Portfolio Management:  Maximizing Investment Return   Team 010 Raja Srinivas Elizabeth Wendel Yelizaveta Yermakova
Introduction <ul><li>“ October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July...
0.56 3.22 20.43 3.15 1.20 16.90 SYMC 0.23 1.14 22.37 11.76 1.50 23.69 SRX 1.39 2.80 26.80 10.04 1.24 33.50 SPSS 1.80 13.54...
Research and Ranking <ul><li>40 % - Free Cash Flow (FCF)  </li></ul><ul><li>35% - Return on Invested Capital (ROIC)  </li>...
Assumptions <ul><li>market generally rising </li></ul><ul><li>no “cooking the books”  </li></ul><ul><li>no drastic fluctua...
Basis of Comparison Value * All P/E values given were above 18 with an average of 29. On average the overall market P/E ra...
Basis of Comparison Value (BCV) <ul><li>FCF and ROIC - the optimum value is large, thus no correcting factor value was nee...
Incorporating Beta
Summative Table of Results <ul><li>Next step:  allocation of funds incorporating beta </li></ul>1.59 5.6 COGN 0.70 4.45 CA...
Normal Curve Distribution for Number of Shares <ul><li>a normal bell curve </li></ul><ul><li>number of shares purchased pr...
Second Equation <ul><li>Normal bell curve (beta values on the x-axis): </li></ul>
Obtaining Results <ul><li>plug in specific beta values for the top 6 stocks previously determined </li></ul><ul><li>f(ß)/∑...
Final Allocation $29,964.73 Total Spending: $3,421.08 86 $39.78 COGN $1,995.63 43 $46.41 CAI $2,276.96 76 $29.96 BMC $4,04...
ROIC AND P/E ANALYSIS   <ul><li>recent results suggest that a relatively high ROIC and relatively low (but not too low) P/...
Replacing One of the Indicators   <ul><li>problems with P/E </li></ul><ul><li>Return on Earnings (ROE)  </li></ul><ul><li>...
Testing the Model <ul><li>look at a historical data of a market that had </li></ul><ul><li>general upwards trend (1997-199...
Results as of 04/16/07 $1,653.91 Profit: $29,964.73  Total Spending: $214.14 $42.27 $3,421.08  86 $39.78  COGN $43.00 $47....
Bibliography <ul><li>Basic Chart . Market Watch.  3 Mar. 2007 <http://bigcharts.marketwatch.com/>. </li></ul><ul><li>Dicti...
<ul><li>Thank you for your attention. </li></ul><ul><li>Are there any questions? </li></ul>
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  • Liza
  • Liz
  • Raja
  • Liza-intro, then Raja with the first three, Liz for the P/E, and Liza for Beta
  • Liza fist bullet, then Liz, then Raja for the third
  • Liz
  • Raja
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  • Liz
  • Liza
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  • Raja
  • Liza
  • Raja – intoroduction then Liza explains the methodology and conclusion
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  • Anyone – did we ever decide?
  • Most recent one have to uploaded – you should all have the excell file – don’t forget to do it on a pc
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    1. 1. Portfolio Management: Maximizing Investment Return Team 010 Raja Srinivas Elizabeth Wendel Yelizaveta Yermakova
    2. 2. Introduction <ul><li>“ October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” </li></ul><ul><li>– Mark Twain </li></ul><ul><li>invest $30,000 for one year </li></ul><ul><li>analyze 18 technology stocks </li></ul><ul><li>select up to 6 stocks </li></ul><ul><li>Three-part problem: </li></ul><ul><ul><li>selection of stocks </li></ul></ul><ul><ul><li>allocation of funds </li></ul></ul><ul><ul><li>suggest ways of testing the model </li></ul></ul>
    3. 3. 0.56 3.22 20.43 3.15 1.20 16.90 SYMC 0.23 1.14 22.37 11.76 1.50 23.69 SRX 1.39 2.80 26.80 10.04 1.24 33.50 SPSS 1.80 13.54 61.38 5.58 0.85 22.01 RHT 2.11 1.18 19.55 16.88 0.47 8.07 QADI 1.27 5.52 18.03 17.75 0.83 16.71 ORCL 3.03 5.35 37.08 -2.07 0.40 13.97 NUAN 1.04 6.06 19.11 30.76 1.20 27.76 MSFT 2.30 4.94 24.24 10.56 2.02 29.98 MFE 1.05 2.17 25.98 2.53 0.10 12.54 MSCS 1.30 10.92 37.48 38.41 0.78 53.10 INFY 1.59 3.72 21.46 13.37 2.03 39.78 COGN 2.49 5.49 24.00 14.16 1.37 31.26 CTXS 2.25 4.21 19.06 5.98 1.10 19.65 CDNS 0.70 0.79 18.58 7.48 3.92 46.41 CAI 1.61 4.08 22.59 19.23 1.58 29.96 BMC 2.38 5.88 74.35 5.00 0.87 34.88 ADVS 1.69 9.33 29.74 10.16 1.38 38.66 ADBE   ($/$) ($/$) (%) ($/share) ($/share)     Forward Flow symbol Beta P / S P / E ROIC Cash Price Stock Eighteen Computer Software/Services Corporation Stocks
    4. 4. Research and Ranking <ul><li>40 % - Free Cash Flow (FCF) </li></ul><ul><li>35% - Return on Invested Capital (ROIC) </li></ul><ul><li>15% - Price to Sales Ratio (P/S ratio) </li></ul><ul><li>10% - Price to Earnings Ratio (P/E ratio) </li></ul><ul><li>Beta, β </li></ul>
    5. 5. Assumptions <ul><li>market generally rising </li></ul><ul><li>no “cooking the books” </li></ul><ul><li>no drastic fluctuation on ROIC value based on “fluke” projects </li></ul>
