Performance Evaluation of Random, Top-Down and Value Portfolios - Essay Example

Introduction

From the financial perspective, portfolio performance evaluation refers to determination of performance of respective investment portfolio. It is pertinent process of making a comparison between return earned by a certain portfolio with the benchmark portfolio or other portfolios. The evaluation process entails performance evaluation and performance measurement. The performance measurement accounting function measure the return earned on a given portfolio during a certain investment or holding period while performance evaluation measures the superiority or inferiority of a given portfolio. The paper comprehensively and candidly carries out performance evaluation of random, top down and value portfolios respectively.

Random portfolio

Random portfolio entailed a random selection of five stocks by diversification method to reduce the overall risk level that one stock has to the overall portfolio performance. The method used in the selection of the portfolio was naïve diversification. Naïve diversification is a method where the stocks that make up the portfolio have equal chances of being randomly picked to form a portfolio. The rationale behind the naïve diversification is the reduction of total risks associated to a portfolio as holding a number of stocks in a portfolio tends to cancel out the fluctuations of returns in the individual assets. Risk averse investors prefer naïve diversification because they demand low levels of risk and high rates of returns from their investments.

Additionally, diversification helps investors to gain insights of unique firm risks for instance uncertainty of common stock performance of the company that can result from ether change in management, research and development breakthrough, downsizing labor striking. The aforementioned risks can be reduced significantly by joining a relatively small number of stocks that are picked from various industry sectors. Random diversification gives chance to inventors’ exposure to exceptional yields hence expanding their returns.

Furthermore, the portfolio returns are maximized by mitigating the risks through avoiding huge loss exposure hence making profits. It is also noted that naïve diversification leads to a large diversification which enables the investors who are long-term to spread the portfolios to different types of common stock. Each component of portfolio that is common stocks show distinctive and shortcomings in terms of risks and profitability and it is therefore recommended that an investor should hold several common stocks to create a stable portfolio whose aim is to enhance value in long-run.

Portfolio selection method

An application of random sampling was made by flipping a coin in determination of which exchange to use. It was assigned that the head of the coin represent NYSE/AMEX while NASDAQ was being represented by the tail. The outcome of flipping a coin was the head hence sticking to NYSE/AMEX exchange. In that scenario there were 26 letters representing companies and therefore an interval of five letters being used to avoid biasness in picking the samples. This is a systematic random sampling method that saw me picking the first, seventh, sixteenth and twenty first letters.

Random portfolio representation

The random portfolio table below depicts the whole pertinent information about the five stocks by listing their names, sectors, symbols and the respective industries. Also, the table stipulates the chief competitor of each company ranked by closing prices and sales respectively. The companies’ earnings per share, forward P/E, Beta, PEG ratio and forward earnings estimates are also shown.

Random Portfolio

Random Portfolio

American Electric Power Co., Inc.

Fidelity National Information Services, Inc.

Knoll, Inc.

PepsiCo, Inc.

Unitil Corp

Ticker

AEP

FIS

KNL

PEP

UTL

Sector

Utilities

Technology

Consumer Goods

Consumer Goods

Utilities

Industry

Electric Utilities

IT services

Business Equipment

Beverages- Soft drinks

Diversified Utilities

Principal Competitor

Duke Energy Corp

DST systems Inc

HNI Corp

The Coca Cola Company

BANGN

Price 1/19

$57.92

$57.89

$17.32

$93.77

$35.91

Median Price Target

$62.67

$74.95

$27.50

$105.80

$37.00

EPS TTM

$3.61

$2.52

$1.34

$3.37

$1.90

Forward Earnings

$0.52

$0.93

$0.42

$1.06

$0.68

Forward P/E

15.6

15.1

10.6

19.5

18.7

Beta

0.3597

0.7905

0.9785

0.7674

0.2281

Market Cap ($bil)

28.43B

18.89B

845.67M

136.61B

502.14M

PEG Ratio

3.51

1.44

0.70

3.49

9.95

S&P 500

1859.33

90 day treasury

0.252%

Value portfolio

Value portfolio entails valuation of economic growth by different industries in the economy. For instance, technology is the fast growing industry, and it is led by Microsoft (MSFT), International Business Machines (IBM) and Apple. On the other hand, small firms such as solar winds have also led to the growth of the industry.

