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Share Price Trend Analysis

Discuss about the Stock Investment Analysis.

In the analysis of various share prices, the main aim of the analysis is usually based on the motive that the share value depicts the market value of the company in question. In this prospect, it is expected that the firm’s depreciation or appreciation in value will be based on the share price movements postulated over time. The management of the profits and the volatility of every share prices of a company depict the relative risks and return that should be expected from the same (Lee, and Kim, 2007). The information about the share price movement over time for every company is very important since it would determine whether an investor should put their wealth in the company or not. The main aim of every investor as a shareholder is to maximize their wealth while reducing the relevant risks that may accrue to their investment (Brennan, Jegadeesh, and Swaminathan, 2013). This research gives an instinctive analysis into the share prices of two Australian companies in the healthcare sector. These company are Pro Medicus Limited and JAPARA Healthcare Limited. Notably, the research takes look into the trend in weekly share prices over the last three months and create a comparison of the same. The risk and return analysis is also done to understand the company that has less risks when invested in relation to the returns postulated herein. A recommendation is drawn to give much attention to the notion of best company an investor should look for and invest.

The most important thing share price trend analysis is to understand the volatility in the price of the share of these company over the periods postulated. It should be noted as well that a smooth trend usually connotes less volatility which means the risks in investing in such companies is deemed to be quite less. The graph below shows the trends in the companies’ weekly share prices for the last three months. 
 Share Price Trend Analysis

From the above, it is evident that the JAPARA has a lower price per share than the Pro Medicus limited. The highest price per share postulated by JAPARA is around 2.78 while that of Medicus stands at 6.271. This means that an investors would use less amount of money to acquire the shares of JAPARA than those of Medicus. In this line of thought the best parameter to gauge the performance of these stocks is the dividend policies put in place (Model, Diversification, and Roll’s, 2007). it should be noted that the graph for both the two companies on share price movements is seen to be smooth showing a lesser risk in investing in them. Additionally, Pro Medicus seem to be increasing its share price from the onset which means that there is growth in the share prices over the weeks analyzed. Modigliani in his analysis critically showed that an increase in the share prices would mean a lot is happening in the company. On one hand it would mean that the company’s reputation is becoming on a positive stance. It would also mean that there is an insider trading going on (Barber, and Odean, 2012). Which would mean that the firm is would expect a major industry place to inject good amount of capital into the firm in this case. It is only expected that more of the shares are to be bought. The rise in demand for these share would therefore increase the amounts of share premium thus pushing the share prices up. The increase in the share prices might also be due to the convergence of the shares due to pairs trading caused by companies which highly correlate (Ezama, De Liaño, and Scandroglio, 2015). The high level of equilibrium correlation creates an avenue of divergence and convergence of these share prices which most investors take advantage. The advantage is taken on the basis that that as the share prices of the firms diverge of converge, arbitrage is created which causes the differential changes in the prices of various shares in question. The above results show that these companies highly correlate in terms of the share price movements (Damodaran, 2016). Additionally, JAPARA is seen to averagely have a higher share prices than Pro Medicus. The smoot trend in the share prices for these companies shows that there is low volatility in the share prices creating a platform of low risks on the investments brought forward on the shares.

Risk and Return Analysis

To ascertain the volatility, it is important to understand the correlation and risks involved in investing in such stock. Additionally, the dividend policy for each company is very important as it helps us understand the real amount of cash that the investor would be accumulating over the years. It should be noted that the consistency of the firm in giving the dividend and the way in which the dividend policy changes over time. The changes brought here will depict whether the company is indeed on the good trend of creating a return or not (Asker, Farre-Mensa, and Ljungqvist, 2014). The table below shows the calculation of the risks in terms of the standard deviation and correlation with keen attention to understanding the risks involved in investing in these stocks.

JAPARA LTD

Pro Medicus LTD

Mean

2.275153846

Mean

5.623153846

Standard Error

0.078678089

Standard Error

0.120062422

Median

2.393

Median

5.69

Mode

2.393

Mode

#N/A

Standard Deviation

0.283677883

Standard Deviation

0.432891219

Sample Variance

0.080473141

Sample Variance

0.187394808

Kurtosis

-0.792829111

Kurtosis

0.277838493

Skewness

-0.911436791

Skewness

-0.505032746

Range

0.798

Range

1.576

Minimum

1.758

Minimum

4.698

Maximum

2.556

Maximum

6.274

Sum

29.577

Sum

73.101

Count

13

Count

13

Largest (1)

2.556

Largest (1)

6.274

Smallest (1)

1.758

Smallest (1)

4.698

Confidence Level (95.0%)

0.171424829

Confidence Level (95.0%)

0.261593546

From the above table, it comes out clearly that it is riskier to invest in Pro Meducis Limited than JAPARA owing to the high standard deviation postulated by Pro Medicus. In this prospect, it would be expected that the degree with which the Medicus share prices changes is deemed to be higher than those of JAPARA. One would therefore confidently accentuate that there is high level of consistency in the movements of the share price of JAPARA than those of Pro Medicus which seems to be quite volatile as depicted by high standard deviation of the same (Brown, 2012). The table shows that the standards deviation for JAPARA stands at 0.28 while that of Pro Medicus stands at 0.43. It is therefore less risky to invest in JAPARA than Pro Medicus. The next set of analysis now revolves around the investment in the portfolio containing the companies. In this prospect, we give much attention to the correlation between the stock prices of these companies and investigate on how the importance of their relationship for these periods of weeks postulated for our analysis. The correlation results of the investment portfolio are as shown below.

