How to Analyze a Single Stock

Summary

In the video, Philip shares his grandmother's wise investment in Disney stock, which grew significantly over time. The script then delves into the art of stock picking, contrasting technical analysis, which focuses on historical price movements and patterns, with fundamental analysis, emphasizing a company's financial health and value. It also touches on qualitative factors like management and industry trends. The video concludes by suggesting that a balanced approach, combining these methods, is key to informed investing, echoing Warren Buffett's investment principles.

Takeaways

• 🎁 Philip received a Disney stock as a gift, which grew significantly over time.
• 📈 The stock's value increased from $1.40 to $35 per share, and the number of shares multiplied due to stock splits and dividends.
• 🏠 In 2007, they sold the shares for $1,600, using the money for a down payment on their first house.
• 🤑 Philip realized an 114,100% return on the initial investment.
• 📊 Stock analysis methods are categorized into technical analysis and fundamental analysis.
• 📈 Technical analysis focuses on historical price movements and trading volumes to predict future trends.
• 📊 Back-testing is a key concept in technical analysis, looking for repeatable patterns like 'cup and handle' or 'candlestick'.
• 📈 Moving averages and crossover strategies are used to signal buying or selling opportunities.
• 📊 Fundamental analysis examines a company's overall strength and financial stability.
• 📈 Fundamental indicators like EPS (Earnings Per Share) and P/E (Price-to-Earnings) ratio help in comparing companies.
• 📈 Qualitative elements such as competitive advantage, management quality, and industry trends also influence investment decisions.
• 💡 Warren Buffett's investment approach considers returns on capital, management quality, and sensible pricing.
• 💼 The script encourages becoming a more informed investor by combining different analysis approaches.

Q & A

What was the initial investment Philip's grandmother made for him?

Philip's grandmother gifted him a certificate for a single share of Disney stock for $1.40 when he was a newborn.

How many shares did Philip end up owning after decades?

After multiple stock splits and dividend investments, Philip owned over 50 shares.

What was the selling price per share when Philip sold his Disney shares in 2007?

The share price had grown to about $35 each when Philip sold them in 2007.

How much money did Philip make from selling his shares in 2007?

Philip sold the shares for around $1,600 in 2007.

What did Philip and Julia use the money from selling the shares for?

They put the money towards the down payment on their first house.

What was the percentage return on investment Philip realized from selling the shares?

Philip realized a whopping 114,100% return on that investment.

What are the two major categories of stock analysis mentioned in the script?

The two major categories of stock analysis mentioned are technical analysis and fundamental analysis.

What does technical analysis focus on?

Technical analysis focuses on tracking price movement and trading volume of a company's stock, looking for historical patterns to predict future opportunities to buy or sell for profit.

What is back-testing and why is it important for technical analysts?

Back-testing is the process of studying past market data to evaluate and verify trading strategies. It is important for technical analysts because it suggests that specific movements of the stock price or trading volume will be repeated in the future.

What is the moving average and how is it used in stock trading?

The moving average is a constantly updating average price or trading volume of a stock. It is used in trading strategies like the crossover strategy, where traders look for the share price to fall below or climb above the moving average as a signal to buy or sell.

What are fundamental analysts concerned with?

Fundamental analysts are concerned with the overall strength and financial stability of a company. They look at factors such as profitability, economic resilience, and whether the company is currently undervalued.

What are the two essential fundamental indicators mentioned in the script?

The two essential fundamental indicators mentioned are earnings per share (EPS) and price-to-earnings (P/E) ratio.

How do qualitative elements factor into stock analysis?

Qualitative elements include factors such as a company's competitive advantage, management quality, and industry direction. These elements are not quantifiable like technical or fundamental analysis but can significantly influence a company's health and an investor's decision.

What are Warren Buffett's three general rules for choosing a company to invest in?

Warren Buffett's three general rules are: 1) The company must earn good returns on the net tangible capital required in their operation. 2) They must be run by able and honest managers. 3) They must be available at a sensible price.

What is the ultimate goal of stock analysis according to the script?

The ultimate goal of stock analysis is not to become a magical stock soothsayer but to make the investor more confident and informed.

