Question

An investor is considering purchasing one of the following three stocks. Stock X has a market capitalization of $8 ​billion, pays a relatively high dividend with little increase in​ earnings, and has a​ P/E ratio of 12. Stock Y has a market capitalization of $62 billion but does not currently pay a dividend. Stock Y has a​ P/E ratio of 37. Stock​ Z, a housing industry​ company, has a market capitalization of $801 million and a​ P/E of 19.

a. Classify these stocks according to their market capitalizations.

b. Which of the three would you classify as a growth​ stock? Why?

c. Which stock would be most appropriate for an aggressive​ investor?

d. Which stock would be most appropriate for someone seeking a combination of safety and​ earnings?

Answer 1

a)

Large-cap company has a market cap > $10 billion.

Mid-cap company has a market cap between $2 billion and $10 billion

Small-cap company has < $2 billion in market cap

Based on these definitions,

Stock x - Mid cap

Stock y - Large cap

Stock z - Small cap

b)Typically growth stocks have high PE on account of high expectations/history of growth. So Y which has high PE could be a growth stock

c) Stock Z is suited for an aggressive investor; Market cap is small; The industry is housing which in the past had been prone to cyclical and sectoral risks

d) Stock Y is an ideal candidate for safety and earnings; This is because its a large cap (read:safety) and because of its high PE and high growth story implications, it could be a good candidate for earnings