Stock Market
All comments and Stock Market Ananlysis are made by Guy Brumley. Guy has been trading the Stock Market daily since 1992.
Trading, evaluating stock prices and predictions
Stock Market Commentary 7-8-2009
The Dow gave back 161 points Tuesday, to break finally below the 8200 level. There is support at the 8000 level, and then the 50% retracement at 7650.
The question for the next two weeks is earnings, and earnings forecasts. The first concept in valuing a stock is to find a growing company that is making money. The key word is growing. If a company has flat sales and earnings, its value is the same next year as it is today. (Pay attention, value and stock price cross paths all the time.) A growing company that doubles earnings over a year will have a stock price that is worth double.
How simple can it get?
Now, what happens if the grow reverses, and we have contraction. If the company shrinks by 10%, you can expect the company to contract by more. The reason, stocks trade against next year’s expectations, which include growth and/or inflation.
Here is a real world example. Alcoa.
The company has 1 billion shares in its float and is selling at $10.00. Its market cap is $10 billion. Two years ago, it had sales of $30 billion, and made $3.00 a share, or $3 billion. (It was also trading for $45.00 per share, and had a market cap of $45 billion.) If you had bought the entire company, it would have taken 15 years to pay off your investment, assuming no growth. Today, the sales are projected to fall to $16 billion, and the company is projected to lose $2.5 billion. Alcoa has only $1.3 billion cash in the bank, and will need to secure loans for the additional $1.2 billion, or issue 120 million new shares at $10.00 to pay its debt.
Now consider the stock price. The sales have drop by almost half, and the company is losing money. The price begins to fall, and you try to guess the price where the company turns back to a profit. Maybe $1.00? (Can you say GM?)
Earnings, and more importantly the projections for the balance of 2009, will dictate whether the market thinks the worst is over, or if we are in for another leg down.
Personally, I think the market is still overpriced. The only thing that can keep prices inflated is for the government to continue to printing money.
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