How To Analyse Share Prices?

Analyzing a share price mainly requires technical analysis, but it is often beneficial to use a combination of different approaches including fundamental analysis, sentiment analysis, and risk assessment.

What is a technical analysis?

Technical analysis is a common method used to evaluate stocks by analyzing historical price and volume data. The main aim of this method is to forecast future price movements by studying price charts.

In technical analysis, investors analyze and identify recurring patterns in historical share price movements, including support and resistance levels and trendlines. Common chart patterns such as head and shoulders, triangles, and flags are also sought after in technical analysis.

To ensure accurate technical analysis, it’s required to adjust all closing price charts for dividends and capital increases. However, such charts were not readily available in Iraq. In response to this challenge and to better serve both local and foreign investors, Rabee Securities started to provide adjusted price charts for all ISX-listed companies on its new website. These adjusted charts offer a more comprehensive view of price movements, facilitating more informed investment decisions. (Please click to go to the company pages of ISX-listed companies including their price charts and more).

While technical analysis is vital for stock evaluation, forecasting price movements may require considering additional analytical methods. By using different analysis techniques, investors can better understand market dynamics and anticipate future trends.

What is a fundamental analysis?

Fundamental analysis is a method used to evaluate the intrinsic value of a stock, estimating its true underlying worth independent of its current market price. This approach involves considering various fundamentals of a company to calculate an estimated value based on expected future cash flows. Fundamental analysis requires analyzing the financial statements of a company (balance sheet, income statement, cash flow statements), considering the industry it operates in, considering macroeconomic factors (interest rates, inflation, GDP growth), and evaluating the quality of management.

The fundamental analysis aims to determine whether a stock is overvalued, undervalued, or fairly valued. If the intrinsic value (interchangeably used with “target value” by analysts) exceeds the current market capitalization (Mcap) of the company, the stock is considered undervalued, presenting a buying opportunity with potential upside in share price. Conversely, if the intrinsic value is lower than the Mcap, the stock is deemed overvalued, signaling a potential share price decline, suggesting selling. When the intrinsic value closely aligns with the Mcap, the stock is considered fairly valued, indicating that holding the shares may be appropriate if you have them already.

In international markets, equity analysts working in Research Departments publish company reports on publicly traded companies. The first report issued by an equity analyst is known as an initial coverage report, which includes the analyst’s calculated target value for the company along with investment recommendations such as “BUY,” “SELL,” or “HOLD” based on the intrinsic value.

However, in Iraq, brokerage houses are prohibited by law (No. XXXXX) from providing investment advice. Consequently, as Rabee Securities, we are unable to provide target values and investment recommendations in our company reports. Instead, we provide detailed financial analyses of recently published financial results and information on the companies’ ongoing operations. This approach aims to help investors gain insights into the performance of the company, facilitating informed decision-making despite the regulatory limitations. (Please click HERE to reach Rabee Securities’ coverage company reports on the Iraq Stock Exchange)

What are the ratios that I can benefit from to understand if a stock is undervalued or overvalued?

Price-to-earnings (P/E) and price-to-book (P/B) ratios are fundamental analysis tools used by investors to assess whether a stock is overvalued or undervalued relative to its intrinsic value. The simplest method to use P/E and P/B ratios for this purpose is by comparing them with those of similar companies within the same sector. It’s generally believed that all P/E and P/B ratios will eventually converge to the sector average.

For example:

In the agriculture sector, where 2 companies are trading, the average PE (Price-to-Earnings) ratio is 3.0. Company X is trading at a PE of 2.0, while Company Y is trading at a PE of 4.0.

If we solely consider the PE ratios, buying Company X might be preferable, assuming its share price will rise to align its PE with the sector average of 3.0. Conversely, Company Y could be considered overvalued due to its PE of 4.0 compared to the sector average.

A similar analysis can be conducted using PB (Price-to-Book) ratios. You can access the sector average PE and PB for the Iraq Stock Exchange, along with metrics like ROA (Return on Assets) and ROE (Return on Equity), in our RS Daily and Weekly Bulletins in the table “ISX’s Sectors’ Returns and Valuations”. Additionally, PE and PB ratios for each ISX-listed company can be found in our daily and weekly bulletins in the table “Performance of Traded Shares”.

