How to Compare Stocks?
Don’t Listen to Me, But Please Hear Me Out. #9
Last week, I wrote about the importance of understanding the terms in a stock table. Today, I will show you how to compare different stocks across the same sector using the stock table. This will help us get closer to picking a stock to invest in.
Picking stocks is not easy. However, you can try to mitigate the risk of picking the wrong stocks if you knew how to do the following:
- Read a stock table
- Read a Balance Sheet, Income Statement and Cashflow Statement
- Keep abreast of the news that may impact the company and its operations
- Don’t panic and remain patient
Choose a Sector
To compare apples to apples let us pick one sector. I chose the Fitness, Sports and Apparel sector. I won’t bore you with too many details, but here are few reasons I chose this sector:
- Sports Apparel Market Expected to Reach $248.1 Billionby 2026 : Allied Research reports that the industry is growing at a CAGR (Compound Annual Growth Rate) of 5.1%. That’s a healthy growth rate.
- Global Fitness Industry revenue was $94 Billion in 2018 and expects to add 230 Million members by 2030, IHRSA reports.
- Even though #Covid19 will change some businesses like gyms and wellness salons, others like home equipment, fitness tech and wearables, footwear and apparel could continue to grow. In fact, Nike is the largest athletic apparel company in the world.
What if we had $10,000 and wanted to invest in stocks in the fitness sector? Let us compare all the metrics we have learned from last week across this sector because we believe fitness is In and here to stay.
Comparing Stock Metrics Across the Same Sector
We will look at the following 6 companies operating in the fitness sector.
- Nike Inc (NKE)
- Adidas AG* (ADS)
- Under Armour Inc (UA)
- Lululemon Athletica Inc (LULU)
- Pelaton Interactive Inc (PTON)
- Fitbit Inc (FIT)
I chose Peloton, the new kid on the block that is cool and sexy. (Be careful when you choose Peloton (PTON) as there is another company called Peloton Minerals Corporation (PMCCF) which looks like a Penny Stock. I advise against penny stocks.) To some degree, it is nipping away at the market share of established companies like Nike in equipment and apparel. Moreover, Peloton and Soulcycle (not publicly traded) is disrupting the gym industry. Covid19 has certainly boosted Peloton as it gives you an in-home workout while making you feel like you are in a gym taking a group class. It has a great revenue model that is counter-intuitive to traditional gyms.
Allow me to digress a little because this stuff is fascinating. Gyms make money when you pay for membership and then DON’T show up. They can therefore sell a lot more memberships than the space can cater to. In the case of Peloton, the first revenue stream is from the equipment itself which can set you back $2,245 and then the best bit is the app. This is where Peloton gets recurring revenues when you subscribe to the classes on the app. It is the Gillette model; buy the shaving kit once and keep paying for the replacement blades. The money is in the blades. Prof. Scott Galloway calls this the Rundle model; bundled services with a recurring revenue model. Peloton also sells Apparel and Accessories.
Getting back on track, I’m adding Fitbit because it was the new kid on the block just a few years ago and may not look as Fit anymore. It could be a cautionary tale of investing in “hyped” stocks. Under Armour (24 years old) was cool once but Lululemon (22 years old) seems to have upstaged them quite nicely. So, let’s get into it.
The table above compares all the metrics we have discussed for the 6 competing companies.
To really understand what they mean, look at the table below where I have calculated a few variances.
- IPO Date: This is the date each of the companies went public. As you can see, the oldest company, Nike was listed nearly 40 years ago, and the youngest, Peloton, is barely 9 months old in the public market. It is good to know this, because it is easier to assess the growth potential of an established company than a young one with not much past history to guide us. However, sometimes it is the brash, young companies that can give massive growth. In other words, it is easier to double $1 to $2 rather than $1 Million to $2 Million.
