1. Introduction 2
2. Economic Analysis 2
3. Industry Analysis 5
4. Company Analysis 7
5. Conclusion 9
This report attempts to perform a brief analysis of various environmental and company-specific factors to identify stocks that could generate significant positive returns in the near future. A top-down approach that is focused on economic analysis, industry analysis and company analysis is adopted for this report. This report recommends investment in a set of banking and financial services stocks along with an Energy stock focussed ETF.
2. Economic Analysis
The scope of this analysis and the stock pricing exercise is limited to the stocks listed and traded on the stock exchanges in the US. However over the last few years there has been a strong correlation among the different stock markets and the economies, specifically the group of developed ones. Following chart shows the GDP growth rate of the US and the UK economies over the last few years.
Source: World Bank (2014)
It can be observed from the chart above that the overall economic growth has been on a long term decline since the 1960s. For the US economy the annual growth rate in GDP was hovering between 2% and 4% during the period from 1995 to 2006. However in 2009 the economy was struck by the global financial crisis and the global recession which led to a massive drop in the economic performance and the GDP growth rate in 2009 fell sharply down to -2.8%. In 2010 the GDP growth rate recovered to 2.51% but has since then remained in the narrow range 1.85%-2.5%. It would be reasonable to expect that there would be strong momentum in recovery given that it is after the global financial crisis. However the recovery has been quite muted and the economies around the world including the US have struggled to retain the positive performance even during the period immediately following the recovery. The recovery in the global economic performance has been largely driven by the relaxed monetary policies adopted by the central banks which included flooding of the economies with liquidity. This liquidity driven economic recovery has the risk of losing momentum after the excess liquidity in the economy is drained out by the Federal Reserve. It is interesting to note that the Federal Reserve has maintained the policy rate – the Fed rate, at the record low level of 0.25% since December 2008, when the economy was struck by the financial crisis. This relaxed monetary policy was expected to stimulate the economy and bring it back on the path of growth. Recently the bank indicated that this relaxed monetary policy would be maintained for as long as required.
US economy is largely consume driven as the consumption expenditure forms the largest part of the GDP. Following chart shows the consumer confidence index as measured using the University of Michigan model.
Source: University of Michigan (2014) The most recent survey conducted in April 2014 shows that the consumer confidence is at a 7 year high of 84.1. The subindex for current economic conditions is also at a multi-year higher of 98.7. These clearly indicate that the consumers in the US are more confident on the economic conditions now than they have been since the financial crisis hit the economy in 2008. Widely acknowledged as a leading indicator of economic performance this index clearly forecasts that the GDP growth and the economic performance of the US could improve significantly in the next few years to come.
Another important lead indicator of economic performance is the industry production. Following chart shows the industrial production data for the US since 2009.
Source: Trading economics (2014a)
It can be observed that the industrial production tanked in 2009 but has since then recovered sharply. The industry production growth yoy has managed to remain constant between 3% and 5% during the period from 2010 and 2014. This augurs well for the US economy. This