An Investing Assignment - Report Example

Investing Assignment Investing Assignment Introduction The bottom line in selecting stocks is that there is no one technique of picking them, thus, every stock strategy is not anything more than the use of theory, the most excellent guess. But, in some instances two or more seemingly contrasting theories can be thriving simultaneously (Laopodis, 2012). Notably, even though it is important to consider the theories, it is crucial to determine how better an investment strategy fits individual outlook, time structure, risk tolerance, as well as the amount of time is devoted in investing and selecting stocks. Our group main goal is that asset security is more imperative than probable profits and the attention is centered on those stocks having mounting incomes, institutional backing, in addition to high comparative strength.  Hence, the selection made for gainer portfolio seeks to exemplify our preference of strategy. Part 1 Momentum Strategy There were two methods used in picking stocks. First, the top-down approach was used by beginning to examine macroeconomic premise before closing on individual stocks which fit such premise. Secondly, bottom-up approach was employed by focusing on assessing individual firms and then selecting a collection of stocks based exclusively on their own business performance devoid of industry sector. Our group scaled long-short range using their realized volatility within the preceding 6 months, thus obtaining an approach with steady volatility. In evaluating the economic implication of our outcomes, our group weighed up the payback of risk management using power utility role with invariable comparative risk version (Erb & Harvey, 2006). The Key basis for predictability, under momentum strategy does not arise from orderly risk, but rather from specific risk. Thus, administering this time-changeable risk practically removes crashes and nearly doubles the Sharpe ratio from momentum strategy (Laopodis, 2012). The stocks for momentum strategy comprises Sarepta Therapeutics and Gilead Science Inc. Using the primary trading rule of selecting stocks which are not trading in the region of or above the 52 week high, Sarepta Therapeutics limited $ 15.00 when its fifty-two-week high stood at $ 15.57. When it comes to the second trading tenet, stocks having more than one million shares within their daily trading volume were selected, considering that stocks having daily trading volumes of fewer than 100,000 shares were not considered due to lack of being seasoned investors. The third trading tenet implies shunning small plus mid-cap stocks, with market values being less than $ 10 billion, and this applies to Sarepta Therapeutics effectively. It is also a large-cap stock at $ 511.44 million in terms of market cap value. For that reason, Sarepta Therapeutics average three-month volume was 2,733,074 shares. The last trading requirement asserts that stocks selected are those with analyst opinion skewed in favor of positive future prospects, rather than, those either unenthusiastically or with no change when it comes to their weekly consent value. Therefore, based on Wall Street Journal Market watch, industry analyst observed that Sarepta Therapeutics ought to post its fiscal first-quarter earnings per share within the period ended at 91-97% range (2012). Accordingly average analyst recommendation for Sarepta Therapeutics was to purchase (Wall Street Journal, 2012). Overall, Sarepta Therapeutics price dithered widely within the range of $5.00 -$40.00, thus, using Dow Theory, the midpoint of SRPT is $20.00 with a significant tendency towards $45 level. Therefore, there seems to be a bullish bias as accumulation takes place roughly below $50. Using the conventions of investors, projected P/E ratio ought to be less than that of trailing 12 months, in addition to being less than those of the firm competitors or the industry all together. Based on Wall Street Journal online Market Watch, SRPT trailing-twelve-month P/E ratio was 18.62 with a forward P/E of 16.09 (September 28, 2012). The company new drug called eteplirsen that will be used for treating Duchenne muscular dystrophy, was likely to be approval by the FDA, and this and other top-line results will eventually act as vehicle to realize some of SPRT hidden value. Industry analysts argue that, given that there are over 12,000 of the Duchenne muscular dystrophy patients across US, the drug will easily penetrate, say 70% of the market, almost 1,092 patients per year, and that will get SPRT peak sales of almost $327 million. Therefore, providing SRPT peak sales would value it at around $8.7 billion (Wall Street Journal, 2012). Other companies that had similar market cap, average volume, price per share range and 52 week high and low at that time, included Gilead Inc with a ttm P/E ratio of 21.24, and a Forward P/E (fye) of 15.50. Pfizer Inc had a Trailing P/E (ttm) of 18.97 and Forward P/E (fye) of 10.86. These three companies were chosen to represent momentum (gainer) section of the portfolio, since they all presents strong prospects for future growth, and they are large and fiscally-stable companies due to their large-cap status. Furthermore, SRPT earnings profile seemed to evolve, thus being sustainable in due course. Even though, there will be annual reduction in earnings of around -8% during 2013, SRPT is anticipated to increase its earnings by around +53% during 2015-2017, thus creating fair value estimate of its stock price to $97 (Wall Street Journal, 2012). Contrarian (Loser) Portion Carbo Ceramics Inc and Superior Energy Services were selected as part of contrarian (loser) section of the portfolio, since these two stocks are presently underpriced in spite of their outstanding management as well as strong fundamentals. When it comes to Carbo Ceramics Inc, it is still the principal producer of ceramic proppant to the most important oil plus gas industry. Carbo Ceramics Inc went through a double plunge following the fall of natural gas prices, and heavy impact of environmental uproar following its fracking technology. Thus, this has led to a drop of roughly 49% of its share prices from commencement of the year. However, compared with its main industry competitors, Baker Hughes, C&J Energy Services, Fairmount Minerals Limited, Inc, Hexion Specialty Chemicals, Inc, Saint-Gobain Proppants and Unimin Corp have moderately almost or lower book value (Wall Street Journal, 2012). However, the steep decline has been across board within the natural gas market, rather than Carbo Ceramics Inc specifically. That is why its total returns reveals that it is down to 46.34% during the last year compared to S&P 500 overall Return up of 14.84%, while that of its competitor C&J Energy Services Inc up by 17.48%, and also Baker Hughes inc being 21.96% downwards (Wall Street Journal, 2012). However, it is the industry leader when it comes to proppant, and as more manufacturers realize how tremendously gas is cheaper compared to oil, the company will acquire some of these clients. Furthermore, Carbo Ceramics Inc price was almost near its fifty-two-week low price during period of purchase. Our group bought Carbo Ceramics Inc at $ 63.96 when its fifty-two-week low stood at $ 60.33. Carbo Ceramics Inc was chosen based on the second investment tenet of net income pattern decreases preferably and that losses ought to mirror a declining trend over the preceding phase. Thus, based on Wall Street MarketWatch, Carbo Ceramics Inc net income is following an increasing trend, from $149 million in 2010, to $167.1 million in 2012 (Wall Street Journal, 2012). The second reason is that it is less risky compared to its key competitors in the current oil and gas industry problems, in terms of minimal drilling plus completion activity. Carbo Ceramic’s gains in global sales volumes appear to partially counterbalance its declines within North America market, especially in China. Furthermore, the growth of its technology platform has seen it expand its client base coupled with a capitalization of $1.74billion, allowing it to have a massive liquid market in terms of its shares and continuous dividend growth. Our group also compared CRR with Superior Energy Services Inc, since Superior Energy Services Inc seems that its stock problems are due to the fallout its acquisition of Complete Production Services Inc., paid in immense premium, taking into consideration of the oilfield slowdown. However, Superior Energy possess a flawless record in terms of acquiring other firms, as it usually maintains the management, and thus preserving human capital required by such businesses to run successfully. That is why our group expects that when investors forget that purchase, and oilfield services industry expected surge resumes, the firm will return to high share price. Furthermore, it is a mid-cap stock, making it less risky even as industry analyst rating the firm as generally favorable, with an average recommendation of 4, based on Wall Street Journal MarketWatch (2012). Thus, our investment in Superior Energy Services Inc conforms to trading rules, as well as investment rules, when it comes to value stock under contrarian segment. Market Strategy In view of the fact that, market strategy key idea is to invest in the index fund, such that the returns are similar to those of the markets, our group decided to invest in Community Bank System (CBU). This is a small bank operating in upstate New York as well as Pennsylvania with a market cap of just above $1 billion. Community Bank trades a daily average of around 244,000 shares (Wall Street Journal, 2012). Thus, the bank was favorable to our group, since it did not acquire the Troubled Asset Relief Program money. Furthermore, it pays a dividend yield of around 3.6 %-4.7% depending on entry price during the September. Notably, Community Bank has raised its dividend continuously for the past 19 years of $1.04 per share, and it was even ranked the crown dividend stock under insider buying having 3.67% yields on Forbes Dividend Channel. When shares were bought in September when the stocks were trading in the region of $22-23.00, and in the beginning of October shares were trading in the region of $28.15, which is somewhat a 4.3% above purchase price (Wall Street Journal, 2012). According to Wall Street MarketWatch, the chart below indicates its one year feat against its 200 day M/A. The bank 52 week high low is $21.67-$28.95 (2012). The bank has a strong valuation metric with burly profitability metrics and an impressive quarterly dividend history, coupled with flattering continuing multi-year growth rates across major elementary data points. Given that the market rises