Investment Portfolio Based Exclusively on Stocks - Assignment Example

Part I The stock market is a great investment option for individual investors. Some individual have made fortunes on stocks that have risen in pricestremendously. Some examples are the early investors in companies such as Microsoft and Google that have grown tremendously over time. In the Microsoft case this is a company with over 20 years in the market, Google in the other had in a dot com company that took off in the this decade and became a growth stock that made its investor s that invested early on incredible profits that surpassed the 10x profits. A person that wants to enter the stock market must play the game in a way to minimize risk. The best way to achieve a solid investment strategy is by building a diversified portfolio of various investment s which along with stocks includes other investment such as bonds, real estate and other type of business. The objective if this paper is to build an investment portfolio based exclusively on stocks. The strategy is to select five different types of stocks from the Canadian Stock Exchange (TSX). The types of stock include in the portfolio are blue chip stocks, growth stocks, cyclical stocks, speculative stocks and potential turn around stocks. An investor that builds a diversified stock portfolio is able to minimize market risk. A detailed analysis of each stock will be provided to justify the selection of the five stocks. The report provides an analysis of type of stocks that utilizes both qualitative and quantitative analysis based on research from electronic sources and newspaper articles along with other financial analysis techniques. Selection of five stocks section Breakwater Resources LTD (BWR) Breakwater Resources LTD is company dedicated to the acquisition, exploration, and development of mining products of base metals and other precious metals; the company has a total four mining mines reserve that represent the main assets to obtain the raw materials that allow the company to produce the products to sell in the market (Breakwater). The market for the company’s product is very large and there many customers interested in the services. The business this company performs belongs to the commodity industry. The first risk this company encounters is industry risk from commodities. Commodities are tangible goods subject to sale such as grains, metal and foods (Answers). The commodity market imposes a business risk which can be referred to a interest risk, but in reality the risks is more associated with time value of money. The commodity prices fluctuate a lot and it very difficult to determine what the actual price of project sales will be since at a same level of output the final sale of production with fluctuate a lot. The stock just like any other stock is subject to the normal overall market risk. The market risk is determined by the Beta variable. A Beta variable determines how much the price of stock fluctuates with respect of the total chances of the market. If a beta coefficient is 1.5 this means that a on regular trading day this stock will fluctuate 50% more that the overall market fluctuation. This stock was selected into the portfolio as a potential turn around stock. The company has solid sales in the first semester of 2006 which accounted for 199,247 million Canadian dollars. Recent news indicated the potential of the stock might go down, thus a short sales is strategy to implement. Then news that was published on October 18, 2007 indicates that the company had to temporary shut down its milling operation at its Monchite Mine (Honduras) (Financial Post). The price of the stock (BWR) went down immediately after the recent announcement from over $3 a stock to $2.65 as of October 22, 2007 which represents a decrease of nearly 12% in a few days (Financial Post). A short sale o this stock is a good strategy to gain some quick profits since there is not clear solution for the problem and it is very possible the stock might go down further. Maybe after making the short sale profits the investors could buy it back at a much cheaper price once this problem is resolve or if the drop is really huge which is typically and indicator of a possible short term boost. This is just an alternate move the current initial strategy is a short sale. Dragon Pharmaceuticals (DDD.TO) Dragon Pharmaceutical is a speculative stock with potential of the company going up in price. The company produces a variety of pharmaceutical products including 7ACA and Clavunacic Acic which are antibiotics, natural hormones such as EPO and other formulation drugs (Dragonpharma). The demand for antibiotics is extremely high. A report released by industry experts estimates the demand for such product in the billions of dollars (Marketresearch). The 7ACA product is currently the company cash dog. It sales volume and sales prices are both on the rise. The company has been able to achieve great penetration of the large and very profitable China market which represents the market with the biggest amount of potential customers since it has a total of over 1 billion people living in the country. The total sales of the company’s 7ACA product have gone up 27% in the first 8 months of 2007 (Financial Post). The growth of key products makes this an attractive stock to buy and hold to ride the rise wave of the price of the stock. The stock, DDD.TO of the company was valued at $0.83 in the Canadian Stock Exchange at the end of the trading day on October 25, 2007 (Yahoo). Since the price of the stock is below $1.00 this stock is categorized as a penny stock. A penny stock is the riskiest type of investment. When making such an investment the investor has to be prepared for the possibility of losing the entire