The technology industry is one of the viable investment opportunities. It is shown that in 2015, the industry traded approximately 16.4 times the total earnings while technology made a return of 3.8% and S&P 500 remained constant. The firms such as Invent sense (INVN) Cirrus Logic Inc (CRUS) which had small shares that were below $40 showed a growth potential in the year 2016.

The health sector is another industry that has shown growth potential in long-term. The heath sector grew by approximately 12 percent in the year 2015. The S&P 500 rose by 0.4% with an anticipated increase of about 10 percent in 2016. The forward earnings indicate that Inc (EBS), Emergent Bio Solutions and HMS Holdings Corp have growth potential.

Stocks

Even sense

It is the leading supplier of sensor packages used in tablets, Smartphone, gaming devices and optical image stabilization. The high demands for technological devices and smartphones have led to the growth of the company and industry. Additionally, the firm enjoys a competitive advantage in the industry. The release of Ultra Print fingerprint reader proved innovation capability in the industry. The company has the lowest share costing $7.61. The decline of cost company products declined about its rivals hence improvement in stock. Though the price/earnings to growth ratio are lower as compared to other companies, the firm offers excellent returns in short-term notwithstanding the probable decline in growth.

Emergent Bio Solutions (EBS)

The corporation has experienced a substantial growth that is anticipated to continue in future. Development of new items led to the generation of $5 million in the year 2015. The analysis by Fool article stipulates that the company realized a 20% revenue growth and 471% income growth. The company PEG ratio is 1.33 hence leading in the selected companies. The company anticipates its share to grow taking into consideration the management capability to ensure shareholders wealth maximization.

HMS Holdings Corp (HMSY)

The increased insurance covers by Americans led to the company growth in the past. The company has relevant credit levels that are riskless to investors besides a strong financial position. The investors share price scaled up after the company renewed the contract with the government. Under the Financial Times latest recommendation, the company has a great investment opportunity in 2016. This is good news for the investors as they should now buy equity. The forward price/ earnings ratio remains constant although slightly high.

NIC Inc (EGOV)

The company operates in a market sector that gives it a competitive advantage over its competitors in the industry. The steady growth of the company is attributed to the reliability of market domain leading to a provision of services to over 3,500 government agencies. The company earnings per share increased by 19% in the year 2015 while revenue by 8% respectively. The equity beta is more than 1 indicating that the firm has the potential of giving returns though it’s a risky venture.

Cirrus Logic Inc

The company relationship with Apple led to the growth of the market share. The reduction is the production of iPhone 6s resulted in a fall in company share price by a margin. The company revenue exceeded the overall industry average. In 2015, the income grew by 45.9% in the last quarter despite the risk associated with continued production of iPhone. The company P/E is lowest of all the other investments showing that the company has the capability of presenting beyond returns that are satisfactory.

Top down portfolio

The top down portfolio entails the analysis of industries in facilitating the economic growth. It is noted that some industries show more potential than others. Technology is the leading industry that boosts the economy significantly. The theology sector has high-tech corporations like Apple, International Business Machine (IBM) and Alphabet. The sector had returns of 3.8% though S&P 500 remained constant. The price-earnings were 16.5 which were not associated with high stock price. The small firms include Inven Sense (INVN), Cirrus Logic and EGOV.

Healthcare sector had a growth of 12% in the year 2015. The S&P 500 realized a growth of 0.4% with projected growth of 10% in 2016.

InvenSense

Emergent BioSolutions, Inc

HMS Holdings Corp.

NIC Inc.

Cirrus Logic Inc.

Ticker

INVN

EBS

HMSY

EGOV

CRUS

Sector

Technology

Healthcare

Healthcare

Technology

Technology

Industry

Consumer Electronics

Biopharmaceutical

Services

Application Software

Semiconductor

Principal Competitor

Analog Devices

PharmAthene, Inc

Performant Financial Corporation

Accenture PLC

Texas Instruments Inc.

