Stock Investing Myths and Truths Part 2 of 4

Welcome back for Part 2 of our 4 Part series on Stock Investing Myths. As we told you in Part 1, even though there’s plenty of information about what works and what doesn’t when it comes to investing in the stock market, many myths still refuse to die and, if you have heard one (or several), this blog series will hopefully persuade you not to be fooled by it.

Off we go.

Myth #3: The only option that you have are Large-Cap stocks

While it makes sense that the investment media focuses on stocks that belong to the Dow Jones industrial average or the S&P 500 index, because they’re the most widely held companies and also the most familiar, the fact is that they also make up only about 10% of the US exchange listed stocks.

As an individual investor, you are certainly not tied down to any investment objective or restriction, and thus taking advantage of the many stocks outside of the large-cap index is a freedom that you should take advantage of. Another reason is simply that, as the size of the company goes down, the potential for returns on their stock goes up.

Simply looking at history will show you what we’re talking about. Small-cap stocks have outperformed large-cap stocks since 1926. Their annualized return of 11.9% is better than the 9.8% of the large-cap stocks and, since smaller companies are often overlooked by investors, there’s a much better chance that their stocks will be underpriced. The only two caveats are that smaller-cap stocks have less trading volume and are a bit more volatile, the trade-off that you pay for the higher level of returns that they bring

Myth #4: A low-priced stock will double its value more easily than high-priced stock.

Okay, so a kindergartner could tell you that if you take a stock that’s trading at $2 per share, it would only take a $2 increase for it to double in price. For a $20 stock to double in price it would need to increase by $20, so it stands to reason that making money with the $2 stock would be easier.

The only problem is that this logic ignores one of the most basic concepts of investing, the fact that the entire market capitalization of the company has to double in order for its stock price to double in value. (This assumes that there’s not been a change in a number of outstanding shares.)

Market capitalization, which is the value of the entire company, can be determined by multiplying the number of outstanding shares by the current price of those shares. Knowing this simple formula allows you to see why, whether a stock trades for $2 or $20, the only way its stock price will double as if the entire company doubles its current value.

Frankly, if a stock is trading for less than the price of a single bottle of water, you should already be asking questions about it’s worth. Usually investors perceive a high level of risk when any stock is trading for $2 per share or less. You won’t find these companies traded on the exchanges or filing quarterly reports with the SEC either.

And there you have it, two more myths debunked. We hope you’re finding this information valuable, as well as interesting. Make sure to come back and join us for Part 3 and learn even more about investing myths.

Stock Investing Myths and Truths Part 1 of 4

One of the biggest reasons that many investors underperform is that they follow strategies based on myths rather than doing their own research and using due diligence. While a plethora of studies exist showing what does and doesn’t work, there are a number of myths that continue to endure and avoiding them will definitely make a substantial difference in your profits over time.

In this 4 Part series we’ll take a look at some of the biggest myths and do our best to debunk them for you. Enjoy.

Myth #1: Excellent companies always have excellent stocks

While it wouldn’t be a stretch to believe that an excellent company would also have an excellent stock and make a great investment, the fact is that some companies look great on the outside but, on the inside, aren’t as sound as you might think. For example, they might have an excellent product and a CEO who’s quite charismatic, but that charisma hides the fact that they aren’t profitable and have a business model that goes through cash faster than they can generate it. There are of course excellent companies that, due to their success, also have stocks that have a very high valuation.

Your best plan of action when you hear about a company that’s doing well is to conduct your own thorough research before you buy any of their stock. See if they’re financially sound by checking their financials and profits. Check their stock’s valuation to make sure it’s not over or undervalued and always keep in mind that even a good company can be a bad investment.

Myth #2: Growth is better than Value

It’s certainly true that people will pay attention to a company that has strong revenues and earnings growth. If those companies happen to be in emerging industries or their products and services are innovative, the attention can be even more intense. Stories like these are positive and it’s easy to believe that a company’s soaring growth will also lead to a huge rise in their stock prices.

Long-term data however is completely contrary to this opinion. In the compendium of historical data on stock and bond performance, the Ibbotson SBBI Classic Yearbook, long-term data showed that value definitely beats growth. For example, a portfolio of large-cap growth stocks between 1928 and 1912 showed an annualized return of 8.8% while, during that same period of time, a large-cap value portfolio had a return of 11%.

