Equipped with a capital of US100,000, I entered the world of investments having conducted research to ensure I aligned my investments with my risk appetite. I believe that investing, like most other things, is based on a general perception of trying to do things so as to avoid making careless errors. It is like you cannot make a souffl without a recipe. So before entering the stock market, I needed the basic recipe for investments which was the research that I conducted. I learned some basic techniques of stock investing.
I decided to invest 90 of the capital in stocks and the remaining in cash. This strategy in general is viewed as aggressive since 90 of the portfolio is tilted towards stocks with 10 in cash to cater to any liquidity needs.
Following is the information on the stocks that I chose and the amount I invested in each
Initial Portfolio
Microsoft Corporation
I chose to invest in Microsoft Corporation because I believe its potential for growth in sales and earnings is excellent. In financial theory, it is called growth investing which basically means investing in stocks that are expected to outperform others on the basis of excellent growth prospects. Growth stocks usually have high price-to-earning (PE) multiples. Microsoft has had a good history and enjoys an inimitable repute across the globe. The company is financially strong, with a PE ratio of 15.6, EPS of 1.62, Gross Profit Margin in 2009 of 84, and current ratio of 2.1.
Apple Inc.
Investment in Apple stock was primarily driven by its strong financials, high PE ratio of 25.4 in 2009, reasonable debt ratio of 48, current ratio of 2.6, EPS of 6.29, and Gross Profit Margin of 41. These strong ratios enticed me to inject some capital into this stock. High PE ratio signals strong prospects for growth.
Pacific Capital Bancorp
Pacific Capital Bancorp provides a range of consumer and commercial banking services to individuals and businesses primarily in California. It has a market capitalization of over 109 million, debt-to-capital ratio of over 78 and has a book value per share of over 4. Currently, trading at around 2, the stock is expected to do well in the long-term.
Citibank
It is a world-renowned financial institution with market capitalization of over 119 billion. Though the financial results for the year 2009 were not impressive for Citibank, however, the stock has been volatile with some short-term upswings. The stock is good for short-term market-timing strategy, needless to say that it will serve to increase the risk of the portfolio.
Novavax, Inc.
A small bio-pharmaceutical company, having good long-term prospects, with current ratio of 5.5 in 2009, market capitalization of over 262 million, and asset-equity ratio of 1.1. Though the company did not fare well in 2009 in terms of profitability, it has a high intrinsic value which will be realized in the long-term. The stock is a good hold for the portfolio.
Las Vegas Sands Corp.
Las Vegas Sands Corporation develops integrated resorts worldwide. The companys gross profit margin in 2009 was 38.1 and current ratio stood at 3.1. It is expected that there will be some short-term upswings which can be taken advantage of.
Dell, Inc.
World-renowned Technology Company with gross profit margin of over 19 in 2009, PE ratio of 21.6, current ratio of 1.3, and return on equity of over 25. The company has strong fundamentals and is expected to deliver strong earnings in 2010 in the backdrop of recovery in the technology sector.
Goldman Sachs Group
World-renowned Investment Banking Institution with a market capitalization of over 77 billion, PE ratio of 6.1, EPS 22.13, and return on equity of over 21. It is a growth-stock and a good ingredient for a high performing portfolio.
Equity Investment Strategies
Various equity investment strategies were adopted to manage this portfolio. These included
Buy-and-hold strategy a passive strategy whereby stocks are selected for their earning potential and appreciation over the long term. The stock of Microsoft was bought using this strategy. It is envisaged that this stock will appreciate over the long term based on its strong earning potential.
Market-timing strategy a short-term strategy with an objective to capture short-term swings. This is a risky strategy since short-term downswings can lead to losses in the portfolio. On the contrary, short-term upswings can add to portfolio gains. Stocks of Citibank and Las Vegas Sands Corporation were bought with a short-term focus since these stocks are relatively volatile as compared to Microsoft and Novavax. The stocks of most banks have become volatile after the financial meltdown.
