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Investment Theory: Company and Market Analysis

Investment Theory
Business strategy concept - Rock Paper Scissors. symbol of victory and the right investment

Financial Markets

An analysis of America’s domestic economy relative to the financial markets can provide key insights into the performance of various blue-chip companies in the country. The primary metrics that one examines to assess the domestic economy of a country include GDP growth, inflation, the unemployment rate, and investment. In the last five years, the US population has risen from 321 to 329 million. During this period, GDP growth has largely stagnated between 1.6 and 2.9 percent.

This value is acceptable considering that the country is a mature economy whereby a miniscule change in GDP can have outsize impacts. The inflation rate has averaged 1.9 percent, largely due to the Federal Reserve’s open market operations and funds rate controls. The body has also been able to control unemployment, which has reduced from 5.3 in 2015 to 3.7 in 2019. Despite stable consumption, investment growth has been erratic, seesawing between 1.3 and 4.6 percent. This trend is similar to the performance of the country’s financial markets, whose annual variation ranges from -2.2 in 2015 to 22 percent in 2019.

These metrics have undoubtedly had an impact on asset prices. The most prominent link to asset prices is the federal funds rate. There appears to be a negative correlation between this value and the prices of assets. During periods where the interest rate is markedly low, that is, between 0.25 and 0.75, asset prices appreciate significantly. However, when the Fed Reserve attempts to reign in the economy by cutting the rate, the prices reduce. This negative correlation has been evident in the prices of assets such as real estate, stocks, as well as minerals such as gold. For example, the housing price index has reduced following a rise in the Fed rate to 2.50.

Company Valuation

  1. An examination of key metrics reveals that Apple is one of the best performers in the technology segment. With regards to efficiency, the company has an asset turnover of 0.81, which is better than the industrial average of 0.74, a receivable turnover of 17.4 against an average of 16.4, and an inventory turnover of 40 against 43. Its liquidity ratio is comparable to the industry average. The values for the current and quick ratios are 1.5 and 1.46 respectively. Its profitability is also competitive. Its five-year average for net profit margin is 21 percent, which is markedly higher than the industry average of 12.9%. Its gross and operating margin are 38 and 24 percent respectively. 
  1. One can describe intrinsic value as the assessment that an investor has about a company’s stock. This figure is crucial to value investors whose primary goal is to purchase stocks of companies whose market values are less than the intrinsic one. Various models are used to value a company’s stock. The most popular and reliable of them all is the capital asset pricing model (CAPM). The primary assumption of this system is that there exists a perfectly efficient financial system that allows investors to diversify their portfolio at zero cost (Elbannan, 2015). It entails selecting a market portfolio’s proxy, estimating a stock’s beta, and calculating the expected return. Based on this approach, Apple’s intrinsic value is $204 against a real price for $383 (Morningstar, 2020). One can, therefore, deduce that the company is significantly overvalued. Value investors are, therefore, less likely to hold positions in the stock. 


The primary stakeholders of the company are customers, stockholders, the government, and the community.

The customers are primarily interested in high-quality items at a fair cost. Apple has been able to deliver on this aspect by producing market-changing products. Its focus on aesthetics has allowed it to create a loyal customer base, helping it reduce its advertising budget significantly. Stockholders on the other hand are mainly interested in dividends and competitive stock prices. The company’s management has been able to deliver on this aspect. As per June 30, 2020, the company’s dividend payout was $3.27, with the dividend yield averaging 0.88%. Its share price of $383 is also attractive to stockholders and investors. The government is also interested in Apple’s capacity to pay taxes. With an effective tax rate of 24 percent, the company is one of the largest remitters in the US. Finally, the company has ConnectED, a community program aimed at helping families understand the value of technology (Apple, n.d.). 

The required rate of return is the minimum yield that an investor expects to receive for holding a certain stock.

It is a compensation for assuming the risk associated with the share. Analysts often use this value to examine an investment project’s profitability. It incorporates the stock’s volatility, funding cost, and firm’s capital structure. Apple’s expected rate of return is derived from its stock’s systematic risk, market portfolio’s expected return rate, and the treasury composite, which is supposed to represent the risk-free rate. The values for these components are 1.28, 11.91, and 1.23 percent, making the company’s expected rate of return to be 14.94 percent. 

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