JAPARA LTD

Pro Medicus LTD

JAPARA LTD

1

 

Pro Medicus LTD

-0.46414701

1

The above table results reveal that these two stocks are negatively correlated. Hence as the price of one goes down, the prices of another goes up. In one line of thought this notion is deemed sufficient for the whole context pair trading since the arbitrage would form in the opposite direction. A closer look at the figure however, it shows a small correlation degree. The figure of 0.464 far from 1 which connotes a low degree of correlation stance. In this prospect, the firms are deemed to be faintly correlated. Hence the movement in the prices of JAPARA does not highly affect the movement of share prices of Pro Medicus. In trying to bring on board the advent equal investment, the two stocks have a diverse set of variation in terms of share price accumulation (Muhammad et al, 2015). The fact that the results shows a negative correlation gives us the confidence that an investor can indeed invest in the two companies and will be assured of ultimate gain. This notion is because, as the prices of shares of one company increases, the share value of the other will reduce. Either way, an investment involving this portfolio is deemed to gain a profit.

In the analysis of the individual company’s performance, it is important to understand the earnings of the firms with respect to their share prices. Here we look into the comparison of the price earnings ratio of the companies for a given period of time in order to give a profound recommendation on the best way to invest in these stocks (Joshi et al, 2013). The graph below shows the price earnings ratio for the two companies over the period stated below.

price earning ratio

The above table shows that the change in the price earning ratio is higher for Pro Medicus while the change for JAPARA is seen to be negative. It only means that the earnings ratio is increasing at a decreasing rate for JAPARA hence this poses a risk for loss in terms of investment. The positive change inearnings ratio shown for PME is seen to be quite important as it boosts the confidence of the company shareholders hence in my recommenadion I would advise that the company should invest in PME and not JAPARA as far as the results above is concern (Downie, and Stubbs, 2013).

Conclusion

In conclusion, for the two type of stocks for the companies, it is important to understand that JAPARA is deemed to have a higher share value than Pro Medicus. Additionally, the risks involved in investing in Pro Medicus Limited is higher than for JAPARA Healthcare Limited as depicted by a higher risk measure (standard deviation). On the account of portfolio management, investing in the two stock is recommended as they tend to have a negative correlation which would ensure diversification fo risks involved in the investment (Joshi, Singh Ubha, and Sidhu, 2012). On the account of the investment into the price earnings ratio, JAPARA is seen to have a higher stance of positive change for which it is recommended which would ensure more profit for the investor.

References

Asker, J., Farre-Mensa, J. & Ljungqvist, A., 2014. Corporate investment and stock market listing: a puzzle?. Review of Financial Studies, p.hhu077.

Barber, B.M. & Odean, T., 2012. Trading is hazardous to your wealth: The common stock investment performance of individual investors. The journal of Finance, 55(2).

Brennan, M.J., Jegadeesh, N. & Swaminathan, B., 2013. Investment analysis and the adjustment of stock prices to common information. Review of Financial Studies, 6(4).

Brown, R., 2012. Analysis of investments & management of portfolios.

Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.

Downie, J. & Stubbs, W., 2013. Evaluation of Australian companies’ scope 3 greenhouse gas emissions assessments. Journal of Cleaner Production, 56.

Elton, E.J., Gruber, M.J., Brown, S.J. & Goetzmann, W.N., 2009. Modern portfolio theory and investment analysis. John Wiley & Sons.

Ezama, D.P., De Liaño, B.G.G. & Scandroglio, B., 2015. Economy, Psychology and Stock Investment: Analysis of variables that participate in the process of decision making. International Journal of Psychological Research, 5(1).

Gilmanova, A., Shakirzyanov, R. & Novenkova, A., 2015. Strategic marketing analysis of premium package products of joint stock investment commercial bank “Tatfondbank”.

Joshi, M., Cahill, D., Sidhu, J. & Kansal, M., 2013. Intellectual capital and financial performance: an evaluation of the Australian financial sector. Journal of intellectual capital, 14(2).

Joshi, M., Singh Ubha, D. & Sidhu, J., 2012. Intellectual capital disclosures by Indian and Australian information technology companies: A comparative analysis. Journal of Intellectual Capital, 13(4).

Lee, K.C. & Kim, H.S., 2007. A Fuzzy Cognitive Mapâ€ÂBased Biâ€ÂDirectional Inference Mechanism: An Application to Stock Investment Analysis. Intelligent systems in accounting, finance and management, 6(1).

Model, A.P., Diversification, I.I. & Roll’s, C.A.P.M., 2007. Investment Analysis & Portfolio Management.

Moroney, R., Windsor, C. & Aw, Y.T., 2012. Evidence of assurance enhancing the quality of voluntary environmental disclosures: an empirical analysis. Accounting & Finance, 52(3).

Muhammad, N., Scrimgeour, F., Reddy, K. & Abidin, S., 2015. The relationship between environmental performance and financial performance in periods of growth and contraction: evidence from Australian publicly listed companies. Journal of Cleaner Production, 102.

Xu, Y., Carson, E., Fargher, N. & Jiang, L., 2013. Responses by Australian auditors to the global financial crisis. Accounting & Finance, 53(1).

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