- Day Range Variance: This just shows how much price volatility there was within a day. Day traders like stocks with high price volatility within a day. Look at Under Armour, with the right bet, and if you were lucky in your timing, if you had bought $1 Million of Under Armour at the day’s lowest and sold at its highest, you would walk away with $83,000. However, if you had bet wrong, you could have lost $83,000/- as well. It is not easy to time the market and I personally do not like day trading.
- Change In Daily Volume to Avg Volume: This gives you some directional indicator on the demand for the stock on this particular day. Look at FitBit and Under Armour. Trading volume was down by 28% and 37% respectively compared to the average daily volume. Investors may not be keen on these stocks. Are they right? Are
- investors undervaluing these companies? Is it a buying opportunity? Peloton on the other hand as the volume of trade increased by 13%. This is significant on a day when all the other competitors had a lower than average trading volume. Is Peloton too hot now to buy? We always want to buy low and sell high.
The Stock Table gives you a snapshot of the stock on any given day. If you want to invest in any, you have to carefully watch the performance over some period of time. There are many other metrics such as moving averages, relative strength index, stochastic oscillator and a whole lot of technical analysis that professional analysts study. However, I don’t use many of these personally. Instead, I look at the following:
- The company’s balance sheet and financial statements.
- The industry they are operating in and see if there is potential for growth or disruption.
- I never try to time the market.
- When there is a dip in the market AND the fundamentals of the stock still seems strong, then I will buy.
I will cover financial statements in the next blog. Let us see how our 6 stocks performed against the market.
Did they beat the Market?
The chart below compares the YTD (till June 15, 2020), 1, 3, 5 and 10 year returns for each of the stock compared with the S&P 500 index. Ofcourse some of the stocks have been in the market for less than 1 year or 5 years and so their returns would be missing for longer periods.
Lululemon and Nike beat the S&P 500 consistently over the past 10 years. Lululemon is definitely the star. Had you bought the stock on 16th June 2010 your returns would be over 1,230% averaging 123% per year. Nike also beat the S&P 500 returning 602% in the same period averaging 60% per year. Please note that Nike’s market cap is $152 Billion and dwarfs Lululemon’s $40 Billion in market cap. Still, Lululemon returned twice as much as Nike. S&P 500 returned 236% or on average 23.6% over the same period. Bigger is not always better.
In the 5-year period also, Lululemon (351%), Adidas (262%), & Nike (100%), beat the S&P 500 which returned 61% or about 12% per year in the past 5 years. Interestingly, FitBit did not beat the S&P 500 and returned only 27% in 5 years or a little over 5.4% per year.
Table below shows you the returns in percentages.
As the investing horizon gets shorter, the returns also decrease. If you have not already read it, I encourage you to read one of my original blogs on why Time in The Market Matters. The longer your investment horizon, the greater your returns will be so long as the fundamentals of the stock is good.
A Stock Table is a snapshot of the stock’s performance on a particular day. A stock table on its own is not sufficient to make an informed decision on whether to trade in a stock. However, it is useful in comparing many stocks together especially in the same sector. Bigger is not necessarily better. Young & hip company today may not be fit tomorrow.
Time in the market really matters. So, if you want to own a stock, consider owning it for at least 10 years. Peloton maybe a dark horse if it truly has championed a sustainable disruption in the industry. Lululemon with a high multiple of nearly 69, is a reflection of the high level of investor confidence that it will continue to see aggressive growth. Even in the COVID19 era, it has managed to return 30% YTD whereas Nike and the S&P 500 is nearly flat at -4% and -5% respectively. You will often hear “work from home” stocks will do well during the pandemic. This explains both Pelaton and Lululemon’s popularity among investors.
In my next blog, I will cover financial statements and try to assess how strong the fundamentals are for each company.
*ADIDAS is listed in the German Stock Exchange, NYSE as well as the French Stock Exchange. I took the Euro figures (ADS.DE) on June 15th and converted them to USD just for comparison at an exchange rate of USD 1.12 for Euro 1.
I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself so you can feel empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me and I’ll do my best to help you with your queries.