Initial Investments - Term Paper Example

The Term Project FNCE4330 Submitted by: August 31, Table of Contents Introduction Initial Investment Buying and Selling 4 End of the Investment Period 6 Introduction: The stock portfolio game was a very good applicative learning process for the students of this course as it allowed the students to apply their knowledge of stock analysis concepts to a practical investment situation. This assignment makes use of the concepts of fair value, P/E ratios and earning potential and analyzes the impact of one-off events that can bring a change in investor opinion and the market price. Initial Investment: The game started with $50,000 in hand and the initial investments of my portfolio were made in 5 stocks in equal amounts – Cree Inc., Pilgrim’s Pride Corporation, Texas Instruments, Best Buy and Bristol Myers Squibb. Cree: This is a company that makes energy efficient lighting products, such as LED diodes and compact fluorescent light bulbs. Analysts gave the stock a consensus buy rating and a fair value of 85.00 per share. At the time the initial purchase was made, the shares were down in value because of investor fears of a cyclical downturn in the semiconductor industry, and because the inventory of flat panel TVs and computer monitors is high. However, analysts pointed out that less than 12% of those products use Cree diodes, and say that if that segment of the business went completely away, it would impact earnings per share by less than 10 cents. Since the company reported earnings per share of 1.45, it would remain solidly profitable if this happened. Because most of the pressure is based on investor worries rather than on company or industry performance, the stock could be positioned to outperform, and is a good investment for that reason, since it is so solidly profitable. Pilgrims Pride Corporation: This company operates chicken processing plants and prepared food processing plants in 12 states of the Unites States. 64% of its holding lies with JBS, a huge Brazilian meat processing company, but the market for the minority shares is very active. Analysts have a hold rating on the stock, which currently sells for about 12.00 per share, and do not assign it a fair value. Analysts are concerned that the company might be planning to expand too rapidly. Chicken prices increased over 23% last year. The company plans to open three more plants this year, and there are some worries that this could cause prices to go back down. However, they believe that if the economy continues to improve, even at the modest level it is improving now, the price of chicken will go up even if these plants are opened. The other concerns involve a high debt level, and the fact that JBS put in all new management, who have very little room for error. This stock carries more risk with it than the other choices do, but if performance occurs as planned, there is gain to be made as well. Texas Instruments: Texas Instruments is the absolute world leader in the semiconductor industry. The company had earnings per share of 74 cent last quarter, and expects the same for the remainder of this year, and 74 to 84 cents per share in 2011. Analysts give it a strong outperform rating, and a fair value of 32.00 per share. The outperform rating made the stock a good choice. It is currently trading below the analysts fair value estimate, which suggests that, as the market continues to rally, it will gain more rapidly than other choices, but will not fall as fast if the market turns down. Best Buy: Best Buy is the largest consumer electronics retailer. Because consumer confidence is down, the stock has taken some hits, and analysts regard it as being one of the cheapest large cap stocks available. It has a buy rating, and a fair value of 50.00 per share, which is well above where it was trading at the time of purchase. The company is profitable, with earnings per share in the second quarter of 43 cents. Analysts expect 47 cents per share for the rest of the year. The stock is a good choice, because it is likely that the consumer electronics market will improve before the housing market does. This means the stock should rise fairly rapidly. One other thing that should help it rise is that WalMart is not having the impact on the consumer market that was expected. People who want good service and higher end products are still coming to Best Buy. If consumer confidence comes back strongly as the economy improves, Best Buy stock is likely to outperform the market, since it is currently undervalued. It is a good choice. Bristol Myers Squibb: This large pharmaceutical company is in the process of purchasing 100% of ZymoGenetics, to gain full ownership of a hepatitis C drug they have been developing together. The company is