Price 1/19

$7,61

$37,37

$12,16

$17,84

$34,49

Median Price Target

$9,00

$43,33

$15,83

$19,67

$42,63

EPS TTM

$0,02

$1,19

$0,15

$0,63

$1,99

Forward Earnings

$0,48

$1,51

$0,55

$0,67

$2,22

Forward P/E

17,3

18,9

19,93

24,1

12,1

Beta

2,09

1,08

0,99

1,19

1,11

Market Cap ($bil)

$0,70

$1,46

$1,05

$1,17

$2,18

PEG Ratio

0,82

1,33

1,10

1,07

1,31

S&P 500

1929,80

90 day treasury

0,331%

Stocks

InvenSense

It is one of the leading suppliers of sensor packages used in tablets, gaming devices, and smartphones. The high demand for technological devices and Smartphone’s have led to the growth of the company and industry. Additionally, the firm enjoys a competitive advantage in the industry. The release of Ultra Print fingerprint reader proved innovation capability in the industry. The company has the lowest share costing $7.61. The decline of value company products decreased concerning its rivals hence improvement in stock. Though the price/earnings to growth ratio are lower as compared to other companies, the firm offers excellent returns in short-term notwithstanding the probable decline in growth.

Emergent BioSolutions, Inc. (EBS)

It is a biopharmaceutical company that develops vaccines and antibody therapeutics. One of its products BioThrax is known to be the only vaccine for anthrax with Drug and Food Administration License. The corporation has experienced a substantial growth that is anticipated to continue in future. Development of new items led to the generation of $5 million in the year 2015. The analysis by Fool article stipulates that the company realized a 20% revenue growth and 471% income growth. The company PEG ratio is 1.33 hence leading in the selected companies. The company anticipates its share to grow taking into consideration the management capability to ensure shareholders wealth maximization.

HMS Holdings Corp. (HMSY)

The corporation operates in the healthcare sector and sells containment services for healthcare payers and program coordination integrity. The firm has its headquarters in Irving Texas. The increased insurance covers by Americans led to the company growth in the past. The company has relevant credit levels that are riskless to investors besides a strong financial position. The investors share price scaled up after the company renewed the contract with the government. According to the financial Times latest recommendation, the company has an excellent investment opportunity in 2016. The investment opportunity is good news for the investors as they should now buy equity. The forward price/ earnings ratio remains constant although slightly high.

NIC Inc. (EGOV)

It is the leading information service provider with its main clients being stated governments and federal. The company provides secure payments and government website alongside other online services. The provision of eGovernment services has made easy access to the government services in the economy. The company operates in a market sector that gives it a competitive advantage over its competitors in the industry. The steady growth of the enterprise is because of the reliability of market domain leading to a provision of services to over 3,500 government agencies. The company earnings per share were increased by 19% in the year 2015 while revenue by 8% respectively. The equity beta is more than 1 indicating that the company has potential of giving returns though it’s a risky venture.

Cirrus Logic Inc. (CRUS)

The company specializes in analog semiconductors and circuit production. The firm is headquartered in Austin. The company products are used in automotive entertainment, tablet, televisions and home theater receivers. Also, the company produces mobile graphic chipsets and desktop. The company relationship with Apple led to the growth of the market share. The reduction is the production of iPhone 6s resulted in a fall in company share price by a margin. The company revenue exceeded the overall industry average. In 2015, the income grew by 45.9% in the last quarter despite the risk associated with continued production of iPhone. The company P/E is lowest of all the other investments showing that the corporation has the capability of presenting beyond returns that are satisfactory.

Conclusion

In a nut shell, it is evident that a stock in a given individual plays a big role in the overall performance of the portfolio. Investors and other individuals who are willing capable of investing should make depth analysis of the risks and expected returns of different portfolios before they venture into investment. Risk averse inventors should consider diversification of their investments to reduce the associated risks that a given portfolio has.