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Module 4 Part 2/2: Types of shares

April 16, 2024
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EasyEquities
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EasyEquities

Different types of shares - part 2.

Welcome to the EasyEquities Mentorship program, where we make investing EASY for you!

We have prepared 6 modules that we will post on FinMeUp over the month of July.

The modules are intended to give investors the necessary knowledge to start their investing journeys.

Lets get into it!

The different types of shares that we will discuss are (The last three will be discussed in this article):
Dividend stocks
Small-cap and medium-cap stocks
Growth stocks
Value stocks
Cyclical stocks
Defensive stocks

Value stocks

These are stocks that investors believe have been underestimated by the market. This may be because the industry the stock is in is experiencing trouble but has the potential to do well.

Investors who invest in Value Stocks believe they are getting a bargain on shares that will become more expensive in the future. Value stocks are considered riskier than growth stocks. 

A good indication of an undervalued stock is looking at the P/E ratio, which can be found online. The lower the P/E ratio, the better.  To determine if the P/E ratio is good, investors can compare it to the industry average.

Other metrics and resources that are used to indicate that a stock is undervalued include:
P/S ratio
PEG ratio
P/B ratio

https://simplywall.st/dashboard 

*Ratios are not all relevant to every stock*

Examples as of June 2022 include:
Sibanye Stillwater (P/E ratio of 3.60x compared to an industry average of 6.0x)
Advtech (P/E ratio of 14.6x compared to an industry average of 17.4x)
Verizon Communications (P/E ratio of 10.0x compared to an industry average of 17.5x)
Figure 1 [refer to the image attached] shows the main differences between value stocks and growth stocks.

Cyclical stocks

These are stocks that increase in value when the economy is strong and lose value when the economy weakens.
These are companies that offer luxury goods and services such as airlines and vehicle manufacturers. 

Cyclical stocks can lose a lot of their value during an economic recession, but some can regain what they lost and even pass their former values when the economy recovers.

Some industries that are often cyclical include:
Consumer goods 
Airlines
Luxury goods

Defensive stocks

These are solid investments during economic downturns because the businesses that issue these stocks are less affected or even profit from financial struggles. There is always a demand for their products or services. This makes defensive stocks more stable during various phases of the business cycle.

When there are high periods of volatility and during a struggling economy, it might be a good idea for investors to increase their exposure to defensive stocks. Defensive stocks typically have strong cash flows, stable dividends, and stable operations.

Defensive stocks usually have a beta of less than 1. To understand what this means, lets look at an example. Company ABC has a beta of 0.5. If the market drops 2%, then we would expect the stock to lose only about 1%. 

Food, fuel, utility, and healthcare stocks are considered defensive stocks because the demand for them doesnt decrease with the economy. 

Examples include:
McDonalds (Beta = 0.57)
Shoprite (Beta = 0.55)
Pick N Pay (Beta = 0.31) 

Figure 2 [refer to the image attached] shows the difference between defensive stocks and cyclical stocks.
 


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