While that difference might not seem significant, what you need to consider is that your brokerage account balance, in just 10 years, would be over 22% bigger if you were investing in value stocks instead of growth stocks. That gap would also become even larger as you keep investing.

The reason for this mystery is simple; higher expectations often lead to disappointment and expectations for growth stocks tend to be much higher than for value stocks. Even worse is that investors expect a company that’s doing well to keep doing well and, as its revenue rates and earnings growth continue, valuation rises as more and more investors purchase the stock.

Consequently, when the company reports their sales and earnings, and they don’t need the expectations of investors, their stock price will plunge no matter what the actual growth rate is, or how strong it is.

Have these first two myths opened up your eyes a bit? Hopefully they have because we’d like you to come back for the next 3 Parts in our series to find out more. In the meantime, keep doing your research and learning as much as you can about investing in stock market. The more you know, the less risky any purchases you make will be.

 

Why SM Energy (SM) is a Growth Stock to Watch

Most investors know that growth stocks can be some of the most exciting stocks on the market. The reason is that they tend to catch the attention of other investors and thus produce big gains. Everything that goes up must come down however and, when the growth is over and the downside begins, finding companies that still have strong growth prospects is the most important factor for an investor looking for a good stock that will provide top-notch long-term gains.

SM Energy Company (SM) is one of those companies, and it appears to be very well-positioned for excellent earnings growth in both the near and outlying future. With an EPS growth just shy of 260% last year, this Oil-US Exploration and Production company is looking good for 2014 as well. As a matter of fact, current growth estimates for 2014 are calling for a 55.6% earnings per share growth which is very strong.

At 17.77%, the long-term growth rate that SM Energy Company now has is suggestive of excellent long-haul prospects.  Add that to the 1.67% rise in estimates over the past month for the  current fiscal year and you have an excellent stock on your hands with a very high potential for outperforming the industry.

If a fast-growing stock with a lot more opportunities in the future is the kind of stock that you are searching for, SM Energy Company should definitely be a stock that you consider purchasing soon. Right now it not only has  and earnings growth prospect in the double digits but most analysts predict that it will do quite well in the future.

Keep in mind that while SM Energy is no longer a growth stock, analysts believe that it will do quite well in the long run, making it a stock that should fit well into any investor’s portfolio.

Earlier in the year one of the first major signs that Samsung might significantly underperform near-term expectations came when it warned investors about a huge 24% decline in their operating profits. Citing challenges with currency, cannibalization of its smaller tablets by phablets and headwinds against the sales of their other smartphones, news about the company since then has continued to worsen.

One of those bits of news is the fact that the iPhone 5S, which Apple released nearly 8 months ago, is still outselling their flagship smartphone, the Galaxy S5, even though it was released just recently.

In fact, the iPhone 5S was still the best-selling smart phone in the world as of May, going directly against what was predicted by most analysts. The Galaxy S5 might have come in second place but, in even worse news for Samsung, it was a very distant second.

Not only that but the total amount of smart phones overall that Samsung is selling declined in the second quarter of 2014 as opposed to sales from last year’s second quarter.

It’s widely believed that Apple is one of the main reasons for the poor results that Samsung is now having, and that probably won’t change with Apple’s third fiscal quarter earnings report that’s coming out soon. Analysts have predicted it will show a 12% increase from a year ago, which would be a third-quarter record.

With all signs pointing to the release of two new, bigger iPhones in the very near future, it’s likely that Samsung is going to feel the pinch from Apple in the near future as well. Right now Samsung is benefiting from the fact that Apple is absent in the large screen smart phone category, but the launch of the iPhone 6, which reportedly will come in both 4.7 inch and 5.5 inch screen sizes, will quickly put an end to that.

This is likely to appeal to both fans of the ubiquitous iPhone and fans of the new, larger size ‘phablet’ phones. For example, a recent survey by Counterpoint showed that nearly 40% of all smart phones sold globally in May were the bigger screened phablets, a huge increase in the last year. It’s predicted that the 5.5 inch iPhone 6, if rumors are true of course, will be an instant hit among fans of these bigger smart phones.

Apple investors are thus in a very fortunate position, since consumers have already proven that smart phones with larger displays are in demand. After taking advantage of Apple’s absence and riding the recent success of phablets, Samsung will find itself in a much tougher position going forward, especially as it appears that sales of their smart phones have peaked.

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