investment. The company risk is extremely high, the stock happens to belong to the pharmaceutical industry which is a competitive high risk industry in which the companies belonging to it have a high industry risk and as a consequence a high market risk represented by the Beta coefficient. The financial risks if the stock analyzed from its most recent internal financial results is medium to medium low. The total sales of the company increase by 56% in fiscal year 2006 in comparison with fiscal year 2005 (Dragonpharma). In the first quarter of 2007 the company’s sales increased by 32% in comparison with the first quarter of 2006 (Dragonpharma). Husky Energy Inc. (HSE) Husky Energy Inc. is an integrated energy and energy related company that is considered one of Canada’s largest petroleum companies based on its total production and the value of its assets (Financial Post). The financial numbers of this company are extremely solid. In 2006 the company obtained $12,127 million in sales with a very profitable metric of 20.10% net profit margin (Financial Post). A company of this size with a good market share of its regional market is stable enterprise that is categorized as a blue chip company. The energy industry is a multibillion dollar industry, thus sales are always going to be available and future expansion into other regions is a possibility. An article released in MarketWire said the company paid the last semester a nice dividend that represents a 32 per cent increase from the previous quarter (MarketWire). Companies able to pay dividends give money back to its shareholders because they are financial stable, a common characteristics of a blue chip stock. The reason to invest is this stock in that HSE represents a stable investment with low market and default risk. The fact that the company is in the energy industry is also a positive sign since this industry is soaring and the oil barrel is reaching all time highs in price in a weekly basis, thus the total profits on a much higher price product are larger. The investor strategy with this share is buy and hold with the possibility is selling it back in the medium term if another opportunity rises. The investor has to keep in might and its portfolio composition needs a blue chip stock, thus in the future of the stock it sold it should be replaced with another blue chip stock at some point in time. Bombardier Inc (BBD.B) Bombardier is a company that offers a variety of services including design, development, manufacturing activities, aerospace, rain equipment, recreational products and financial services (Financial Post). The diversified services the company offers allow them to enter into industries which are a growth period, thus the stock could be categorized into a growth stock. Aerospace is that are growing due to technological advances that are creating the need for new more aerospace products. A future moon project is already on the way and should land human on the moon once again in the mid part of the next decade. Marketing is booming field especially online marketing application. There are currently over 1.1 billion users and the target is to double that amount in next 5-8 years by provided cheaper computer products for third world countries in third world countries in South America and Africa (Plunckett Research). The company faces a variety of risk including market risk and default risk. The company is solid but any technology company always composes a general business risks. On October 15, 2007 the company accomplished and breakthrough contract in a tough market, India, worth $43 million dollars (Comtex News). A recent technological advance for the company was new product they were able to introduce in France. The company built the first hybrid train which is operation in France, this product represents an opportunity for more sales of this product in other markets (Comtex). Since the company a variety of service its customer base is wide thus if one division has weak results it will not affect the overall financial results of the company on a year to year basis. Lululemon Athletia Inc. (LLL) Lululemon Athletica Inc is dedicated to designing and selling athletic apparel shoes in North America (Financial Post). The apparel business whether dedicated to shoes or clothes in is cyclical business that has sales booms in Christmas and summer thus the LLL stock is cyclical stock. The stock is good buy because recently they expanded their operation and open a lot of new which will generate an nice revenue stream for the future. The third quarter earnings per share increased 20% over the previous quarter (Comtex News). A cyclical stock has the peculiar risk of low sales during weak season such as fall and autumn. Market risk and default risk are typical risks of all stocks. Product and R&D risks in another risk on such a stock because a bad design that generates weak sales can have a serious negative impact on the financial results of the company. Last year the company sold $220 million. The purchase of this stock is based on a diversification strategy which will raise the value of the portfolio during those strong seasons for the company that will raise the price of the stock. Part II People should established clear and precise financial goals for their future since the moment they enter the workforce and start generating an income stream. It is amazing the type of wealth a person can generate if they start very early in life to save and to invest their money in different types of investment including real estate, bonds, commodities, individual retirement accounts (IRA), stocks and mutual funds among other potential investment . The benefit of starting early in life to accumulate wealth in order not to worry in future once a person reaches retirement