In: Finance
Question 2.
Intergalactic Software Company went public three months ago. You are a sophisticated investor who devotes time to fundamental analysis as a way of identifying mispriced stocks.
1)Which of the following characteristics would you focus on in deciding whether to follow this stock?
2) When you looked at the projection for Intergalactic Software Company’s revenue in the future, you found that most of analysts assume the revenue growth rate is mean-reverting over time. What is the rationale to assume that revenue growth rate is mean-reverting over time?
1. Listed following all of the characteristics are quite important while selecting or to start following stock in terms of fundamental or technical analysis point of views,
Market Capitalization gives idea of total amount till now invested in the stock. If the stock belongs to Small/Mid/Karge cap category or not. It gives investors confidence when investing in large-cap stocks as compared to small-cap stocks.
It gives the idea whether the stock is actively trading or not in the market. It also gives idea about interest about the stock among investors/traders.
Bid-ask spread gives an idea about liquidity about the stock. High bid-ask spread indicates that stock is illiquid or the presence of only buyers/sellers at a time. Which is always not a good signal about a scrip/stock
Underwriting by top investment companies gives confidence about fundamentals of stock and confidence on management also.
Audit done by Big four gives clarity and the presence of clear financial data of the firm.
If analysts from major brokerage firms following the company mean the stock is fundamentally good or major announcement /policy changes may come related to the firm / sector.
The presence of institutional investors gives confidence to retail investors. As institutional investor may have more access to accurate and timely data about market/firm.
2) revenue growth rate is mean-reverting: A revesion back to mean over a long term period is always expected. Means that growth rate the firm shows in past will be repeated in future under normal economic condition.