Outlines

00:00

📈 Stock Investment Journey and Analysis Techniques

Philip shares his personal story of inheriting a single share of Disney stock as a newborn, which grew to over 50 shares through stock splits and dividends, eventually being sold for a 114,100% return. The narrative transitions into an educational segment on stock analysis, highlighting two primary methods: technical and fundamental analysis. Technical analysis is described through its focus on historical price movements and trading volumes, using tools like back-testing and patterns such as the 'cup and handle' and moving averages. Fundamental analysis, on the other hand, is portrayed as an approach that examines a company's overall financial health and stability, using metrics like earnings per share (EPS) and price-to-earnings (P/E) ratios to evaluate a company's profitability and valuation.

05:00

🔍 Deep Dive into Financial Ratios and Qualitative Analysis

This paragraph delves deeper into financial ratios, explaining how EPS and P/E ratios are calculated and used to compare companies. It uses the example of Donut Dragons and Cupcake Queens to illustrate how these ratios can indicate a company's profitability and value. The discussion then broadens to include qualitative elements of company analysis, such as competitive advantage, management quality, and industry trends, emphasizing the subjective nature of these assessments. The paragraph concludes with a nod to Warren Buffett's investment philosophy, which combines elements of technical, fundamental, and qualitative analysis. It encourages viewers to become informed investors, suggesting they start small, verify information, and consider personal values in investment decisions. Lastly, it promotes a related PBS series, 'Future of Work,' hosted by the speakers, which explores contemporary work-related issues.

Keywords

💡Stock Split

A stock split is a corporate action in which a company increases the number of its outstanding shares by issuing more shares to its current shareholders. This is usually done in the form of a bonus issue. In the script, Philip's grandmother gifted him a single share of Disney stock, which through multiple stock splits, turned into over 50 shares. This illustrates the potential for growth in the number of shares one owns without additional investment.

💡Dividend Reinvestment

Dividend reinvestment is a strategy where the dividends received from a stock are used to purchase additional shares of the same stock. This can lead to an increase in the number of shares owned over time. In the context of the video, the Disney stock Philip received also benefited from dividend reinvestment, contributing to the increase from one share to over 50.

💡Share Price

Share price refers to the current market value of a single share of a company's stock. In the script, the share price of Disney stock grew from $1.40 to about $35 each, which significantly increased the value of Philip's investment.

💡Technical Analysis

Technical analysis is a method of evaluating stocks by analyzing statistics generated by market activity, such as past prices and volume. It is used to predict future market movements. The video script describes technical analysis as focusing on tracking price movement and trading volume, using tools like moving averages and patterns like 'cup and handle' and 'candlestick'.

💡Back-testing

Back-testing is the process of testing a financial model or trading strategy on historical data to evaluate its potential performance. It's a critical concept for technical analysts. The script mentions back-testing as a way to discover repeatable patterns in stock price movements that might be predictive of future trends.

💡Moving Average

A moving average is a technical analysis indicator that helps smooth out price action by filtering out the 'noise' from random price fluctuations. It's used to identify the overall trend direction. The script refers to the moving average as a tool that technical analysts use to execute trades when the share price crosses above or below the moving average.

💡Fundamental Analysis

Fundamental analysis is a method of measuring a company's intrinsic value by examining its financial health, management, and competitive position in its industry. The video script contrasts this approach with technical analysis, emphasizing that fundamental analysts focus on the overall strength and financial stability of a company.

💡Earnings Per Share (EPS)

EPS is a financial metric that represents the amount of net income a company earns per outstanding share of its common stock. It's used to evaluate a company's profitability. The script explains that a higher EPS indicates a more profitable company.

💡Price-to-Earnings Ratio (P/E Ratio)

The P/E ratio is a valuation ratio of a company's current share price compared to its per-share earnings. It is used to determine if a company's stock is overvalued or undervalued. In the script, a lower P/E ratio is suggested to indicate a potentially cheaper buy.

💡Qualitative Elements

Qualitative elements refer to non-numerical factors that can influence a company's performance or stock price, such as brand reputation, management quality, and industry trends. The video script suggests that qualitative elements are important for investors to consider alongside technical and fundamental analysis.

💡Investment Philosophy

An investment philosophy is a set of principles that guide an investor's approach to investing. The script discusses different philosophies, such as technical analysis, fundamental analysis, and qualitative research, and suggests that using them in combination can lead to a more informed investment strategy.