Key Considerations Beyond Share Price Analysis: What Else to Evaluate?

Sentiment analysis and risk assessment are also necessary for share price analysis as they help consider factors that may impact share prices. Sentiment analysis involves monitoring news, social media, and analyst reports to evaluate general opinions on the company and its industry, as positive or negative sentiment can affect share prices in the short term. Risk assessment involves evaluating risks associated with investing in the company’s shares, such as industry-specific risks, regulatory risks, and company-specific risks.

After leveraging various analytical tools and identifying stocks with potential upside in their share prices, it’s advisable to diversify your investment portfolio across different sectors to reduce overall risk.

Why is share price important?

Share price is crucial because it represents the cost of purchasing one share of a listed company on a stock exchange. Monitoring share prices is essential for making strategic investment decisions.

The main reasons why share price is important include:

• Share price reflects the market’s perception of a company’s value, as it determines the total equity value of the publicly listed company when multiplied by the company’s outstanding number of shares.
• Share price changes are important to follow as they are the primary source of investment returns for shareholders. For instance, if you buy a share at IQD10.0 per share and sell it at IQD12.0 per share, your investment return will be 20% ((12-10)/10)).
• Share price can impact a company’s ability to raise capital through a rights issue. For instance, if a company’s market share price falls below IQD1.0, shareholders may be unwilling to participate in a rights issue at IQD1.0 per share when shares are cheaper on the market. Additionally, a market share price below the nominal value of IQD1.0 may indicate operational distress for a company. Conversely, it’s easier for a company to raise capital through a rights issue when its market share price exceeds IQD1.0, as shareholders may be more willing to participate at the nominal price despite higher market prices.
• Share prices play a crucial role in calculating market indexes like the S&P 500, which gauge market performance based on selected stocks. At Rabee Securities, we’ve introduced our price return index, the RSISX Index (RSISX) (calculated since Jan. 2007), to better reflect market sentiment. This index, a free-float value-weighted index, has become a benchmark in the Iraq market. Furthermore, in January 2024, we launched a new index, the total market return index (RSISXTR), enabling investors to assess market returns by considering both price return and dividend return.

In summary, investors and market participants commonly analyze share prices together with other financial metrics to assess a company’s performance and growth potential. However, it’s essential to recognize that share price alone doesn’t provide a comprehensive view of a company’s financial health or overall value. Therefore, it’s crucial to consider additional factors such as financial performance, dividend distributions, and other fundamentals when evaluating a stock price.

Why is the share price important in terms of dividend yield?

The dividend yield is calculated by dividing the dividend per share by the share price, expressing the dividend per share as a percentage of the share price. Investors commonly evaluate and compare dividend yields of publicly listed companies because it indicates the portion of profits they can expect to receive as a percentage return on their investment.

In this scenario:

Company A pays a dividend of IQD0.5 per share.

The current share price of Company A is IQD2.0 per share.

Therefore, the dividend yield for Company A is (0.5 / 2.0) = 0.25 or 25%.

Company B pays a dividend of IQD1.0 per share.

The current share price of Company B is IQD10.0 per share.

Therefore, the dividend yield for Company B is (1.0 / 10.0) = 0.1 or 10%.

If we solely compare the dividends they pay, one might initially lean towards buying Company B because it offers a higher dividend per share. However, this decision overlooks the amount spent to acquire one share.

For Company A, you pay IQD2.0 to buy one share and receive IQD0.5 cash dividend, resulting in a dividend yield (your dividend return) of 25% (IQD0.5/IQD2.0).

For Company B, you pay IQD10.0 to buy one share and receive IQD1.0 cash dividend, resulting in a dividend yield of 10% (IQD1.0/IQD10.0).

Therefore, by comparing the dividend yields, it is more favorable to buy Company A rather than Company B.

How to buy shares?

Investors must open a trading account at a licensed brokerage house to buy shares on Iraq Stock Exchange. Please contact Rabee Securities’ Customer Service (cs@rs.iq, Whatsapp: +964 783 534 5151).