Situation
The article, US Airways Shares Fall as JPMorgan Downgrades Airline Stocks, discusses the decrease in airline stock prices such as Tempe and other large airlines. Due to rising fuel prices and a weakening economy, Standard & Poor's Ratings Services plan to review the top ten US airline companies. For example, "US Airways stock closed at $9.98 per share Tuesday and dipped to $8.87 Wednesday before starting a rebound to end the day at $9.44 (Luebke 2007)."
Who is Affected?
Stock holders with risky stock such as the airline industry need to know when to buy in the market and when to sell their stock. In this situation, the main decision makers in this situation are stock holders such as the corporation and individuals.
What Model Should be Used?
A simple financial model known as the Dividend Discount Model (DDM). DDM tells you the value of equity, which is stock. Three variables are needed to determine the current value/price of stock. First, the dividend amounts are needed for a base period and for the following period after that. Second, the percentage of total expected return by investors (current income + price change), which is defined as variable R. Third, the annual growth rate from the base period and the next period is needed, which is defined as variable G. To find the stock's price, divide the next period's dividend amount by R minus G as so:
Price of Stock = Dividend of Next Period
__________________
R - G
How the Dividend Discount Model is Useful
The dividend discount model is a quick and dirty method for decisions in buying and selling securities. If the 'Price of Stock' from the model is less than the actual stock price, than the stock holders should try to sell their stock or on the other hand, potential investors should not buy the stock. If the 'Price of Stock' from the model is more than the actual stock price, then the potential buyers should buy the stock because it is undervalued, or stock holders may decide to keep the stock.
Although this model is simple, it is a quick way to evaluate stocks and is readily available with only a few necessary variables.
References
Luebke, Cathy. US Airways Shares Fall as JPMorgan Downgrades Airline Stocks. Phoenix Business Journal. 12 March 2008. Retrieved March 12, 2008 from http://www.bizjournals.com/phoenix/stories/2008/03/10/daily27.html?jst=b_ln_hl
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1 comment:
Ah, when you have quick rules of thumb, often you do not need a DSS. However, I wonder if you might in this case. In particular, could you use the DSS to help you evaluate why the stock price dropped, whether it is likely to rebound quickly, or some other factor that might make you think about holding on for a little while longer.
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