It's been a bad day for the market after the morning's trading. The Nasdaq has decreased 1.7%; the S&P 500 is down 1.3%; and the Dow has declined 1.4%. The financial sector is the category of stocks containing firms that provide financial services to commercial and retail customers. This sector includes banks, investment funds, insurance companies and real estate. Financial services perform best in low interest rate environments. A large portion of this sector generates revenue from mortgages and loans, which gain value as interest rates drop. Furthermore, when the business cycle is in an upswing, the financial sector benefits from additional investments. Improved economic conditions usually lead to more capital projects and increased personal investing. New projects require financing, which usually leads to a larger number of loans.
The Financial sector (XLF) is currently ahead of the overall market, down only 1.1%, and its biggest movers are currently:
|Company||Market Cap||Percentage Change|
|Credit Acceptance Corp. (Nasdaq:CACC)||$2.4 billion||-3%|
|Affiliated Managers Group, Inc. (NYSE:AMG)||$5.7 billion||-2.8%|
|Virtus Investment Partners Inc (Nasdaq:VRTS)||$659.2 million||-2.7%|
|Knight Capital Group Inc. (NYSE:KCG)||$1.14 billion||+2.2%|
|Franklin Resources (NYSE:BEN)||$24.33 billion||-1.9%|
|Markel Corporation (NYSE:MKL)||$4.24 billion||-1.8%|
|SPDR S&P MidCap 400 ETF (NYSE:MDY)||$9.65 billion||-1.6%|
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At $91.20, Credit (Nasdaq:CACC) has slipped 3%. So far today, the company's volume is 6,354 shares. In technical analysis, trading volume is used to determine the strength of a market indicator. A company's investment value can be estimated using valuation ratios such as the price to earnings (P/E) ratio, the price to earnings growth (PEG) ratio, the price to sales (P/S) ratio, the price to book (P/B) ratio, and the dividend yield. The capitalization ratio is calculated by dividing long-term debt by the sum of long-term debt and shareholders' equity. CACC has a capitalization ratio of 62.6%, which is on the high end. A company considered too highly leveraged (too much debt) may find its freedom of action restricted by its creditors and/or have its profitability hurt by high interest costs. This ratio is considered to be one of the more meaningful of the "debt" ratios - it delivers the key insight into the use of leverage by a company.
Affiliated Managers Group (NYSE:AMG) is down 2.8% to reach $107.84 per share. This morning, 165,031 shares have been traded, below yesterday's volume of 322,725 shares. Volume is also used as a secondary indicator to help confirm what the price movement is suggesting. Margin analysis is a great way to understand the profitability of companies. AMG has a gross profit margin of 58%. A company's operating margin is calculated by dividing operating income by revenues. AMG has an operating profit margin of 26%. Net profit margin compares net income with sales. Net margin is 9.6%.
