Recommendation and stock selection – Assignment-Witer

FINANCIAL REPORT 8
 
 

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John C. Conner II
 
Dr. Black
 
FIN 534
 
23 August 2021
Imagine that you are a financial manager researching investments for your client. Think of a friend or a family member as a client. Define their characteristics and goals such as an employee or employer, relatively young (less than 40 years) or close to retirement, having some savings/property, a risk taker or risk averter, etc. Next, use Nexis Uni at the Strayer University library, located at Nexis Uni, click on “Company Dossier” to research the stock of any U.S. publicly traded company that you may consider as an investment opportunity for your client. Your investment should align with your client’s investment goals.
I would advise her to invest in a mid-cap or large-cap company rather than a small-cap name because she does not have the spare cash or time to recover from a massive loss. Because startups are such high-risk ventures, they yield such significant returns. She stands just as much a chance of hitting it big as she has of bottoming out. Even though some outstanding tiny companies would fit within an older person’s investing framework, she should stick to this counsel for the most part. It comes from the Benjamin Graham and Warren Buffett school of thought, as do many other suggestions. Furthermore, if you invest in “best of breed” enterprises and well-known products, you shouldn’t have any trouble adhering to this criterion.
The second criterion I’d use to assist her in choosing a stock is to choose one that has an excellent track record. It may not return double digits every year, and it may even have a weak quarter now and then. In addition, the long-term chart’s general thought process must be compelling. Finally, I’d advise her to put her money into a company that has made its shareholders wealthy rather than a firm that has depleted shareholder value over time. She should buy equities that meet the criteria listed above and have done well over a long period.
It’s time to narrow down on a specific firm now that we’ve weeded out the types of stocks to focus on. I would urge her to invest in a stock with a simple, easy-to-understand business concept. These businesses frequently offer a product or service that is simple to understand and recognize. She should avoid companies that other investors would find complicated because she is not an industry specialist. That firm should also be regarded as “best of the breed.” This includes companies with well-established brands as well as those with powerful new brands.
These businesses are among the best in their field. The basic rule of thumb is to stick with well-known, widely recognized, and well-liked brands. Furthermore, many of the best-performing stocks in history have one thing in common: they all have a fantastic brand. It should not be difficult to identify a brand with a track record of outstanding performance if you are looking for both well-established and newer brands. The majority of organizations that fit this profile have a strong track record of generating long-term shareholder value.
I would advise her to invest in Nike, Inc. based on the logic for selecting a stock that fits all of these criteria. Nike is global athletic footwear, apparel, equipment, and accessory company that designs, develops, markets, and sells athletic footwear, gear, equipment, and accessories. They offer products in a variety of categories, including running, basketball, the Jordan brand, football, training, and sportswear, through their parent company and several subsidiaries, including Jump man, Converse, Chuck Taylor, All-Star, One Star, Star Chevron, Jack Purcell, and Hurley trademark. It sells merchandise to people of all genders and ages for a variety of professional and recreational sports. They also provide sports gear and accessories and licensed college and professional team and league emblems.
 
 
 
Ratio Analysis
Over the last three years, Nike has been one of the most consistent performers. According to financial statements, Nike has maintained one of the best performers in its area over the last three years. To assess Nike’s financial health, I would utilize two sets of ratios. I’d start with a set of liquidity ratios, focusing on the current, quick, and cash ratios. Liquidity ratios are a type of financial metric that measures the ability of a firm to settle its short-term obligations without having to acquire additional funds. In addition, liquidity ratios assess a firm’s ability to meet its margin of safety.

Liquidity Ratios
 
2019
2018
2017

Current Ratio
210%
251%
293%

Cash Ratio
51%
87%
113%

Quick Ratio
139%
163%
201%

 
The current ratio is the first ratio I look at. The current ratio, often known as the “working capital” ratio, assesses a company’s capacity to meet short-term obligations, such as those due within a year. This metric aids investors in determining a company’s ability to service short-term debt with current assets. For the past three years, Nike has maintained a current ratio of greater than two. This means they have nearly three times the capital required to pay their short-term obligations on hand.
The quick ratio is the following ratio to be looked at. The acid-test ratio assesses a company’s capacity to satisfy short-term obligations with its most liquid assets. Current assets do not include inventory in this ratio. Nike has continually maintained a fast ratio of greater than one. Even after eliminating inventories, this indicates significant liquidity, with over $1 in assets converted quickly to cash for every dollar in current liabilities.
The cash ratio would be the last liquidity ratio I’d look at. Because it solely analyzes a company’s most liquid resources, this ratio is more conservative than other liquidity measures. It informs creditors and analysts of the value of current assets that can be converted into cash fast, as well as the percentage of current liabilities that these cash and near-cash assets can cover. In addition, it’s thought to predict a company’s value in the worst-case situation, such as if it’s set to go out of business. In 2017, Nike had a cash ratio of over 1, nearly.9 in 2018, and over.5 in 2019. Even though Nike does not have $1 in cash for every dollar of liabilities, when the other ratios are included, the company remains highly liquid, allowing it to cover any short-term liabilities without the need to borrow capital.
Profitability ratios are the next set of ratios I’d use to assess Nike’s financial health. Profitability ratios are a set of measurements that illustrate how well a company’s current assets are used to generate profit and value for shareholders over time. Operating margin and profit margin are the profitability ratios I’ll focus on. And then there’s the return on investment (ROE). Higher ratio outcomes are often more beneficial, but ratios reveal much more information when compared to other, similar companies, the company’s previous performance, or the industry average.

