PODCAST 167
SAFE DIVIDEND INVESTING
9 May 2024
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 167, on May 9th of 2024.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering 1 interesting investment question. The objective of my books, my website and my podcasts are to show all those seeking financial independence how to become informed, confident, successful, self-directed investors.
QUESTION #1
IS CHOOSING THE STOCKS WITH THE HIGHEST TRADING VOLUMES IMPORTANT?
Many investors are dazzled by popular stocks that trade millions of shares daily. These are stocks investors buy because they believe everyone is buying those stocks and they do not want to miss out on the chance to get rich. The media love reporting on the daily fluctuations of these high-volume stocks. This reporting must mean that these stocks are what people are interested in.
Almost all of these highly traded stocks are traded on the New York Stock Exchange. It is the largest stock exchange by stock market capitalization in the world with a market capitalization of 25 trillion dollars.
The NASDAQ whose market capitalization is not far behind. It has a market capitalization of 21 trillion dollars. However the NASDAQ lists more stocks than the New York Stock Exchange. This must mean it has a greater number of smaller companies.
The world’s next closest stock exchange in market capitalization is a distant third. This is the Euronext with a market capitalization of 7 trillion dollars. The next six largest stock exchanges were all in Asia.
For our British listeners, the London Stock Exchange market capitalization was 3.4 trillion dollars. Canada’s Toronto Stock Exchange was at 2.9 trillion dollars and Australia’s stock exchange capitalization was 1.7 trillion which made it the 17th largest stock exchange in the world.
The New York Stock Exchange’s gigantic trading volumes attract not only stock buyers and sellers from all over the world but it attracts the largest foreign corporations who want their stocks listed there as well as in their local exchanges. . Of the 2,385 stocks trading on the New York exchange, 530 are foreign headquartered companies located in 45 countries.
Looking closely at just the five most highly traded companies on the New York Stock Exchange on May 2nd of 2024 gave me some interesting insights into highly traded stocks. The five most heavily traded stocks that day were:
Apple Inc (stock symbol AAPL) it traded 158 million shares.
Tesla Inc (stock symbol TSLA) traded 75 million shares.
Paramount Global (stock symbol PARA) traded 66 million shares.
SoFi Technologies (stock symbol SOFI0 traded 56 million shares.
Palantir Technologies Inc (stock symbol PLTR) traded 55 million shares.
While it is not surprising to see Apple with a market cap of 3 trillion dollars and Tesla with a market cap of 578 billion dollars in the top five. It seems odd to see a SoFi Technologies with a market cap of only 7 billion dollars. This does not appear to be a significant market cap for the 4th most active stock being traded on the New York Stock exchange.
SoFi’s volume of shares traded that day exceeded giant companies like Advanced Micro Devices with a market cap of $243 billion or Bank of America with a market cap of $291 billion.
It raises the question as to what causes the high number of investors to be trading SoFi’s Technologies’ shares? Based only on its name, I was surprised to discover that SoFi was a San Francisco based banking service offering personal loans, student loans, underwriting, funding, credit cards and so on. I had thought it would be technical company like Apple.
I had also thought the high volume of shares traded on Friday must be due to the stock’s superior financial strength. I was wrong. The high volume was reported to be caused by the stock falling short of analysts’ expectations. This stock had a share price losing day despite reporting quarterly earnings that topped its quarterly estimates and raised its forecasts for the year.
It is interesting to me that 4 respected analysts are predicting that this stock is a strong buy and will increase by more than 50%. Yet, all the indications I looked act indicated that this is not a strong stock. For example, the current share price of $6.96 is a significant drop from the $23.23 it was at shortly after it was first listed on the New York Stock Exchange in late 2020. It is paying no dividend. The operating margin and price-to-earnings ratio were reported to be zero. However, it does have a book value of $5.69 which is acceptable for a stock trading at $6.96. It actually beats Apple’s book value of $4.00.
To sell a stock, there must be a buyer willing to buy it. It seems that the 56,617,990 shares that traded on May 2nd of 2024 found buyers. Furthermore, analysts are projecting a price of between $10.00 and $14.00.
This is not a company making a profit. What is being sold is its potential. When I put it through the IDM stock scoring software it scored a 30. I avoid stocks that score under 50. T
This appears to me to be a speculative stock not much different than a gold mining stock in which you are risking investing your money on a geologist’s drilling samples while understanding that the mine will not be productive for perhaps ten more years.
The lesson here seems to be that just because a stock is being traded at a higher volume than 2,380 other stocks on the New York Stock Exchange does not mean it is a strong stock.
