Financial Research Report

FinancialResearch Report

FinancialResearch Report

Inessence, stock purchase may seem a challenging affair as because itrequires proper financial analysis on various dimensions. Mostly, aninvestor seeks the services of financial investment companies withthe intention of establishing the probable stock where to invest.Consequently, financial investment companies conduct an in-depthanalysis based on various parameters to establish the stocks that arein line with the clients’ financial outlay. It is important to notethat the customer is always pushed by the urge to enjoy a high rateof return hence, the need to establish the most rewarding companythat is in line with the capability of the investor. However, it isequally vital to establish the risk level for a certain stock tocushion the investor against loss. Thus, this paper will evaluate thebest stock to invest in the United States based on an in-depthanalysis of the various dimensions. Risk assessment in stockpurchases is the most important aspect in stock analysis.

Rationalefor the Selected Stock

Forthis study, we will use Bank of America (BAC) as the stock of choiceto invest in based on various reasons. First, a major considerationbefore investing is the level of recognition of the company where toinvest. In this case, BAC is considered as a renowned brand in thefinance industry despite the negative repute that is associated withthe banking and finance stocks. Indeed, according to a recentanalysis report, BAC was named as one of the most valuable brands inthe banking industry, which goes along way with customer retentionand securing new ones, culminating into higher rates of returns forthe stocks (Bhagat&amp Bolton, 2014).Moreover, with the possible normalization of the interest rates, itis expected that the profit margin can contribute positively to therate of return for the stocks. According to Alanyaliet al. (2013), despitethe uncertainties that are associated with the interest rates,historical analysis shows that the rates tend to rise a little higherin the future financial periods. With these deliberations in mind,it is postulated that the interest margin for BAC will improve in thefuture, thus increasing the rate of return and ultimately enhancingthe dividends for the stocks held.

Thechoice of BAC is also based on the GDP growth that has been exhibitedin the United States in the recent past. Currently, the GDP growth isstill far from the people’s expectations however, the prevailingrates are reasonable. The analysis by Tanzi(2014)highlights that despite the inevitable case of recession that mayrecur in the United States, the GDP is slated to march higherglobally in the long term, which poses to increase chances for theplayers in the banking sector such as Bank of America. The GDP growthfor any country comes with positive outcomes for investors as therate of return for their investment increases (Cogneau&amp Zakamouline, 2013).Succinctly, bearing in mind that BAC is among the most magnificentfinancial institutions in the United States, it is expected that thebenefits for the investors shall largely correlate with the growth inGDP.BAC is considered to be the stock of choice since it is wellcapitalized with the market capitalization value amounting to 161.66B(Moynihan,2016).In light of this, BAC has made great strides since the greatrecession concerning the capitalization, which is an indication thatthe bank is showing proper preparedness in case another recessionstrikes. On this note, a highly capitalized entity is able toutilize emerging opportunities with ease and propel growth since ithas adequate capital to implement its plans. Consequently, BAC is ina position of increasing the value of the shareholders since it grabsthe prevailing opportunities.

Theproduct that the company demonstrates shows great sense ofinnovation. In this regard, BAC has taken a major stride inprovision of technologically driven services to the customers, thusdelineating chances of continued growth and market dominance (Agwu&amp Murray, 2015).In concern to this, the firm has designed a product that caters forMillenials that entail the interaction use of fingerprint and touchID on Android and IOS mobile users when transacting. Through themobile banking app, customers can access their bank accounts onAndroid or iOS based devices by a mere use of touch commands (Agwu&amp Murray, 2015).These innovative led activities not only make the access to servicesmore convenient but also make them more secure. Additionally, thecompany is valued attractively as compared to other financialinstitutions. According to the fundamental metrics, it is evidentthat BAC is trading at a price to growth ratio close to 1.5 whilealso trading a little lower than the tangible book value at thecurrent pricing value of $16.7 (Agwu&amp Murray, 2015).Indeed, the Bank of America is fairly valued as compared to otherfinancial institutions that exhibit high rates of overvaluations. Another major factor that makes BAC most preferred stock is thehistorical data regarding the dividend yield, which is currently at1.3% with the payout ratio of 15% (Moynihan,2016).From this data, it is evident that BAC has higher chances of dividendexpansion in the future.