Highlights

Philip received a Disney stock certificate as a newborn, which grew significantly over decades.

A single share turned into over 50 shares through stock splits and dividend reinvestment.

The share price increased from $1.40 to $35 each, leading to a substantial return on investment.

The investment's return was a staggering 114,100%, showcasing the power of long-term holding.

Julia challenges Philip to pick a winning stock like his grandmother did.

Picking stocks involves more than just gut instinct or social media trends.

Two major categories of stock analysis are technical and fundamental analysis.

Technical analysis focuses on historical price movements and trading volume.

Back-testing is used to identify repeatable patterns in stock price movements.

Examples of patterns include the cup and handle, candlestick, and falling knife.

Moving averages are used to signal buy or sell decisions based on price crossovers.

Fundamental analysis looks at a company's overall strength and financial stability.

Key fundamental indicators are earnings per share (EPS) and price-to-earnings (P/E) ratio.

EPS indicates a company's profitability, while P/E ratio helps determine if a stock is a good buy.

Qualitative elements such as competitive advantage and management quality are also considered.

Personal feelings and values can influence investment decisions beyond quantitative analysis.

Combining technical, fundamental, and qualitative analysis can lead to a well-rounded investment strategy.

Warren Buffett's investment rules emphasize returns, management, and a sensible price.

Investing in stocks is not for everyone, but those interested should start small and verify information.

The goal of stock analysis is to become a more confident and informed investor.

Julia and Philip host a docuseries exploring work-related questions facing Americans.

Two Cents is financially supported by patrons, and viewers are encouraged to become patrons.

Transcripts

- [Philip] When I was just a newborn,

my grandmother generously gifted me a certificate

for a single share of Disney stock to celebrate.

The price? $1.40.

- [Julia] Decades later,

we fished that certificate out of our safe

and did a little research.

Turns out, that little single share had made some friends:

through multiple stocks splits and dividend investment,

we now owned over 50 shares.

On top of that, the share price had grown to about $35 each.

So, in 2007, we sold the shares for around $1,600,

which we ended up putting towards

the down payment on our first house.

- [Philip] All told, I realized a whopping 114,100%

return on that investment.

Way to go, baby Philip!

- Okay, Mr. Boss Baby, don't forget.

That was thanks to your Nana,

but now that you can tie your own shoes

and have all these fancy financial licenses,

do you have what it takes to pick a winner

like she did all those years ago?

- Not only did I learn to tie my shoes,

thank you very much.

But I have also learned that there's a lot more

to picking stocks

than following a gut instinct

or what I see on Reddit.

Today, we're going to explore the tools

you can use to become your very own baby Philip moneybags.

Mustache twirling required.

(playful upbeat music)

- Let's say a certain company has caught your eye.

Maybe they make a product you love,

maybe you keep seeing their name pop up on WallStreetBets,

or maybe you simply work for the company

and have an opportunity to become a shareholder.

Before tapping that Buy button on your trading app,

it might be a good idea to kick the tires, so to speak.

- Most methods of analyzing stocks

fall into two major categories:

technical analysis and fundamental analysis.

They're often portrayed as locked

in an eternal battle for supremacy;

same goal, different tactics.

So, which camp comes out on top?

Let's start by looking at the technician.

- If you've ever seen a day trader at a coffee shop

or those huge stock terminals on TV

with squiggly lines in red and green columns,

then you've seen technical analysis in action.

This discipline focuses on tracking price movement

and trading volume of a company's stock.

What they're looking at are historical patterns,

patterns that will clue them into opportunities

to sell or buy a stock at a profit based on the data.

This often requires extensive research

of past trends,

sophisticated trading models,

and a healthy dose of technology

to execute when they recognize

the signal they're looking for.

- These repeatable patterns

are discovered through something called back-testing.

Back-testing is a critical concept to the technician.

It suggests that specific movements

of the stock price or trading volume

will be repeated in the future.

Here's an example of the cup and handle.

Here's a candlestick

and, of course, the falling knife.

Many traders develop entire strategies

around a single pattern or a combination of multiples.

- But mapping the stock price alone

isn't the only factor they consider.

Another is the moving average.

This is a constantly updating average price

or trading volume of a stock.

