Tips for Beginners Amid the Stock Market Correction

Stock Market Data

Venturing into the stock market has become more attractive in the last two years. The increased capital inflows and promising returns are leading to an influx of price and dividend investors.

However, one still has to remain cautious, given the downtrend earlier this year. Although it is not as volatile as the crypto market, uncertainty is still in the air. That is why thorough checking of financials, price movements, and industry trends is necessary. 

Observe the Price Trend

Whether you are into short-term or long-term investments, prices are vital to your investment success. The buy-and-sell investors look at the trends closely, and they often use technical analysis for price valuation. Using statistical trends will help you find trading opportunities.

The simplest method you can use is the Simple Moving Average. Here, you have to add the historical prices and divide the total by the number of observations. 

Most investors employ the flag pattern to watch the price movement and decide when to buy and sell. You can also integrate it with a company’s financials. Some examples include the Price-to-Book (PB) Ratio and the Price-to-Earnings (PE) Ratio.

The Dividend Discount Model is my favorite since it can help both dividend and value investors. You can compare the price and earnings you get from your shares with these methods.  

You may consider investing in hard-hit industries like hotels since their operations are limited. When vaccinations and industry reopenings sped up, businesses started to regain their footing, and financial and stock performance improved.

Although prices are still recovering from the recent downtrend, you may consider investing in the industry. I used the Wyndham Hotels & Resorts, Inc. (NYSE: WH) and Choice Hotels International, Inc. (NYSE: CHH). According to Investopedia, they are two of the best value hotel stocks in 2022. We can confirm it using the Dividend Discount Model. 

Wyndham Hotels & Resorts, Inc. (NYSE: WH)
Current Stock Price $90.26
Average Dividend Growth 0.4580623974
Estimated Dividends Per Share $1.28
Cost of Capital Equity 0.4722436515
Derived Value $103.4978851 or $103.50

 

Choice Hotels International, Inc. (NYSE: CHH)
Current Stock Price $147.11
Average Dividend Growth 0.07662527658
Estimated Dividends Per Share $0.95
Cost of Capital Equity 0.07681227452
Derived Value $157.4323444 or $157.43


You can also assess banks since the industry continues to show impeccable growth even today. At the height of the pandemic, the financial sector saw increased capital inflows, which stimulated its growth.

Moreover, the recession led to a decrease in interest rates. It attracted more borrowers and improved loan repayments. As investments, The Dividend Discount Model and their PE Ratio of less than 20 showed their undervaluation amidst the stock market correction. 

Canadian Imperial Bank of Commerce (NYSE: CM) Farmers & Merchants Bancorp, Inc. (NASDAQ: FMAO) Farmers National Banc Corp. 

(NASDAQ: FMNB)

First Citizens BancShares NASDAQ: FCNCA) First Farmers Financial Corporation (OTCQX: FFMR) MetroCity Bankshares (NASDAQ: MCBS)
Current Stock Price $128.48 $33.10 $17.21 $784.73 $52.26 $25.38
Average Dividend Growth 0.05093839009 0.09268143621 0.2462759171 0.09771264368 0.1457040413 1.393181818
Estimated Dividends Per Share $6.44 $0.76 $0.56 $1.88 $1.44 $0.54
Cost of Capital Equity 0.1010629231 0.1156421613 0.2788151384 0.1001083721 0.1745040413 1.414458414
Derived Value $135.0245644 or $135.02 $36.16775554 or $36.17 $21.44840853 or $21.45 $861.4080429 or $861.40 $57.28520206 or $57.28 $48.70364318 or $48.70

 

Today, the stock market is moving in a bearish pattern. The price drop of stock indexes, particularly NASDAQ, appears to be the steepest since the Global Financial Crisis in 2008. It can be attributed to the economic disturbance in large markets like the US, China, and Japan caused by the new COVID-19 variant.

But the primary driver is the inflationary forces that may raise the interest rates soon. The Federal Reserve System (The Fed) anticipates an interest rate hike in March. As such, investors are enticed to save more than borrow and invest. The same trend appears in the crypto market, not to mention the political turmoil in Kazakhstan. 

Nevertheless, analysts and investors must expect a better year for the stock market. After all, many businesses have reopened and rebounded. Also, the monetary policy changes will be gradual since the US is still on its way to recovery. 

Since January 28, the stock prices have been in a slight uptrend. The NYSE and NASDAQ had a six percent and an eight percent stock price growth, respectively. Meanwhile, S&P indexes had an average growth rate of five percent. The trend can be verified using the Simple Moving Average.

Taken from MarketWatch
Stock Price
Taken from MarketWatch

Read Company Financial Reports and Press Releases

Reading financial reports can help determine whether the stock’s value is logical or purely speculative. Specific accounts and financial ratios give you precise information depending on the industry.

It is also wise to read company news. You will find potential growth catalysts, such as expansion, M&A deals, and new products. These can make any company a promising investment and may be more beneficial for bullish investors. 

Many investors look at the company’s viability through net income and Free Cash Flow. Others opt to look at its liquidity to know if it can cover its obligations within the year. Most industries, especially manufacturing companies, compute their liquidity using the Current Ratio. 

To be more precise, they only include more liquid assets using the Acid-Test Ratio. This is because they cannot convert inventories into cash as quickly as the rest of their current assets. 

But banks and other companies in the financial sector have a more unique way of assessing their liquidity. They have different ways of generating revenues and income. 

So investors must check the revenues and net income of a bank. They must also assess its size and viability through the total assets and Return on Asset ((ROA)).

In general, banks have at least $1 billion in assets, so an ROA of one percent is acceptable. Liquidity is also a crucial aspect checked using the Loan-to-Deposit Ratio. Ideally, the ratio should be between 80% and 90%.

Return on Asset of Bank
Taken from MarketWatch
Loan to Deposit Ratio
Taken from MarketWatch

Metrocity Bankshares (NASDAQ: MCBS) has the highest ROA on the graph below. It is the most viable bank, given the income relative to its assets. Yet, its Loan-to-Deposit Ratio is more than 100%. It can be risky now that the economy is reopening and may increase interest rates soon. It may need more reserves if borrowers fail to pay loans. 

Overall, these banks have good viability and liquidity. They can sustain their operations without running out of resources.

Farmers National Banc Corp. (NASDAQ: FMNB) and First Citizen Bancshares, Inc. (NASDAQ: FCNCA) are most careful. Now, their prices remain in a bullish trend. It shows the massive impact of their fundamentals on their stock price performance. 

Watch the Economic and Industry Trends Closely

Watching the economy and industry trends provides you with a broader view of your stock market’s performance. Watch the inflation and interest rate changes since they are macroeconomic indicators. Massive changes in the industry can still affect the price trend and financial performance, so you have to be more careful.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.