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Stocks are basically stakes of ownership in a company. A company’s capital structure consists of equity and debt (Bratton and Watson 57). Therefore, stock or shares are important contributions made by the owners of a company in order to achieve the requisite capital for both investment and financing the operations of a company. In finance, the owners of shares or stock are referred to as stockholders (Brown and Abraham 38). Their main goal of investing is to maximize their returns or earnings. This goal is also known as shareholders wealth maximization (SWM). It is important to note that in cases where a company wants to close down, the claims of the stockholders come last since the claims of the creditors to the company have to be settled first. There are two main subdivisions of stock; these are the preferred stock and the common stock. The difference between the two is that the common stock bears the voting rights during the annual general meetings that the stockholders form part. Moreover, the common stockholders also receive annual dividend payments. In case a company gets liquidated or it is declared bankrupt, the claims on the preferred stock are settled first before those on the common stock since the preference is given to the preferred stockholders (Dodd and Graham 97). Furthermore, the dividend payments to the preferred stockholders usually accumulate.
There are many ratios that are used in the valuation of shares. Some of these ratios include the price/earnings, dividend yield, return on assets and the dividend payout ratios (Stringham 23). My goal in this paper, therefore, is to give a financial overview on whether to buy, hold or sell the shares. This goal will be predicted by analyzing DECK, FL and MUSA stocks and making a financially researched decision on each of these shares.
An analysis of DECK stock as per the tracking form reveals that this stock is performing well. The following calculations relate to DECK stock.
- Total stock’s value in week 1 =$ 72.46 x 150= $ 10,869
- Total stock’s value in week 8= 74.68×150= $ 11,202
- Price deviation = +$ 333, meaning that the price per share has increased by $ 2.22
After evaluation of DECK stock, it is evident that its overall performance in the stock market is outstanding; however, before making the final decision, the financial information reveals that the products associated with DECK stock have more utility designs and patents. This implies that more of these products will be produced, and an increase in production will in turn lead to an increase in sales volume for the DECK products and hence high earnings. Importantly, the earnings before interest tax and depreciation (EBITAD) for this product will rise. With increase in EBITAD, the product will see an increase in profits (earnings after tax (EAT)). This will ultimately lead to an increase in demand for this share and its share/stock price too.
Following the analysis above, it is important to buy more of DECK stock/shares since its share price will continue to rise as a result of increased demand.
FL-Foot Locker Stock
FL-Foot Locker Stocks/shares were evaluated as follows as per the information available on the stock tracking form:
- FL-Foot locker stock value in week 1 =100×60.08=$ 6008
- FL-Foot Locker stock value in week 8=100×62.50=$ 7007
- Share price deviation= $ 7007-6008 = + $ 242, meaning that price of a single share will increase by $ 2.42.
This share also creates an initial impression that it is performing relatively well in the stock market. However, the financial information available as per the financial reports reveals that earnings for FL-Footlocker have grown by 57 % for the last five years; nonetheless, the share price does not reflect such growth. With increase in earnings, the EBITAD for these products has increased, but the share price does not increase probably due to the debt associated with these products. The revenue has also grown, but the value of earnings after tax does not increase since the interest on debt is a deductable expense which reduces EAT (Mithas 33). Therefore, the demand for these shares might not increase; there will be no major change in the share price.
Following the above analysis, it is advisable to sell these shares since their share price in the stock market may continue to rise slowly even though the earnings continue to grow rapidly.
The following analysis has been done to evaluate this stock as per its share price:
- MUSA stock Week 1value $ 70.07 x 100= $ 7007
- MUSA stock Week 8 value= $ 57.11 x 100= $ 5711.
Share price deviation= $(5711-7007) = $ -1296 (meaning that the price of a single share has decreased by $ – 12.96).
From the financial reports, the income or earnings of the MUSA shares have increased consistently from 2013 to 2014, but the share price has decreased significantly by $ 12.96. Murphy company might be having a debt, but immediately after clearing its debt, the share price will increase rapidly in the stock market and hence its demand.
Following the above analysis, it is advisable to hold onto MUSA shares since the forces of demand in the stock market will lead to an increase in share prices of MUSA. Also, when holding MUSA stock the potential investors will be speculating.
Bratton, Watson. Enron and the Dark Side of Shareholder Value. New York: St. Martin’s, 2012. Print.
Brown, Christian, and Abraham Fred. “Sum of Perpetuities Method for Valuing Stock Prices.” Journal of Economics 14.3 (2012): 33-38. Print.
Dodd, Daniel, and Graham Ben. Security Analysis. New York: John Wiley & Sons, 2010. Print.
Mithas, Sunil. Customer Satisfaction In Stock Price. New York: Random, 2011. Print.
Stringham, Edward. “The Origin of the London Stock Exchange as a Self-Policing Club.” Journal of Private Enterprise 4.3 (2011): 21-23. Print.
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