age is that money multiplies the more time is in an the bank or in an investment fund due to the power of compound interest. Compound interest is the interest return a person makes in a year that raises the value of portfolio, then the compounding effect means that the interest return the following year a return on the principal plus the previous years return earnings (About). Money multiplies itself due do the compound interest factor. Typically this compound interest works against a person when a person borrows, but when a person saves and investment money it works for the investor if the money or investment is not taken out of the investor’s account. This paper studies, describes and analyses the type of invest that are appropriate at different stages in person life and provides the personal financial goals of the writer. A young person has the capability of investing in higher risks investments such as stocks and commodities. Personally I’m risk taker and once I start working after finishing my studies and will invest in a lot stocks especially well researched projects such as initial public offerings and penny stocks. I will build a diversified portfolio with other thing such as bonds, but I prefer corporate bonds since they pay a higher interest rate than governmental bonds. In my early 30’s I will put money aside in individual retirement accounts. A individual retirement account is a must investment for all people. It puts money aside that will become income once person retires. In the past our parents could depend on social security as the loose money investment which they paid every check out of their income. For the young generation this no longer applies, I other young people my age will might not see a cent of social security money, even if the social security system exist we will get the money when we are 70+ years of age. A home is a must investment and my goal is to have my mortgage paid before I reach the age of 50. If I end up raising a large family, then I know I have to put money aside in certificates of deposit or educational IRA for my children’s education. I want to invest in land to safe up to later possible build apartment building to rent to tenants. This is plan for my early or mid 40’s. The commodity market is very profitable even though is risky, I will invest in commodities such gold and oil. I realize than when I get older I will not be as aggressive in my investment, but right now I will be a bold investor as soon as I have extra money to invest in the market. I researched company called Scottrade which is an online broker that enable investor to open an account for $500 and they only charge $7 a trade (Scottrade). That company sound likes a place I will open an account soon. My goals in life are to study and Bachelor and master degree to become a well prepared professional. In order for person no matter how high their income is to be able to generate wealth over time a person has to take risks and play the stock market to generate good returns. Compare with the low one to two percent the bank pay the stock market on the average can generate 6-8 interest return per year easily, much more if a person studies and learns about the game. My plan is to have financial security in the 50’s and hopefully retire a few years before I reach 60 years of age. I know all my education and financial goal will be accomplished if I focus on them and work hard to accomplish them. Life is a journey which involves other things other than economics and finances, but people must pay close attention to the money they earn and save for the future to make sure one can retire without any financial worries. Works Cited About.com. 2007. Compound Interest: A Review. 24 October 2007. Answers.com. 2007. Commodities. Barron’s. 22 October 2007. Breakwater. 2007. About Breakwater. 21 October 2007. Comtex News. 16 October 2007. Lululemon Athletica raises third quarter store comparable sales outlook. 22 October 2007. < http://stockgroup.canada.com/sn_newsreleases.asp?symbol=T.LLL&newsid=9371276&apFlag=> DragonPharma. 2007. Investors Relations. 24 October 2007. DragonPharma. 2007. Products. 24 October 2007. DragonPharma. Press Releases. 2 April 2007. 24 October 2007. Financial Post. 22 October 2007. Husky Energy Inc. 22 October 2007. < http://stockgroup.canada.com/sn_newsreleases.asp?symbol=T.HSE&newsid=9405242 http://stockgroup.canada.com/sn_overview.asp?symbol=T.HSE> Financial Post. 22 October 2007. Lululemon Athelica Inc. 22 October 2007. < http://stockgroup.canada.com/sn_overview.asp?symbol=T.LLL> Financial Post. 15 October 2007. Bombardier Awarded Breakthrough Contract for Mass Transit Signaling System in Delphi India. 22 October 2007. < http://stockgroup.canada.com/sn_newsreleases.asp?symbol=T.BBD.B&newsid=9363909> Financial Post. 9 October 2007. The world’s first hybrid train build by bombardier officially enter commercial service in France. 22 October 2007. < http://stockgroup.canada.com/sn_newsreleases.asp?symbol=T.BBD.B&newsid=9329770> Financial Post. 3 October 2007. Strong Demand Pushes up both prices and sales volumes for Dragon’s main products. 24 October 2007 Financial Post. 22 October 2007. Breakwater Resources. 22 October 2007. Marketresearch.com. 1 September 2006. Antibiotics. 24 October 2007. Marketwire. 18 October 2007. Breakwater temporarily suspends Milling Operation at its Mochito Mine (Honduras). 22 October 2007. Marketwire. 21 October 2007. Husky Energy Increases Quarterly dividend by 32 percent. 22 October 2007. < http://stockgroup.canada.com/sn_newsreleases.asp?symbol=T.HSE&newsid=9405242> Plunckett Research. 2007. Ecommerce Stats. 19 October 2007. Plunckett Research database. Scottrade.com. 2007. 22 October 2007. Yahoo.com. 24 October 2007. DDD.TO. 24 October 2007. Read More