One classic use of this particular indicator

is the crossover strategy.

This strategy looks for a share price

to fall below or climb above moving average,

hence, crossover.

They use these shifts as a signal

to buy or sell out of their position.

But crossovers are just the beginning.

Strategies like pennants, flags, or triangles

are other configurations analysts might look for.

(sighs)

Now that our brains are good and scrambled,

let's visit the other side,

the fundamentalists.

- Fundamental analysts aren't concerned

with all the squiggly lines

and fine details of a stock's movement.

Instead, fundamentalists focus on the overall strength

and financial stability of a company.

They ask questions like, how profitable were they last year?

Are they in a strong position

to weather an economic downturn?

Are they currently undervalued?

Obviously, you can't just set a meeting with the CFO

to get answers to these questions.

So, these investors rely on a few specific formulas.

- If you were to do an online search for any company stock,

you'll likely come across two essential,

fundamental indicators:

earnings per share or EPS,

and price-to-earnings or P/E.

EPS for a company is found

by taking the company's net income,

subtracting preferred dividends, if any,

then, dividing that number

by the number of shares outstanding.

The higher the EPS,

the more profitable the company.

Then, if you take their EPS

and divide it into the current stock's share price,

you'll have your P/E ratio.

- These ratios will allow you to compare a stock,

apples to apples

or Apple to Samsung.

For example, let's say you're interested in two companies,

Donut Dragons and Cupcake Queens.

After you run the numbers,

you see that Donut Dragons has a higher EPS

than Cupcake Queens,

suggesting a higher profitability.

Further crunching reveals that Donut Dragons

also has a lower P/E ratio than Cupcake Queens.

Meaning, it might be a cheaper buy.

Analysts use all kinds of creative ratios like this

to help measure the fundamental value

of one company over another.

- I'll admit, the idea that I can just use math

to make money is really appealing.

It gives the individual a sense of control

over something as uncontrollable as an economic market.

And even though these two analytical paths

can help you make a more informed decision,

we can't forget that there are important aspects

to company's health that are neither technical

nor fundamental in nature.

- These are known as qualitative elements.

Does the company have a durable, competitive advantage?

How's the management at the top?

What's their turnover like?

What direction does this company's industry

seem to be heading?

Even if you're able to find some of this out,

the information is going to be interpreted

through the lens of your personal feelings.

Maybe you feel that a company, while booming now,

is ultimately doomed due to climate change.

Maybe after hearing about a leadership scandal,

you decide to sell,

despite what the P/E ratio might tell you.

That's okay.

You should allow space for your excitement

and personal values

to have a seat at the decision-making table.

- So, which of these philosophies ultimately wins out?

Should you lean into technical analysis

or focus on fundamentals?

Maybe qualitative research

is ultimately the most important.

For many investors, professional and novice alike,

These different approaches

actually aren't in a battle at all.

Instead, when used in tandem,

they compliment each other.

- In 2019, Warren Buffett told his shareholders

his three general rules for choosing a company to invest in.

"First, they must earn good returns

on the net tangible capital required in their operation.

Second, they must be run by able and honest managers.

Finally, they must be available at a sensible price."

As you can see, even the Oracle of Omaha

uses a three-pronged approach.

- Now, if all this makes your head spin, that's okay.

This kind of stuff isn't for everyone

and you don't have to do it

in order to be a successful investor.

But, if solving this puzzle

and picking stocks is of interest to you and you have time,

go for it!

Start small and do your own work

to verify anything you might see on the internet.

- The point of all of this

isn't to become some sort of magical stock soothsayer

impervious to losses,

rest assured, there is no such thing.

The goal is to make you a more confident

and informed investor.

- [Julia And Philip] And that's our two cents.

- Quick! Before you go,

do you know what you wanna be when you grow up?

- No matter your answer,

we think you should check out "Future of Work,"

a new six-part docuseries on PBS Voices

hosted by Julia and me

that explores the real, big, work-related questions

that Americans are facing today.

Everything from debt and the gig economy,

to career identity and so much more.

- Check it out!

Link in our description

and be sure to tell them that Two Cents sent you.

(mellow music)

Thanks to our patrons

for keeping Two Cents financially healthy.

Click the link in the description

to become a Two Cents patron.

(playful music)