the two main criteria that market is really appreciated about each stock which are Return On Invested Capital (ROIC), and ability to create value for investors by generating high free cash flow.
Based to GD’s ROIC as shown below, the company was able to jump from negative territory to a positive one in 2018 and was able to maintain high ROIC even when it was decreasing but still above the market average as well as the industry average.
Also, based in the company free cash flow, the company was able to do the same as its ROIC, the free cash flow (as shown below) has jumped from (-24) billion Droller to (5.249) billion droller in year 2018 and the company keep maintain this value for the followed year.
Based on the two criteria showed above (GD) one of the best companies that investors can buy its stock and holed it for at lest three ears.
In this series I will continue discussing companies that is considered the best choice for investment during this period of time where no one knows where is the market heading next.
AbCellera is a technology company that searches, decodes, and analyzes natural immune systems to find antibodies that its partners can develop into drugs to prevent and treat disease. From July 2020 until now its share prices dropped from 58$ until it reached to 9$. When analyzing the company financial statement , it appears that the company made high Return On Invested Capital (ROIC) greater than its peers as well as the industry in general, which made it create more value for the investors based in the free cash flow it generate that is the amount of money that left after paying all expenses and left for all the lenders and equity holders as shown below:
The ABCL created only negative ROIC in 2019, but immediately after one year the company increases its ROIC from -3% to 25%. The high ROIC which ABCL made, allow it to increase its value which lead to generate high free cash flow during the 2020 and 2021 as shown below:
The company was able to increase its Free cash flow by more than 997.5% in 2020, and in 2021 the company was still able to increase its free cash flow to 80% from 2020 and 1795% from 2019.
Based on the two major criteria that investors are looking for which is Return on Invested capital and Free cash flow, I believe ABCL considered the best choice for those who want to invest in stock market for at less 3 ears.
In this blog, I am going to show the second choice regarding stocks that people can Invest in especially with the unknown sentiments of the market. This choice is based solely on financial analysis of company financial statements and based on how much Return on Invested capital and free cash flow can be generated.
Microsoft is one of the most powerful companies that generate higher ROIC and Free Cash flow as shown in the below graphs:
As you can See in the above graph Microsoft from 2018 until 2021 doubled its ROIC from 16% until it made it 38%, which is one of the highest ROIC that company can make.
Also, Microsft generated high Free cash flow which was a result of its High ROIC as shown below:
Since Microsoft was able to double its ROIC, From 2018 until 2021, that lead to double its Free cash flow from 35.7 Billion in 2018 until it become 83.5 Billion in 2021 which help Microsoft Acquire Activision Blizzard in cash last year.
These two measurements make Microsoft one of the high candidates that people can invest in its stock, especially with the uncertainty that covers the stock market these days and no one can be sure where is the market heading next.
After almost 13 years of this bull market despite some phases of corrections in 2015 and 2016, as well as the 2018 and 2019, also the tumble during the coronavirus pandemic, Does the stock market right now considered overvalued?. It is really hard to answer this question since there is no science involved. It is just human behavior that is really hard to predict and some of financial valuations art that can be relied on. Financial valuations depend on the financial statements released by those companies listed in the stock market which shows the financial positions of these companies and the income statements as well as the cash that these companies made during a period of time either quarterly or yearly.
Theoretically, the stock price should always go up because it’s just a reflection of the company that designed and operated to make a profit and add value to the economy. But once the stock price goes down that means there is something that goes wrong in this company in its way of handling its business that made its reflection in the stock market drop-down. But that is theoretical speaking because stocks might go down for so many reasons which include as explained earlier human behaviors which can not be explained. But there is one piece of the puzzle here that can help investors to see if the stock market is overvalued or not, that called in the financial valuations analysis, the intrinsic value of the stocks. This intrinsic value of the stock is what investors are willing to pay pulse the premium to invest in a company. This intrinsic value is driven from the financial statements of the company and can be calculated using many ways one of which is considered the most applicable and accurate one that used the free cash flow generated by this company which then discounted to the present value. This method is called Discounted Cash Flow (DCF) and there are so many resources available on the internet that explained this method and help investors to come up with the intrinsic value of the stock of a company.
By applying (DCF), I came up with the intrinsic values of two main companies which are Microsoft and Apple. The reason that I choose these two companies is that they are both parts of the Dow30 Index and S&P 500, and they are both considered the two giant companies in the market based on the market capitalization.
Company Stock Fair Value
Fair Value of Microsoft and Apple
As it appears above the stock price of Microsoft company is 65.5% higher than its fair value, while apple on the other hand is 42%. This shows that there is an inflation in these stocks prices which is more than 53.7% on average.
These intrinsic values have some assumptions which means that there is an error factor that should be applied here which is assumed to be 10%. If this error is applied that means the average inflation above which is 53.7% can be either 43.7% or 63.7%. These intrinsic values are calculated with the assumption that the investor will collect his/her profit in 2023, which means that these values will be changed if the ending year was 2030 or 2040. All this lead to the things said before, which is financial analysis is an art that based on the assumptions that the analyst used to come up with the intrinsic value, but at least this shows somehow that these stocks are not going up because of their intrinsic values have not been reached yet, or if they are undervalued, its the opposite, these intrinsic values show that these stocks are overvalued at this time and its weird they are still going up.
By calculating the intrinsic values of Microsoft and Apple, it becomes clear that these two stocks are overvalued. But what about the other 28 stocks for the 28 companies listed in Dow30 or the 498 stocks listed in S&P 500?. I went through some of these stocks especially those listed in Dow 30 index in this post, which shows that the index is overvalued. But regarding the S&P 500, there are many stocks that are undervalued were not discovered yet because they are not discussed in the news or over the internet and many investors ignore them.
If we assume that the market is overvalued, what should investors do about it?. This is the question that must be asked or at least need to be discussed. There are so many things that investors need to do when the stock market is at its peak and the following are some ideas about how to deal with peaks:
(1) Investors should have cash in their portfolio, by liquidating half of the stocks they own, especially the losers. (2) Never buy overvalued stocks and always buy undervalued stocks especially those stocks in which the difference between their prices and the fair value is 100% or more. (3) Always by stocks their prices are below the Moving average (200) with Return on equity at least 20% or more. (4) Always by stocks their prices are below the Moving Average (200) with Free cash flow double than their net debt.