A company's value as an investment is more easily estimated using valuation ratios such as the price to earnings (P/E) ratio, the price to earnings growth (PEG) ratio, the price to sales (P/S) ratio, the price to book (P/B) ratio, and the dividend yield. Price/earnings ratios (P/E ratios) provide a measure of the relative value of a stock. AMG's P/E ratio of 36.1 is above the industry average of 16.08. Usually, if a stock has a high P/E ratio, it indicates that the market expects the company to grow earnings quickly in the future. High P/E stocks could be "growth" stocks, while low PE stocks may be "value" stocks. SEE: How To Find P/E And PEG Ratios
After a decline of 2.7%, Virtus Investment Partners (Nasdaq:VRTS) has hit a share price of $82.35. The company is currently trading a volume of 5,288 shares. This is 0.2 times its average volume over the past three months. If a stock is trading on low volume, then there is not much interest in the stock. On the other hand, if a stock is trading on high volume, then there is a lot of interest in the stock. Investment valuation ratios can be very useful in determining the value of a stock, but it is very important to keep in mind that while some financial ratios have general rules (or a broad application), in most instances it is a prudent practice to look at a company's historical performance and use peer company/industry comparisons to put any given company's ratio in perspective. The price/book value ratio is one of the more common methods of determining whether a stock is fairly valued. The P/B ratio for VRTS is 2.86, indicating that the stock is trading for more than its book value. This implies that investors expect management to create more value from a given set of assets and/or that the market value of the firm's assets is significantly higher than their accounting value. Users need to be careful when applying this ratio though, as it is more useful for industrial companies that have a lot of tangible assets than it is for technology or consumer product companies that may not have much in the way of hard assets. SEE: Investment Valuation Ratios: Price/Book Value Ratio
Knight Capital Group (NYSE:KCG) has risen 2.2% to hit a current price of $11.87 per share. So far today, the company's volume is 314,310 shares, 0.3 times its current daily average. The trading volume for a stock indicates the level of investor interest. Understanding investment valuation ratios allows the investor to assess the true value of an individual stock. The debt-equity (D/E) ratio compares the total liabilities for a company to its total shareholder equity. KCG has a low debt-equity ratio of 29%. This shows that the company's assets are financed primarily through equity. This easy-to-calculate ratio provides a general indication of a company's equity-liability relationship and is helpful to investors looking for a quick take on a company's leverage.
Falling 1.9%, Franklin (NYSE:BEN) is currently at a share price of $110.87. So far today, 149,862 shares have changed hands. If a stock price makes a big move up or down, volume lets us know the significance of that move. Investment valuation ratios can be very useful in estimating whether a stock price is too high, reasonable or a bargain investment opportunity. The price/sales ratio measures a company's stock market value by its total revenues or alternatively, a company's price per share by its revenue per share. The P/S ratio for BEN is a high 3.74. This could be a good sign if the share price increases. It is important to keep in mind when looking at the P/S ratio that just because a company is generating revenues, this does not mean that the company is profitable, and in the long run, profits drive stock prices.
Markel (NYSE:MKL) is trading at $430.95 per share, down 1.8%. So far today, 14,704 shares have changed hands, which is less activity than yesterday's volume of 20,344 shares. Price change alone is not enough to know how a stock is doing. Volume is an important secondary indicator used to confirm trends suggested by price movement. Investment valuation ratios provide investors with an estimation, albeit a simplistic one, of the value of a stock. The easy-to-calculate debt ratio is helpful to investors looking for a quick take on the leverage for a company. MKL has a high debt ratio of 69.6%. This means that the company's cash flow is significantly impacted by paying off principal and interest and that any negative change in performance or rise in interest rates could result in default. As with all financial ratios, a company's debt ratio should be compared with the industry average or similar companies.
Slipping 1.6%, SPDR S&P MidCap 400 (NYSE:MDY) is currently trading at $171.75 per share. The company's volume for the day so far is 430,656 shares. This is 0.2 times the average volume over the last three months. As a stock moves up or down, it is important to pay attention to the trading volume. This indicates the level of interest: the higher the volume, the more the interest. Valuation ratios include the price to earnings (P/E) ratio, the price to earnings growth (PEG) ratio, the price to sales (P/S) ratio, the price to book (P/B) ratio, and the dividend yield. The dividend yield is calculated by dividing a company's dividends per share by its stock price. MDY's dividend yield of 1.2% is fairly low. If you are an income investor, this stock may not be attractive to you. A stock's dividend yield depends on the nature of a company's business, its posture in the marketplace (value or growth oriented), its earnings and cash flow, and its dividend policy. SEE: Guide To Stock-Picking Strategies: Income Investing
The Bottom Line No matter the economic climate, Wall Street will always have stocks that make major moves each week. It is important to weigh current activity against historical performance when making any investment decisions. Tools like valuation ratios and profit margins, however, are only as useful as the context you put them in; remember to take historical data and competitor performance into account.