Please provide your thiughts about the below paragraph regarding stocks and returns:
The two companies I chose from the list given are Ford Motor Company and The Kroger Company. Currently Ford’s and Kroger’s risk-free rate is at 2.78% according to the Guru Focus website. The market risk premium is currently from high at 5.5% to low 5.0%. Risk-free rate is “the rate of return that can be earned on a risk-free investment; the sum of the real rate of return and the expected inflation premium” (Smart, Gitman, & Joehnk, 2017, p. G-9). “The market risk premium is the additional return an investor will receive (or expects to receive) from holding a risky market portfolio instead of risk-free assets” (Corporate Finance Institute, 2017, p. 1). Most investors do not like taking risks. If investors take risk they usually expect some type of compensation for taking that risk. The larger the risk the more the investor expects in return. Therefore if the investor sees that the return is larger than the required return the investor will most certainly be interested in investing. In order to calculate the required rate of return Guru Focus uses Capital Asset Pricing Model (CAPM) with the formula - cost of equity = risk free rate of return + beta of asset * (expected return of the market – risk-free rate of return) and using a 10-Year Treasury bond as the risk-free rate.
Using the above formula for Ford Motor Company the required rate of return for each stock is 8.3%. With Kroger the required rate of return for each stock is 7.52%. Now, would I invest in any of these organizations? While doing some research and looking at these numbers I am not sure if I would invest in Ford. Currently, Ford is struggling against its competition especially General Motors (FM) both in the truck segment as well as the low demand for their luxury vehicles. In addition, Ford is making the same poor decisions it made ten years ago, neglecting cars and focusing on the trucks and even its decisions on trucks are going nowhere and many investors are questioning the company. Therefore I would not invest in Ford right now. The Kroger Company is a retail food and drug stores company. It has multi-department stores, jewelry stores, convenience stores through the United States. The Kroger Company has also been through some trouble, such as with competition from digitized grocers such as Amazon.com. However, the Kroger stock remains profitable and is expected to grow. Unfortunately, the growth and margins are very low in order to make their portfolio attractive compared to strong margin, high growth companies. Because of this I do not believe that investing in the Kroger Company would be a good investment at this time.