    6. 6. Basis of Comparison Value * All P/E values given were above 18 with an average of 29. On average the overall market P/E ratio has fluctuated between been 15-25 historically. Therefore, we chose 20 as the optimum value for the P/E ratio. A high P/E ratio can represent an over valued company and vice versa. 20 is thus neither too high nor too low. 10% 15% 35% 40% Weight Small and Between 15-25 (20)* $/$ P/E Small Value $/$ P/S Large Percentage % ROIC Large Value $/Share FCF Optimum Units Factor (Variable)
    7. 7. Basis of Comparison Value (BCV) <ul><li>FCF and ROIC - the optimum value is large, thus no correcting factor value was needed </li></ul><ul><li>P/S - a smaller value is desirable </li></ul><ul><ul><li>the inverse of the P/S ratio used to “correct” </li></ul></ul><ul><li>P/E - the value as close to 20 as possible </li></ul>BCV 5.6 COGN 6.44 QADI 6.62 ORCL 7.43 BMC 11.38 MSFT 13.77 INFY Basis of Comparison Value Stock Symbol
    8. 8. Incorporating Beta
    9. 9. Summative Table of Results <ul><li>Next step: allocation of funds incorporating beta </li></ul>1.59 5.6 COGN 0.70 4.45 CAI 1.61 7.43 BMC 1.27 6.62 ORCL 1.04 11.38 MSFT 1.30 13.77 INFY Beta Basis of Comparison Value Stock Symbol
    10. 10. Normal Curve Distribution for Number of Shares <ul><li>a normal bell curve </li></ul><ul><li>number of shares purchased proportional to the distance of stock beta to target beta (1.2) </li></ul>
    11. 11. Second Equation <ul><li>Normal bell curve (beta values on the x-axis): </li></ul>
    12. 12. Obtaining Results <ul><li>plug in specific beta values for the top 6 stocks previously determined </li></ul><ul><li>f(ß)/∑f(ß) gives distribution of the number of shares of each stock to be purchased by way of percent </li></ul>5.313439 sum of f(ß) 9.65% 0.512929 1.59 COGN 4.85% 0.25774 0.7 CAI 8.63% 0.458365 1.61 BMC 27.17% 1.443576 1.27 ORCL 23.49% 1.248088 1.04 MSFT 26.21% 1.39274 1.3 INFY f(ß)/ ∑ f(ß) = s f(ß) ß Stock Symbol
    13. 13. Final Allocation $29,964.73 Total Spending: $3,421.08 86 $39.78 COGN $1,995.63 43 $46.41 CAI $2,276.96 76 $29.96 BMC $4,043.82 242 $16.71 ORCL $5,801.84 209 $27.76 MSFT $12,425.40 234 $53.10 INFY Total Money Spent on Particular Stock Number of Shares Price ($) Stock Symbol
    14. 14. ROIC AND P/E ANALYSIS <ul><li>recent results suggest that a relatively high ROIC and relatively low (but not too low) P/E are strong indicators of the value of a stock </li></ul><ul><li>new information does not change our final choices </li></ul>
    15. 15. Replacing One of the Indicators <ul><li>problems with P/E </li></ul><ul><li>Return on Earnings (ROE) </li></ul><ul><li>same values for the ROE and ROIC </li></ul><ul><ul><li>difference - ROIC factors in the debt of the company while ROE does not </li></ul></ul><ul><ul><li>our stock choices have little or no debt </li></ul></ul><ul><li>decided against including a new indicator </li></ul>
    16. 16. Testing the Model <ul><li>look at a historical data of a market that had </li></ul><ul><li>general upwards trend (1997-1998) </li></ul><ul><ul><li>apply model </li></ul></ul><ul><ul><li>pick stocks </li></ul></ul><ul><ul><li>compare to actual performance for validation </li></ul></ul>
    17. 17. Results as of 04/16/07 $1,653.91 Profit: $29,964.73 Total Spending: $214.14 $42.27 $3,421.08 86 $39.78 COGN $43.00 $47.41 $1,995.63 43 $46.41 CAI $48.64 $30.60 $2,276.96 76 $29.96 BMC $529.98 $18.90 $4,043.82 242 $16.71 ORCL $202.73 $28.73 $5,801.84 209 $27.76 MSFT $615.42 $55.73 $12,425.40 234 $53.10 INFY Gain/Loss Current Price ($) Total Money Spent on Particular Stock Number of Shares Price ($) at Purchase Stock Symbol
    18. 18. Bibliography <ul><li>Basic Chart . Market Watch. 3 Mar. 2007 <http://bigcharts.marketwatch.com/>. </li></ul><ul><li>Dictionary . Investopedia. 3 Mar. 2007 <http://www.investopedia.com/>. </li></ul><ul><li>Hamilton, Adam. “Standard-Deviation Technicals.” Zeal Speculation and Investment . 12 Dec. 2003. 3 Mar. 2007 <http://www.zealllc.com/‌/.htm>. </li></ul><ul><li>Key Statistics . Dow Jones & Company. 3 Mar. 2007 <http://www.smartmoney.com>. </li></ul><ul><li>“ P/Ratio - Price to Earnings.” Value Based Management . 3 Mar. 2007 <http://www.valuebasedmanagement.net/_PEratio.html>. </li></ul><ul><li>Return On Equity . Wikipedia. 3 Mar. 2007 <http://en.wikipedia.org//_on_equity>. </li></ul><ul><li>“ Stock Market Quotes.” Nonstop English . 3 Mar. 2007 <http://www.nonstopenglish.com///_Stock-Market.asp>. </li></ul>
    19. 19. <ul><li>Thank you for your attention. </li></ul><ul><li>Are there any questions? </li></ul>
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