expected to have lower earnings for the remainder of 2010 and 2011 as it absorbs the costs of the acquisition, but the move is seen as good by analysts, whose consensus is a buy rating and a fair value of 28.00 per share. The company being purchased is also developing treatments for such diseases as melanoma and multiple sclerosis, and owns the most widely used drug for controlling bleeding during surgery, which makes it a good fit with Bristol Myers, which, alone or through joint ventures, is strong in diabetes medications and treatments for hepatitis A and B. Analysts who follow the company believe it shows more of the companys strategic prowess. The stock is a strong purchase, for modest gains, but primarily to buffer the portfolio risk that is potentially there from other choices. Therefore, our initial portfolio consisted of the following stocks: Table 1: Initial Portfolio Stock No. of Shares Price on Sep 20, 2010 Cree Inc. (CREE) 204 49.15 Pilgrim’s Pride Corporation (PPC) 1,659 6.03 Texas Instruments Incorporated (TXN) 397 25.22 Best Buy Inc. (BBY) 267 37.37 Bristol-Myers Squibb Company (BMY) 364 27.41 Buying and Selling: On 24th September 2010, it appeared that the investment in PPC was not going to reap the expected profits as the investors view did not seem to recognize the potential in the company yet. Therefore, all the 1,659 stocks of PPC were sold off and a new stock for Walgreen Company was purchased. The investment of PPC was sold off for $9,851 after accounting for the transaction costs. Walgreen Company: Walgreen Company operates a chain of drug stores in the United States. Walgreen is the leader in drug stores and offers the highest return on equity in the industry. At the time of purchase, Walgreen had a Buy recommendation from many analysts and they expected the price to go up to a $40. The stock price at that time could already be seen climbing up and the stock was acquired at a price of $29.76/share. I would end up holding this stock in my portfolio till the end of the game. On 15th October 2010, BMY had failed to pick up the pace that we expected. Therefore, we sold it off in favor of a better more reasonable stock. At the time of sale, BMY was sold at a price of $27.72 and the transaction yearned a total revenue of $10,070 after accounting for transaction costs. The next stock that was acquired on 15th October was MGM Resorts International. MGM Resorts International: This company is best known for its MGM Grand hotel and casino in Las Vegas, but it operates resorts all over the world. It has been through some financial difficulties, but has done a good job of cleaning up its balance sheet. Analysts gave it a buy rating and a fair value of 14.00 per share while at the time of purchase, it was valued at $11.00. While analysts point out that they see the convention market as being in the early stages of a long recovery, this is not the reason for buying this stock. It is highly undervalued, trading in the upper single figure price range. There is a potential for gain as it simply responds to the market. Improvements in the market it serves will make this happen faster, and the potential for good gains is there. The investment in MGM was sold off and Cree stocks were purchased to replace them on November 10, 2010. This was done due to the expected decline in the value of MGM stocks and the still rising Cree stock prices. The other stocks like Cree, Texas Instruments and Best Buy seemed to be reasonable investments and were held till the end of the investment period. However, dividends earned in the middle of the investment period were reinvested in own or other stocks as follows: On 29th Sep, a dividend of $116.48 was obtained from BMY. This was used to invest in 9 shares of MGM. On 1st Oct 2010, the dividend of $40.05 received from Best Buy was again used to buy 2 shares of MGM. Texas Instruments stocks received their dividend on 28th Oct of $51.61 and this was used to buy 4 shares of MGM. On 10th Non 2010, the investment in WAG yielded dividends of $57.75 which were used to supplement the investment in Cree stocks. This meant that there was no additional transaction cost for purchase on this date. The portfolio value at the end of the investment period will be explained in the next section. End of the Investment Period: On November 19 2010, the four stocks in the portfolio were valued as illustrated in the following table. Table 2: Portfolio value at the end of investment period Stock No. of Shares Closing Price on Nov 19, 2010 ($) Total Value ($) Cree Inc. (CREE) 442 58.34 25,786.28 Texas Instruments Incorporated (TXN) 397 31.94 12,680.18 Best Buy Inc. (BBY) 267 43.54 11,625.18 Walgreen Company (WAG) 330 34.76 11,470.8 61,587.88 The total value of the portfolio at the end is $61,588. Read More