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Many individuals consider investing money in a significant global economy like the US. This can be carried out with the S&P 500 stock index of over 500 first-class US companies. That doesn't seem like a lot set alongside the roughly 5,000 stocks traded on the US market. However, these 500 companies account fully for around 80% of the full total capitalization of the US stock market.

The Standard & Poor's 500 is the principal US stock indicator. Its performance influences the GDP of exporting countries and wage growth in addition to many derivatives. The whole world tracks the index daily.

As for the companies (components of the S&P 500 index), everyone knows and uses the services or products of those companies, among those are Microsoft, Mastercard, Google, McDonald's, Apple, Delta Airlines, Amazon and others. In the event that you spend money on securities of such major US companies, it will be the best investment you are able to make.

Is it difficult to construct a profitable stock portfolio all on your own?

Indeed, it will seem something unattainable for a non-professional.  Anyone desiring to start investing needs extra money, understand and read company reports, regularly make appropriate changes within their portfolio, monitor market share prices, and above all, decide which 500 companies to get in the beginning of their journey being an investor. Yes, there are a few issues, but they're all solvable.

Share price. This is the price tag on a company's share at a place in time. It can be quite a minute, an hour, each day, a week, per month, etc. Stocks are quite an energetic instrument. Industry is unstoppable, and price will be higher or lower tomorrow than it is today. But how can you know what price is sufficient to get, whether it is expensive or not or perhaps you need to come tomorrow? The solution is easy, there are financial models for determining what's called fair value. Each investor, investment company and fund has a unique, but in the middle of those complex mathematical calculations is usually a DCF model. invest in the stock market There are many articles explaining DCF models and we will not go into the calculations and examples. The main goal is to discover a currently undervalued company by determining its fair value, which is later transformed into a price per share. We make daily calculations and find out the fair prices of most the different parts of the S&P 500 Index centered on annual reports, track changes in the index and update the data.

Investment algorithm.

For the forecasting model to work nicely, we truly need financial data from companies' annual reports. We process this data manually, without needing robots or automated systems. This way, we dive into the companies' financials completely, read and discuss the report, then feed that data into our forecasting model, which determines the fair price. It is important to own at the very least 5-year data and look closely at the dynamics of revenue, net income, operating and free cash flow. The very decision to possibly invest in a company comes only after determining the company's current fair value and value per share. We consider companies with a possible greater than 10% of fair value, but first things first.

Beginning. So, the company's annual report happens today. The report must certanly be audited and published by the SEC (Securities and Exchange Commission). Centered on section 8 of the report, we make calculations in our model, substitute values, calculate multipliers, and finally determine the fair value. By all criteria, the company is undervalued and right now the share value is significantly less than the calculated values, let's go deeper into the report.

Revenue. Let's look at revenue dynamics (it is a significant factor). Revenue has been growing going back 3-5 years, it could be ideal if it has been increasing year after year for a decade, but the proportion of such companies is negligible. We give priority to revenue in our calculations—no revenue - you should not include the company in our portfolio. We focus on possible fluctuations. Like, during the pandemics (COVID-19), many companies from different sectors have suffered financial losses and the revenue decreased. This is an individual approach, with respect to the industry. The most effective option: revenue growth + 5-10% during the last 5 years.

Net profit. We consider the net profit figure, and it is good if additionally it grows, however in practice the net profit is more volatile. In cases like this the important factor is that company has q profit, rather than loss, which is 10-15% of revenue. Of course, a solid decline in profit is a negative factor in the calculations. The most effective option: a profit of 10-15% of revenue during the last 5 years.

Assets and liabilities. We head to the total amount sheet and note that the company's assets increase year after year, liabilities decrease, and capital increases as well. Cash and cash equivalents are increasing.  We focus on the company's overall debt, it will not exceed 45% of assets. On the other hand, for companies from the financial sector, it is not critical, and some feel confident with 60-70% debt. It is about an individual approach. We consider only short-term and long-term liabilities, credits and loans, leasing liabilities. The most effective option: growth of company assets, total debt < 45% of assets, company capital more than 30%.

Cash flow. We are immediately interested in the operating cash flow (OCF), growing year by year at an interest rate of 10-15%. We look at capital expenditures (CAPEX), it may slightly increase or remain the same. The primary indicator for people will be free cash flow (FCF) calculated as OCF - CAPEX = FCF. The most effective option: growth of cash flow from operations, a small increase in capital expenditures, and above all, annual growth of free cash flow + 10-15%, which the company can spend on its further development, or for instance, on repurchasing of its shares.

Dividend. Apart from the rest, we have to focus on the dividend policy of the company. All things considered, we like it when profits are shared, even just slightly, for our investments in the company. If the dividend grows from year to year, it only pleases the investor. Additionally, the overall return on investment in companies with a dividend should increase. Many investors prefer a "dividend portfolio," investing in 15-20 dividend companies with yields of 4-6%, as well as the growth in the worth of the shares themselves. The most effective option: annual dividend and dividend yield growth, dividend yield above the typical yield of S&P 500 companies.

Multipliers. Shifting to the multiples of the company, they're all calculated using different formulas. When calculating exactly the same multiplier, you need to use 2 or 3 formulas with an alternative approach. We often lean toward the average. The critical indicators will be the 3, 5 and 10-year values. The index for a decade has the best influence in the calculations in addition to the annual. In today's economy, we consider 3 and 5-year indicators to be the most crucial ones.

The amount of multiples is enormous and it makes no sense to calculate every one of them. We should pay attention and then the major ones. One of them are Price/Earnings ratio (P/E), Price/Cash Flow ratio (P/CF), ROA and ROE, Price/Book (P/B), Price/Sales, Enterprise Value/Revenue (EV/R), Tangible Book Value, Return on Invested Capital (ROIC). It's necessary to consider these indicators in dynamics over 5-10 years. The most effective option: price/profit and cash flow ratios are declining or are in exactly the same level (these ratios ought to be less than 15), efficiency ratios are increasing year by year and moving towards 30, other ratios are above average in this sector.

This is a small set for investors. Of course, there are numerous indicators in a company's annual report, the important ones include operating profit, depreciation, earnings before taxes, taxes, goodwill and many others. We prepare the key and most important financial indicators, you are able to save lots of time and research all companies in the S&P 500 Index.

Now we have a broad idea concerning the financial health of the company. We made some calculations in our financial model, where we determined the percentage of undervaluation right now and determined whether to get shares of the corporation or not. You can find no impediments. Allocate 5-8% of your available budget and purchase the stock. Make sure to diversify your portfolio. Buy undervalued companies, 1-2 in each sector. You can find 11 sectors in the S&P 500. Choose only those companies whose business you recognize, whose services you use or whose products you buy. Do not rush the calculations in your model, if you should be unsure, don't spend money on this company.

Surprisingly, an undervalued company may not reach its value for an extended time. The dividend paid will improve the situation. Watch out for companies with information noise. Generally, they talk a great deal but don't do much.

The S&P 500 index of companies has been yielding a typical annual return of 8-10% for all years. Of course, there have been bad years for companies, but they're recovering even faster than their "junior colleagues" in the S&P 400 or 600. Have a good and profitable investment.