up during a long haul, and when trying to match its performance can enable the making of money, Community Bank System stock were selected as our group could hold them in the long term. Furthermore, they have returned an average of around 13.11% every year over the precedent 19 years. Based on coherent expectations theory, a stock price can be determined through current discounted value of every future cash flow linked with its assets. Furthermore, analysts on Nasdaq.com are expecting CBU to grow its earnings within an average annual rate of around 9.9%. Own Strategy Our own strategy entailed investing in low-price stocks but by reviewing yields over a period of time and then making bigger strategic moves. Thus, as a number of considerations were reviewed such as trying to attain an edge so as to hammer the market by buying stocks within a ten year review. The idea was to possess stocks without significant losses, but with the potential to make significant gains and create revenue. Thus, when the market experiences severe blip, our group will still buy for income believing that long term will be positive. Therefore, our group settled on Encana Corp, as it is one of the biggest natural gas makers with operation across Canada and US, especially on transportation plus marketing of natural gas, oil and gas liquids. Unlike its rival, the firm systems are cost proficient, such that it is also profitable given that natural gas prices are below $2 (Wall Street Journal, 2012). Therefore, as the economy shifts to clean natural gas, the firm will be prime recipient of the augmented demand. Accordingly, Keynes theory on higher-order asserts that stock price will be determined by assessment of other individual beliefs. That is why Encana Corp stock price possesses the potential to develop rapidly, hence yielding momentous profits owing to price rise. Technically Encana Corp stock 50-day moving average surpassed its 200-day in September, a powerful long-term purchase signal. It was bought on recoil at $21, with a trading objective of $26, and quarterly dividend reaching $0.80 on 3.6% yield (Wall Street Journal, 2012). Part 2 1. (Data were obtained from Google Finance as of close of markets on October 25, 2012) Strategy Momentum (Gainers) Contrarian (Losers) Market Own Ticker SPRT CRR CBU ECA # Shares Purchased 240 55 127 163 Price Purchased ($) 15.50 65.30 28.30 22.00 Current Price ($) 22.61 73.91 26.48 21.91 Commission Fees ($) 10 10 10 10 Profit Per Share ($) 7.11 8.61 -1.82 -0.09 Gain on Investment (%) 45.5483871% 13.18529862%1 -6.431095406%2 -0.525053686%3 Return on Investment (%) 16.09809865 12.87102596%4 -6.690713354%5 -0.686040044%6 SPRT: 1) Gain on investment = ([($ 22.61/share x 240 shares) - ($ 15.55/share x 240 shares)]/ ($ 15.50/share x 240 shares)) x 100% =45.5483871% 2) 1) Return on investment = ([($ 22.61/share x 240 shares) - ($ 15.50/share x 240shares+ $10)]/ ($15.50/share x 240 shares + $10)) x 100% = 45.47989276% CRR: 1) Gain on investment = ([($73.91/share x 55 shares) - ($65.30/share x 55 shares)]/ ($65.30/share x 55 shares)) x 100% =13.18529862%7 2) Return on investment = ([($ 73.91/share x 55 shares) - ($65.3/share x 55 + $10)]/($65.3/share x 55 shares + $10)) x 100% =12.87102596%8 CBU: 1) Gain on investment = ([($26.48/share x 127 shares) - ($28.3/share x 127/ shares)]/ ($28.3/share x 127 shares)) x 100% =-6.431095406%9 2) Return on investment = ([($ 26.48/share x 127 shares) - ($28.3/share x 127 + $10)]/ ($28.3/share x 127 shares + $10)) x 100% =-6.690713354%10 CBU: 1) Gain on investment = ([($21.91/share x 163 shares) - ($22.00/share x 163/ shares)]/ ($22.0/share x 127 shares)) x 100% =-0.525053686%11 2) Return on investment = ([($ 21.91/share x 163 shares) - ($22.0/share x 163 + $10)]/ ($22.0/share x 163 shares + $10)) x 100% =-0.686040044%12 Conclusion Based on the above return calculations, the momentum strategy produced the highest percentage returns on investment and gains on investment. The threat of momentum strategy is highly predictable, which makes managing the stock risk easier. Our group was opportune to gain from this grand risk, even though our fortunes could have effortlessly trended in the reverse course and cost us considerably. nevertheless, given the added risk that we assumed with our own strategy, it stands to reason that the strategy likewise offered the greatest rewards, which ultimately made our groups portfolio selections the most profitable of the three investment styles. Stocks that were chosen to represent the own strategy and market seemed to have inherent problems, regulations and global issues that resulted in their downward trends. The contrarian strategy stocks produced minimal significant gains, opposite to what we expected to them to yield solid and laudable outcomes. However, the recent Greece, and Spain banking bailout, coupled with uncertainty in the industry due to threat of more far-reaching regulations adversely impacted the banking sector, and this seriously reduced the returns of our strategy. References Erb, C. B., & Harvey, C. R. (2006). “The strategic and tactical value of. Financial Analysts Journal , 69-97. Laopodis, N. (2012). Understanding Investments Theories and Strategies. Routledge. Wall Street Journal. (2012). MarketWatch. Retrieved October 7, 2012, from http://www.marketwatch.com/myportfolio?link=MW_Nav_PO Read More