Stocks

How Do You Pick Winners? Time Period: One to two class periodsResources: Internet accessObjectives: In this lesson, students learn how to identify companies that will likely have high growth potential in the fast-growing industries. They will gain experience in finding companies that will be winners for the Global Stock Game (GSG).Background: In the fast-growing information technology age, industries have transformed into the so-called “new economy.” To identify winners in the market place, students must pick the industries that benefit the most from this new economy. Then they can choose companies that are leaders or "niche players" in these top-performing industries. Once students identify these high growth companies in a particular industry, they can further their research by evaluating the risk and reward factors in the decision making process. Finally, students should visit the company Web site to obtain information such as development of new products, plans for expansion, financial performance, and management teams. By putting all of this together, students will have a systematic method of choosing winners for their investment.  Activities:Identify the top 5 industries from the industries rating list published in the recent Wall Street Journal for the past year.______________________________________________________________________________________________________________________________________________________Next, students should identify three companies that are in each of the top industries by clicking the “by industry” link under Research on Yahoo! Finance http://finance.yahoo.com. The ranking of the companies is based on the analysts' recommendations (Wall street experts from various brokerage firms such as Merrill Lynch, J. P. Morgan, Goldman Sachs and others). Here are the steps that will help students evaluate the risk and reward factors of choosing these companies. Have students do the following:For each of the companies under consideration, select “Research” from the Industry Ranking Table.Check the analysts’ recommendations such as strong buy, moderate buy, etc.Here, spot the upside potential of the company. Click on “Earnings Growth” to compare the 5-year projected growth rates for the company to those with the industry (the higher the growth rate the better). Next, look at the “Price/Earnings” (P/E) ratio. If this ratio is less than the growth rate, meaning the PEG ratio less than the one from the Earnings/Growth Table, the stock is a bargain. For newer companies, this ratio could be very high. Eventually, this ratio will improve as the growth rate catches up with earnings. Students should focus on growth rate for younger companies.Then, select “Profile” from the Industry Ranking Table.Here, evaluate the risk factor of their pick. First, look for “Beta.” The higher the beta, the more ups and downs of the share prices compared with the overall stock market. If students don’t like to take a risk, they can pick a company with beta closer to one. (Note: The market beta = 1; Beta = 1.5 means the stock is 50% more volatile than the market.)In the company profile, also check on the market capitalization or market cap. The higher the market cap, the larger the company's financial strength and the lower the risk. The information above is a lot for students to understand at once. But they should try to pick some companies and fill out the form below to become familiar with the terms. At the end, students will have to make a decision on a stock based on their judgment of the risk and reward expectations. #1 Ranked Industry (one-year period)   . Reward factors Risk factors Company Name Symbol Next 5-year growth %P/E ratio Beta Market Cap 1 . . . . . 2 . . . . . 3 . . . . . #2 Ranked Industry (one-year period)   . Reward factors Risk factors Company Name Symbol Next 5-year growth %P/E ratio Beta Market Cap 1 . . . . . 2 . . . . . 3 . . . . . #3 Ranked Industry (one-year period)   . Reward factors Risk factors Company Name Symbol Next 5-year growth %P/E ratio Beta Market Cap 1 . . . . . 2 . . . . . 3 . . . . . #4 Ranked Industry (one-year period)   . Reward factors Risk factors Company Name Symbol Next 5-year growth %P/E ratio Beta Market Cap 1 . . . . . 2 . . . . 3 . . . . . #5 Ranked Industry (one-year period)   . Reward factors Risk factors Company Name Symbol Next 5-year growth %P/E ratio Beta Market Cap 1 . . . . . 2 . . . . . 3 . . . . Finally, students should visit the companies’ Web sites and learn about their products, customers, business plans, and management teams. Then, students can select the best company from each of the industry groups for the Global Stock Game. Industry Company Symbol Growth Beta Reasons for the pick 1 . . . . . 2 . . . . . 3 . . . . . 4 . . . . . 5 . . . . .