Having the right information and how to interpret it can totally change your investing strategy and lead you to big returns in the stock market. Unfortunately, there’s an overwhelming amount of information out there about companies, and it’s not always obvious to the retail investor which data is the most relevant, nor how one ought to react to it.
These three stock market charts won’t tell you everything you need to know about the companies you own or are considering investing in, but the patterns they reveal can provide important insights you can use to manage your portfolio. Image source: Getty Images 1. Capex
Capital expenditure, frequently called capex , is an important metric for fundamental analysis . It’s also an important economic indicator that measures the amount of money a business is investing in its facilities, equipment, machinery, and technology. Capex generally falls when the economy weakens, because companies don’t invest as heavily for growth during times of financial uncertainty. Conversely, high capex indicates businesses are willing to spend some cash to grow and generate returns on that capital.
This tends to correlate with stock market cycles , too. Poor economic conditions drive investors to pull cash out of the market, causing stock prices to tumble. Investors take on more risk during boom periods, pushing indexes higher. If capex is down across the whole economy, then you should prepare for stock market volatility. If capex is strong, there’s a good chance growth is on the way. You can see this dynamic play out in the chart below among some of the leading companies across sectors like oil and gas, retail, and more. Data by YCharts. Grey areas represent U.S. recessions. Investors usually want to see a business using its cash flow to invest in growth. Companies that don’t spend enough on updating infrastructure or new technology risk falling behind their competitors, which is never good for a stock’s valuation. However, if capex is so high that it’s reducing free cash flow without producing corresponding growth, that’s also a red flag — the company may be squandering its capital and soon end up in some trouble. 2. ROIC
Return on invested capital (ROIC) measures how efficiently a business is using the funds available to it to produce profits. A high ratio indicates greater efficiency, and it’s difficult to achieve that without a competitive advantage.
Businesses that lack meaningful competitive advantages will often find themselves forced to slash prices, invest heavily in new product development, or increase spending on marketing to win customers. All of those actions reduce profit margins, which translates to lower ROIC. Stable businesses with healthy profit margins and comfortable growth rates usually have strong ROIC.
For an example of how this type of narrative plays out, consider Apple . The tech company’s rejuvenation began around 20 years ago with the launch of the iPod. It followed that up six years later with the iPhone, and a few years after that, it delivered the iPad.
Each of these devices offered high product quality and a better user experience than the competition, strengthening the Apple brand and giving the company substantial pricing power. People were willing to pay up for its tech, and that led to a nearly decade-long charge upward in both Apple’s profit margins and its ROIC. The success of those devices — and the ecosystem it built to support them — also helped its Mac line gain a greater share of the personal computing market. Data by YCharts. However, that momentum eventually stalled as competitors like Alphabet , Microsoft , Spotify , Samsung, and other tech companies started gaining ground in their head-to-head competitions with Apple, chipping away at its dominance. There’s still plenty to like about the company today, but it’s plain to see the difference in the trends across the years.
That’s why an ROIC chart can be so powerful for investors. A stock with high and growing ROIC is more likely to sustain its trajectory and generate free cash flow, which drives long-term returns for shareholders.
Investors should also recognize ROIC is a less helpful metric for gauging the value of growth stocks and companies that aren’t yet profitable. These businesses usually aren’t focused on profit maximization. Because they’re in a different life stage, they must pour cash into product development, marketing, and hiring to support the larger-scale company they expect to grow into. That will result in a deceptively low ROIC, even if the company is taking the appropriate steps to expand. 3. Beta
Beta is an extremely […]
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