Is Apple Inc, the stock with the highest volume of shares traded on the New York Stock Exchange, a strong stock? The first indicator it is, is its share price of $183.36. When you look back over the last twenty years you see that it is close to its all-time high. 18 of the 19 analysts recommending it as a buy predict it will be over $200 and some see it reaching a high of $240 to $250.
When you look at its operating margin of 30.98% you recognize that this is a company that knows how to make a profit. Its price-to-earnings ratio of 28.5 is quite acceptable for a company of this size. Several companies with share prices in the hundreds often have inflated price-to-earnings ratios in the hundreds. I prefer price-to-earnings ratios under 20.
On the positive side, Apple has been paying dividends for a few decades. However, it is a very small dividend of 0.55% - but it is still a dividend. Over the last ten years you can see their dividend payouts steadily increasing from 12 cents to their current 24 cents per share.
The only surprise with Apple is that the accountants who calculate the book value of this $183 stock say it has a book value of only $4.
When I scored Apple, its score was 60 which is a good score. Not the highest score I have ever calculated, which was a 78 but a long way from the lowest score I have calculated which was an 8.
Why am I not running out and buying shares in Apple? Because my objective is to live off an ever growing, dependable dividend income of about 7% of the value of my portfolios. Apple’s dividend of less than 1% immediately removes it from consideration.
You can quickly see in my book New York Stock Exchange’s 106 Best High Dividend Stocks that it is not difficult to build a portfolio of 20 strong stocks providing a high dividend income.
The second highest volume of shares traded was for Tesla. It seems to have more analysts paying it attention than any other stock. The analysts seem as confused about its future as most people are. Their estimates of future share prices range from a high of $310 to one brave analyst who predicts it will drop down to $22.86. Most analysts saw its future to be between $150 and $300. Its present shar price is $181.14.
In November of 2021 its share price had reached a high of $407.36. The current share price is only $2 lower in price than Apple which is expected to reach its record high within days.
Tesla’s book value of $19.87 beat Apple’s book value of $4. Its operating margin of 7.8%1was significantly below the 30.98% of Apple. Its Price-to-Earnings ratio of 46.3 is an indication of an inflated share price.
When I scored Tesla, it had a score of 53. Since it pays no dividend, it has zero interest to me.
The third highest volume of shares traded was by the entertainment company Paramount Global. They involved in the entertainment industry from CBS Television network to movie and television production.
Their share price of $12.88 is a big drop from their share price high of $62.69 in February of 2021. The 3 analysts recommending a buy predict prices rising to between $15 and $19. Of the 21 analysts reporting 8 recommended selling the stock. This is unusual. Analysts are often reluctant to give sell recommendations.
Paramount is paying a small dividend of 1.55%, despite having a price-to-earnings ratio of minus 11.4 and a small operating margin of 1.17%. Is the low margin a result of the changes in the entertainment industry that the covid pandemic caused and by consumers abandoning television for access to entertainment over the internet?
Its book value of $34.50 on a stock whose share price is only $12.88 is unusual. This looks like a bargain buy for a company seeking an acquisition of part or all of their operations. The high book value probably reflects a wealth of entertainment material in their vaults, classic movies like the God Father. When I scored Paramount it scored a 51. A change of ownership may or may not benefit shareholders.
Palantir Technologies was the fifth highest stock traded on the Exchange that day. It was only listed on the Exchange in late 2020 and traded initially at $9.71. Its stock price reached a high of $35.18 in February of 2021 and fell to $6.29 in December of 2022. Its price has risen steadily since then to its current $23.32.
It builds software to assist in counterterrorism investigations which would seem to put it in demand in the current stage of conflicts and frictions in the world right now/
Since it is a relatively new developing company the low operating margin of 5.39%, the very high price-to-earnings ratio of 257.8 and the book value of $1.58 is not a surprise. They would indicate all resources are being poured into building the business. However, these three negative factors impact its score which was 39. From my years spent building commercial risk databases I know that it is not easy for a company to survive their first five years of operation. Buyers are betting on this stock’s potential.
What has been an eye opener to me after reviewing these five most heavily traded stocks on the New York Stock Exchange is that I had been under the mistaken impression that only the very strongest businesses could generate such high trading volumes. As you can see the volume of shares traded has little to do with the strength of a stock.
This review also reinforces how important it is to spend just a few minutes doing some basic, simple research to determine just how financially strong any company is before you risk investing in it. Only by comparing one stock with another, can you find the best to build your strong safe stock portfolio.
THE END