WhyBAC is a Suitable Investment for the Client

Client’sProfile

Theinvesting client is a male named Green Maurice aged 55. The customerearned a maximum earning base from the Social security. The clientretired from his formal employment and earns the monthly pensionableamount equivalent to $700. Prior to his retirement, the client was anurse in a local hospital in the outskirts of Minnesota. From thelast assessment, the net worth of the customer stood at $1, 803,815.The quoted amount includes the available assets amounting to$196,900, while the intended value for investment is $110, 000. Theclient has a current annual cash flow amounting to approximately$100,800, while the cash flow assets equal $2,200,000. The income forthe customer is $475,500, while the liability stands at $400,400. Theannual expenses for the client are approximated to be $300, 000, thusmaking the annual surplus to be equal to $180,800. Moreover, theclient recently invested in the service industry having acquiredTwitter stocks whose purchase value was equivalent to $120, 000. Inthis case, the customer intends to acquire shares from the financialsector owing to positive prospects recorded in the sector.

Reasonfor the Choice of Investment

Themajor intention for a client to invest in a certain financialinstrument, whether it is a stock, bond, debenture, or any other formof security is to get returns from such an investment. Similarly, byinvesting in a certain stock, the client is majorly guided by theexpected rate of return that acts as a motivating element. On thisnote, there are numerous considerations that are the primary reasonfor choosing BAC as the selected stock. First, the client is wellplaced to benefit from the dividend payout. In this case, from thehistorical analysis, it is evident that BAC has the potential ofpaying the shareholders reasonable dividends as a share of theprofits in respect to the shareholding. It is important to note thatsome companies do not pay dividends to the investors despite recodinghuge amounts of profits after tax (Aloui,Hammoudeh &amp Hamida, 2015). Notably,Google Company does not pay dividends to the investors despite beinghighly recommended as an investment policy. In addition, thefrequency within which the portfolio companies pay the dividends tothe investors is a matter of consideration by the clients. On thisnote, some firms pay the dividends annually, quarterly or biannually. In the context of this evaluation, BAC pays the investorsdividends on a quarterly basis, with the recent annualized paystanding at $0.3 (Kranc&amp Pylypczak-Wasylyszyn, 2015)

Theclient who intends to make a long-term investment would find BAC asone of the best stocks due to the limited volatility and hugefluctuations of the share prices. In this case, the investment isless risky for the investor since the price has resonated within thepricing bracket of $15.82 to 16.06 for a three year period (Kranc&amp Pylypczak-Wasylyszyn, 2015).By considering that the client intends to make some rate of returnsfrom the financial outlay that is available within the investmentperiod of five years, the client can gain from the increase in sharepricing. From the financial analysis for the five years period, it isevident that the share price has been appreciating, thusdemonstrating an upward trend over the years as demonstrated in theimage below:

Itis also imperative that the client will appreciate the brand of theshares that is chosen for investment. According to Cogneau &ampZakamouline (2013), all the best performing stocks demonstrate astrong brand strength and great reputation. For instance, companiessuch as Nike, Google, and Pepsi are great brands whose performancesin the NYSE and NASDAQ correlates greatly with their brand strengthin their respective industries. In light of this, BAC is a renownedbrand in the banking industry and its stock performance is in linewith the brand strength. As such, purchasing shares in such an entitywould give some level of assurance that the stocks are set to performwell in regard to increase in prices.

Inaddition, the pricing for the shares is in tandem with the financialoutlay that the investor intends to bring forward. An investor shouldstrike a balance between the share pricing and the quantity of theshares that they intends to own in a certain company (Cogneau &ampZakamouline, 2013). As such, a person investing huge sums of moneymay opt to invest in high performing entities whose share price ishigh but allows ownership of a significant number of stocks that canattract reasonable returns. For instance, an investor willing tobring forward $1M for purchasing stocks may find it appropriate toacquire high priced stocks such as Exxon Mobil at $87.40 per share orWal-Mart stores at $72. On the other hand, an investor with about$1000 may find it appropriate to invest in lower priced shares suchas BAC whose stock price in NYSE does not exceed $20 because thenumbers of shares allocated are sufficient to warrant a reasonablereturn.