Growth-oriented strategy this strategy identifies stocks with high growth potential with high PE ratios. The stocks of Goldman Sachs and Pacific Capital Bancorp are growth stocks with high earnings potential.
Value-oriented strategy this strategy aims at identifying stocks with higher intrinsic values than currently priced by the market. The objective is to buy these stocks and hold till expectations of a higher price are met. Value stocks have high book-to-market values. The stock of Novavax Inc. is considered a value stock which is expected to perform better over the long term.
Overall Performance
Almost all the stocks I invested in evidenced a surge in price. The strategies adopted to manage the portfolio worked well and market-timing of certain stocks, especially Pacific Capital Bancorp, went in favour as well. The stock of Pacific Capital Bancorp was the best bet having returned a realized profit over 400 in just under two months. However, the entire profit has been re-injected into the stock in anticipation of further gains due to its strong earnings potential. The current book value of the stock is over 66,000. The stock of Apple Inc. also returned a realized profit over 21 in the same time frame and added to the overall gains of the portfolio.
All other stocks fared well except Goldman Sachs which suddenly headed south in April on the back of fraud uncovered in the company which had a negative impact on the market sentiment. Microsoft is a good buy-and-hold stock, and so are Dell, Novavax, and Pacific Capital Bancorp. They are expected to pay off in the long-term.
Way Forward
Having analyzed the performance of my portfolio and my approach towards investments, I have come to the conclusion that a portfolio should be constructed using different investment strategies like the ones described above. Also, the portfolio should be diversified across sectors to avoid any sector-concentration risk. Moreover, it is very important to focus on the market news and look for any bad news in particular that may affect the stock. It is imperative to stay posted with the current market situation and act promptly in case of any adverse news. Sometimes, even a rumor can lead the stock into the negative territory. I have learned that fundamental analysis should not solely be relied upon but should simply be a complement to other important strategies, one of which should include being in the loop. For instance, the stock of Goldman Sachs Group was badly hurt by the fraud news that was uncovered in late April which caused the stock to head in the southerly direction. Though I have not acted upon the news from the perspective of liquidating the stock, I need to stay current with the news to ensure that my unrealized loss of over 7000 in the stock does not go worse.
I decided to invest 90 of the capital in stocks and the remaining in cash. This strategy in general is viewed as aggressive since 90 of the portfolio is tilted towards stocks with 10 in cash to cater to any liquidity needs.
Following is the information on the stocks that I chose and the amount I invested in each
Initial Portfolio
Microsoft Corporation
I chose to invest in Microsoft Corporation because I believe its potential for growth in sales and earnings is excellent. In financial theory, it is called growth investing which basically means investing in stocks that are expected to outperform others on the basis of excellent growth prospects. Growth stocks usually have high price-to-earning (PE) multiples. Microsoft has had a good history and enjoys an inimitable repute across the globe. The company is financially strong, with a PE ratio of 15.6, EPS of 1.62, Gross Profit Margin in 2009 of 84, and current ratio of 2.1.
Apple Inc.
Investment in Apple stock was primarily driven by its strong financials, high PE ratio of 25.4 in 2009, reasonable debt ratio of 48, current ratio of 2.6, EPS of 6.29, and Gross Profit Margin of 41. These strong ratios enticed me to inject some capital into this stock. High PE ratio signals strong prospects for growth.
Pacific Capital Bancorp
Pacific Capital Bancorp provides a range of consumer and commercial banking services to individuals and businesses primarily in California. It has a market capitalization of over 109 million, debt-to-capital ratio of over 78 and has a book value per share of over 4. Currently, trading at around 2, the stock is expected to do well in the long-term.
Citibank
It is a world-renowned financial institution with market capitalization of over 119 billion. Though the financial results for the year 2009 were not impressive for Citibank, however, the stock has been volatile with some short-term upswings. The stock is good for short-term market-timing strategy, needless to say that it will serve to increase the risk of the portfolio.
Novavax, Inc.