Profitability Ratios
2019
2018
2017

Operating margin
12%
12%
14%

Profit Margin
10%
5%
12%

After-Tax ROE
45%
20%
34%

After accounting for variable manufacturing expenses, the operating margin determines how much profit a corporation makes per dollar of sales. For the past three years, Nike has maintained an operating margin of above 10%. This margin is handy compared to other businesses in the same industry to measure how efficient the business is.
Its net profit margin measures a company’s ability to make earnings after taxes. The profit margin shows how much profit was made per dollar of sales. It is utilized to measure a company’s financial health, management expertise, and development potential by creditors, investors, and businesses. Over the last three years, Nike’s profit margin has averaged around 9%. This would have to be compared to other companies in the field, but it does show that the company is profitable every year.
The final ratio, ROE, is crucial to corporate shareholders because it assesses their capacity to profit on their equity investments. When a company’s ROE may benefit from a greater return, aided by a more extensive asset base, it can grow without adding equity. For example, because Nike is such a massive corporation, it can expand its asset base. As a result, there is a more significant return with higher margins. Nike has a 33 percent ROE, which suggests that equity holders can keep a large portion of the return growth when extra assets result from efficient debt utilization.
Stock price analysis
Nike has maintained earnings for the past three years and has more than enough assets to pay its obligations, so I believe it is well-positioned to continue operating for many years. Moreover, the company is relatively low risk to buy because it has licensing agreements with various professional leagues and numerous academic and athletic institutions and sells goods vital to a significant portion of the general public.
To mitigate the risks associated with buying any stock, an investor might diversify by buying shares in other industry giants like Reebok, Adidas, or Under Amour. However, Nike is well-positioned to gain from these operations as long as sports remain viable in public institutions and professional leagues stay viable as a source of revenue worldwide.
Recommendation and stock selection
Nike has nearly $139 billion market capitalization yet trades for less than $100 per share. That is to say, and it is a massive corporation with a low barrier to entry for new investors. And, having been in business for nearly four decades, the company has a long track record of delivering results for investors.
Nike is an easy investment because it is a large-cap corporation with an easy-to-understand, reasonably clear business plan. This company has a long list of well-known brands that are also “best in the breed.” It has demonstrated that it has been a good performer in the past, with more than enough cash and assets to support growth or weather a downturn. Nike is already paying dividends as well. Investors are currently receiving a quarterly dividend of 1.11 percent. It operates in a viable field, services vast portions of the country. It has a slew of subsidiaries to ensure that a viable product is available to a significant number of people. It would be a mistake not to invest in this stock.
 
Sources
1. Benzinga Editorial. (2012, June 15). Six Rules to Follow When Picking Stocks. Retrieved from www.forbes.com: https://www.forbes.com/sites/benzingainsights/2012/06/15/six-rulesto-follow-when-picking-stocks/#1caccca65a2e
2. Bond, E., & Auerbach, A. (2020, March 15). How to Analyze Profitability. Retrieved from www.edwardlowe.org: https://edwardlowe.org/how-to-analyze-profitability-2/
3. CNN Money. (2017, March 24). Stocks: Investing in stocks. Retrieved from money.cnn.com: https://money.cnn.com/pf/money-essentials-stocks/
4. Gardner, T., & Gardner, D. (2018, March 28). 13 Steps to Investing Foolishly. Retrieved from The Motley Fool: https://www.fool.com/how-to-invest/thirteen-steps/index.aspx
5. Hayes, A. (2019, October 14). Value Investing. Retrieved from Investopedia: https://www.investopedia.com/terms/v/valueinvesting.asp
6. Ponzio, J. (2007, August 16). The Graham And Dodd Method For Valuing Stocks. Retrieved from Seeking Alpha: https://seekingalpha.com/article/44626-the-graham-and-doddmethod-for-valuing-stocks
7. Van Knapp, D. (2015, August 21). Get Your Smart Beta Here! Dividend Growth Stocks As ‘Strategic Beta’ Investments. Retrieved from Seeking Alpha: https://seekingalpha.com/article/3457406-get-your-smart-beta-dividend-growth-stocksstrategic-beta-investments
8. Yahoo! Finance. (2020, March 1). NIKE, Inc. (NKE). Retrieved from Yahoo! Finance: https://finance.yahoo.com/quote/NKE?p=NKE