RatioAnalysis

Ina bid to measure the financial strength of a company, it is essentialto conduct ratio analysis that gives a clear image of financialhealth of the firm (Uechiet al., 2015).In light of this, three crucial financial ratios categories includeliquidity ratios, (measuring ability of a company to meetobligations), efficiency ratios (measuring current financialstandings and business), and profitability ratios (gives animpression of competitiveness from profitability perspective) (Uechiet al., 2015).In a bid to determine the financial health of BAC before makinginferences as to the investment of choice, it is essential tocalculate the company’s current ratio, Quick ratio, earnings pershare ratio, and Price earnings ratios.

Currentratio entails measuring the corporations ability to meet the shortterm and long term obligations (Uechiet al., 2015).In this case, the current ratio is measured as a ratio of currentassets against the current liabilities (Uechiet al., 2015).In the case with BAC, the current ratio for the three years istabulated below:

2013

2014

2015

5.347

4.801

2.263

Despitethe BAC showing a declining rate of the Current ratio, it is evidentthat the firm has a high ability of meeting its liabilities since theration exceeds 1.

BACQuick Ratio

2013

2014

2015

0.34

0.35

0.36

Quickratio is another financial tool that measures the liquidity of thecompany more precisely by putting further emphasis on the cash andaccount receivables (Uechiet al., 2015). Quick ratio differs from the current ratio in thesense that it excludes the inventories in determining the liquidityof the firm because inventories are not easily turned into cash(Uechiet., al 2015). For BAC, the value of 0.34 to 0.36 shows that theratio of most liquid assets to liabilities is at 3:10, which does notdepict poor performance.

Earingper share (EPS) ratio shows the portion of the company’s profitthat is allocated to the common stock, serving as an indicator of theorganization’s profitability (Da Gbadji, Gailly, &ampSchwienbacher, 2015). EPS is calculated by the formula (Net income-Dividends on Preferred stock)/ Outstanding shares) (Da Gbadji,Gailly, &amp Schwienbacher, 2015). A firm with high EPS shows thatit is producing high returns relative to the outstanding shareholdingor capital. In the context of BAC, the EPS for the years 2013, 2014,and 2016 is 0.3, 0.20, and 0.36 respectively (BACincome statement 2015).The ratio shows that per single share, the earnings are equivalent to0.3, 0.2, and 0.36 for the respective years since 2013 hence,demonstrating an extemporary performance (Da Gbadji, Gailly, &ampSchwienbacher, 2015). Moreover, the company is demonstrating anupward trend in EPS since 2012 as demonstrated in the diagram below:

Priceearnings ratio (P/E ratio) measures the corporations share price inrelation to the per share earnings (DaGbadji, Gailly, &amp Schwienbacher, 2015).Price earnings ratio indicates the amount that an investor shouldinvest in a certain company to get a dollar in return for thecorporation earnings. This parameter is most applicable in the stockanalysis in determining the right amount to invest in a certainstock. Nonetheless, P/E ratio is seen to make sense for companiesoperating in the same sector. In the context of BAC, the P/E ratiofor the years 2013, 2014, and 2015 stands at 11.63, 16.4, and 17.9respectively (BAC income statement 2015). In this case, it shows thatfor an investor to get 1$, he or she is required to invest $11.63,$16.4, and $17.9 for the respective years. Thus, BAC poses as anideal stock to invest in bearing in mind that one does not have toput in huge financial outlay before getting the return in dollars.Moreover, the upward trend for the P/E ratio presents an ideal stockto invest due to future prospects as demonstrated in the graphicalrepresentation below:

StockPrice Analysis

Despitethe financial performance of an entity, it is imperative to determinethe valuation for a specific stock to infer whether it isappropriately valued or overpriced (DaGbadji, Gailly, &amp Schwienbacher, 2015).In this case, the use of Price to Earnings ratio helps in makinginferences as to whether the firm is over or under valued. Inanalyzing the P/E ratio, it becomes possible to infer the relativeprice of the commodity against the earnings to infer whether it isworth to invest in hence, delineating the risk level of the stock.Regarding this, BAC has demonstrated a high P/E ratio that averagesat 13.95%, which is comparable with the average stock price of $15(BAC income statement 2015). In this case, the stock is not overpriced nor underpriced and hence the firm is worthy of investing insince the rate is quite optimal. Secondly, the dividends per sharedemonstrated by a firm are a clear indication of the reward thatattracts an investor into a certain stock. In regard to this, BACshows an average dividend yield equivalent to 1.88%, which isreasonable with respect to the prevailing price.