A small bio-pharmaceutical company, having good long-term prospects, with current ratio of 5.5 in 2009, market capitalization of over 262 million, and asset-equity ratio of 1.1. Though the company did not fare well in 2009 in terms of profitability, it has a high intrinsic value which will be realized in the long-term. The stock is a good hold for the portfolio.
Las Vegas Sands Corp.
Las Vegas Sands Corporation develops integrated resorts worldwide. The companys gross profit margin in 2009 was 38.1 and current ratio stood at 3.1. It is expected that there will be some short-term upswings which can be taken advantage of.
Dell, Inc.
World-renowned Technology Company with gross profit margin of over 19 in 2009, PE ratio of 21.6, current ratio of 1.3, and return on equity of over 25. The company has strong fundamentals and is expected to deliver strong earnings in 2010 in the backdrop of recovery in the technology sector.
Goldman Sachs Group
World-renowned Investment Banking Institution with a market capitalization of over 77 billion, PE ratio of 6.1, EPS 22.13, and return on equity of over 21. It is a growth-stock and a good ingredient for a high performing portfolio.
Equity Investment Strategies
Various equity investment strategies were adopted to manage this portfolio. These included
Buy-and-hold strategy a passive strategy whereby stocks are selected for their earning potential and appreciation over the long term. The stock of Microsoft was bought using this strategy. It is envisaged that this stock will appreciate over the long term based on its strong earning potential.
Market-timing strategy a short-term strategy with an objective to capture short-term swings. This is a risky strategy since short-term downswings can lead to losses in the portfolio. On the contrary, short-term upswings can add to portfolio gains. Stocks of Citibank and Las Vegas Sands Corporation were bought with a short-term focus since these stocks are relatively volatile as compared to Microsoft and Novavax. The stocks of most banks have become volatile after the financial meltdown.
Growth-oriented strategy this strategy identifies stocks with high growth potential with high PE ratios. The stocks of Goldman Sachs and Pacific Capital Bancorp are growth stocks with high earnings potential.
Value-oriented strategy this strategy aims at identifying stocks with higher intrinsic values than currently priced by the market. The objective is to buy these stocks and hold till expectations of a higher price are met. Value stocks have high book-to-market values. The stock of Novavax Inc. is considered a value stock which is expected to perform better over the long term.
Overall Performance
Almost all the stocks I invested in evidenced a surge in price. The strategies adopted to manage the portfolio worked well and market-timing of certain stocks, especially Pacific Capital Bancorp, went in favour as well. The stock of Pacific Capital Bancorp was the best bet having returned a realized profit over 400 in just under two months. However, the entire profit has been re-injected into the stock in anticipation of further gains due to its strong earnings potential. The current book value of the stock is over 66,000. The stock of Apple Inc. also returned a realized profit over 21 in the same time frame and added to the overall gains of the portfolio.
All other stocks fared well except Goldman Sachs which suddenly headed south in April on the back of fraud uncovered in the company which had a negative impact on the market sentiment. Microsoft is a good buy-and-hold stock, and so are Dell, Novavax, and Pacific Capital Bancorp. They are expected to pay off in the long-term.
Way Forward
Having analyzed the performance of my portfolio and my approach towards investments, I have come to the conclusion that a portfolio should be constructed using different investment strategies like the ones described above. Also, the portfolio should be diversified across sectors to avoid any sector-concentration risk. Moreover, it is very important to focus on the market news and look for any bad news in particular that may affect the stock. It is imperative to stay posted with the current market situation and act promptly in case of any adverse news. Sometimes, even a rumor can lead the stock into the negative territory. I have learned that fundamental analysis should not solely be relied upon but should simply be a complement to other important strategies, one of which should include being in the loop. For instance, the stock of Goldman Sachs Group was badly hurt by the fraud news that was uncovered in late April which caused the stock to head in the southerly direction. Though I have not acted upon the news from the perspective of liquidating the stock, I need to stay current with the news to ensure that my unrealized loss of over 7000 in the stock does not go worse.
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