Inrespect of Risk assessment, it is imperative to consider the risk andreturn evaluation. On tis note, risk entails the possibility thatthere will be a significant difference between the actual returns ininvestment from the expected outcome. Precisely, investors are moreconcerned that the returns will be much lower than the expectedoutcome. On the other hand, the rate of return represents the rewardthat is realized out of making an investment. Regarding this, thereturn on investment is considered from two aspects current returnand capital return. It is important to note that it is not mandatorythat an investor will gain from the investment by a rate of return.Concisely, it is imperative to determine the expected rate of returnagainst the outcome and the volatility. In this case, BAC has a highexpected rate of return that is equivalent to 11%, with limiteddeviation from the actual outcome. Moreover, BAC is considered morevolatile than 88% of the other securities, while the expectedvolatility is at 35% against the actual value of 33% (BAC incomestatement 2015). BAC has a higher return with the figure standing at79% delineating that there is a high possibility of having a highreturn. Concisely, the prevalent risk rate stands at 21%, whichdemotes the possibility that the company may have a significantdeviation from achieving the rate of returns (BAC income statement2015).

Recommendations

Fromthe analysis, it is established that in making an investmentdecision, an investor should consider several issues. First, it isimperative to consider the brand recognition for the stock of choice.In this regard, BAC poses as a strong brand in the finance section,in line with the intention of the investor. Moreover, the investorshould also consider the economic state of the nation beforeinvesting order to make an ideal decision. On this note, it isimportant to consider the GDP growth rate, a factor that correlatesto the rate of return. In evaluating the financial performance of acompany from which to purchase the stock, it is important to performfinancial analysis on the basic ratio category such as profit ratio,liquidity ratio, and efficiency ratios. In this case, the firm shoulddemonstrate ideal performance in regard to current ratio, Quickratio, and Price earnings ratio. For an investment company, it isimperative to consider the customer profile and meet the financialneeds of an individual and consider the financial outlay at theclients’ disposal. Finally, risk assessment should help to revealthe risk level through comparison of the rate of return against theexpected rate of return. BAC has proved to be a worth investment asit meets the expected rate of return and the risk level is quite low.

References

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Aloui,C., Hammoudeh, S., &amp Hamida, H. B. (2015). Co-movement betweensharia stocks and sukuk in the GCC markets: A time-frequencyanalysis. Journalof International Financial Markets, Institutions and Money,&nbsp34,69-79.

BACincome statement | balance sheet | cash flow | bank of AmericaCorporation com stock – Yahoo finance. Retrieved September 4, 2016,from https://finance.yahoo.com/q/is?s=bac

Bhagat,S., &amp Bolton, B. (2014). Financial crisis and bank executiveincentive compensation.&nbspJournalof Corporate Finance,&nbsp25,313-341.

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DaGbadji, L. A. G., Gailly, B., &amp Schwienbacher, A. (2015).International analysis of venture capital programs of largecorporations and financial institutions.&nbspEntrepreneurshipTheory and Practice,&nbsp39(5),1213-1245.

Kranc,J., &amp Pylypczak-Wasylyszyn, D. (2015, January 12).&nbspMarketwrap-up for Jan. 12 – corporate earnings back in focus.Retrieved September 3, 2016, fromhttp://www.dividend.com/dividend-stocks/financial/money-center-banks/bac-bank-of-america/#dividend-yield-history

Moynihan,B. T. (2016, September 2).&nbspBAC:New York stock quote – bank of America Corp.Retrieved September 3, 2016, fromhttp://www.bloomberg.com/quote/BAC:US

Tanzi,V. (2014). The underground economy in the United States: estimatesand implications.&nbspPSLQuarterly Review,&nbsp33(135).

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