Stock Trak Report Stock Trak Trading Game David Cruz, Nathan DeMeo, Nicholas Hausauer, Thomas Keitel, Joshua Leible 11/25/2014 User ID: slufinance363 slufinance363 Professor Doellman
At the beginning of the Stock Trak assignment, we had a rather naive n aive investment approach, investing solely in companies that were familiar to us. Throughout the duration of the assignment, as investing strategies were discussed in class, our group began to take more of an academic approach in regard to our investment investment strategy. We began to not only rely on news articles but we also analyzed company compan y financials, giving us a better picture of the company as a whole. Investing in such a short short period of time doesn’t allow for much growth other than immediate price change due to urgent company news, especially when following a passive strategy such as the one we employed. Although our analysis of companies is advancing, there is still much room for improvement; this can be seen see n throughout our investment horizon where the market beat our portfolio consistently. During our investment horizon horizon the market plunged during mid-October. This dip in the market can be contributed to several factors, including: uncertainty with the Federal Reserve, th e Ebola outbreak, as well as uncertainty uncertaint y in the market from slow economic growth since the recession. However the market was able to recover from this setback setback and end our investment horizon with a slight positive positive return around 3%. Our portfolio was significantly significantly correlated with the market as can be seen from the graph below, although at the end of the investment horizon our portfolio came up short of the market’s return. While reviewing the sectors to invest in, it was observed that the pharmaceutical sector was consistently beating the market. market. While analyzing potential companies to invest in within this sector, we took took into account the medication provided by each company. With a large and growing trend of type 2 diabetes within the United States, as well as increased obesity, we decided to invest in an insulin in sulin provider. Directly before purchasing Novo Nordisk (NVO) we were informed that they had pending FDA approval for a new drug they were developing (Saxenda). After purchasing and holding the stock, NVO received the FDA FDA approval, causing the price to jump. However by the last day of trading, the gain that we had seen previously was lost, the majority of which was lost during the drop in the market in October. October. During our investment period, NVO also decided to exclusively ex clusively focus research and medication for diabetes. In doing so, NVO cut all R&D expenses for inflammatory diseases and used the savings to construct a new research facility exclusively for diabetes When initially searching stocks, we found that Abengoa’s (ABGB) price had increased consistently since its IPO in June and had tripled in value and we thought that this trend would continue as the company continued to be profitable and win large projects in Europe; additionally, with the volatility of gas prices, we figured that a solar energy company could offset some of the risks of other stocks. One issue we found with this stock was rampant short selling in the Spanish market which greatly greatl y reduced the value of the stock. The most significant news story occurred on November 12th when wh en shareholders sold the stock in mass due to the way they were accounting their net debt. The result of these fears was the value of the stock
plummeted 36.5% in one day and due to the scope of the project we were never able to realize Abengoa’s swift recovery afterwards. After investigating various technology stocks we found Microsoft Corporation has had a steady gain in the past year boosted by new products such as the Xbox One and Surface Pro 3. One event significantly impacted Microsoft’s returns specifically, their acquisition of Mojang AB for 2.5 billion dollars dollars on September 15, 2014. Mojang is the creator creator of the popular game which is well-known for its widespread community. After receiving this information Minecraft which we bought stock in Microsoft and it soon reached a year-long high on September 19 at $47.52, and decreased for the next month. By October 16 Microsoft dipped to a three-month low of $42.74 per share. This reflects the inability for beginner inv estors like us, to take advantage of of the opportunities provided by news stories as soon as they come out. Despite this decrease we held our stocks in Microsoft and were later rewarded by an increase in stock price, p rice, especially after the release of their first quarter earnings which showed record first quarter revenue. The Microsoft stock reached a new high of $49.61 by November 13th and we were able to realize a small amount of returns. In early September, Apple announced it will soon be releasing the iPhone 6, iOS 8, the Apple Watch, as well as other products and services. Taking this news release and anticipated increased sales and demand for Apple products and services, an investment opportunity surfaced. After additional research, we decided investing in Apple App le before these new products were released would allow for potential and probably probabl y capital appreciation and gain. After the release date, there was a certain time period where our investment in Apple dipped down into negative returns. This was correlated with the market’s negative cumulative returns. That being said, we still questioned our initial investment decision because of Apple’s negative cumulative returns (at one point). However, we decided the potential for our investment was still profitable. Thus, we decided to stick with this investment decision in the long-run. Eventually, as the market started turning around, Apple’s returns started increasing. In the end, ou r investment in Apple turned out to be our second secon d most profitable decision with an ending return of 14.60%. At the onset of the trading period we observed that current macroeconomic conditions still lent itself towards companies that catered towards serving the needs of lower income individuals who were still recovering financially from the financial crisis of 2008. Of these companies two stood out: Dollar Tree (DLTR) and Dollar General (DG). Both companies were attempting to take over Family Dollar (FDO), another discount goods store. A successful takeover by one of these corporations would mean an expanded retail base and a larger growth opportunity. After further research we decided to invest in Dollar Tree, as it seemed to have a better opportunity of successfully buying out Family Dollar. Over the course of our investment investment horizon a Family Dollar buyout by either company has not been resolved, however due in part to current macroeconomic conditions Dollar Tree maintained a steady stead y growth in company value
over the course of the project, and we decided to keep an ownership position in the company over the duration of the project. Yahoo’s (YHOO) stock was another big winner for our portfolio. When our initial stock search began, Alibaba was about to have their IPO and because Yahoo owned 22.4% stake in Alibaba, we felt that this IPO could offer us tremendous benefits at a much lower price than if we had purchased Alibaba stocks directly. Alibaba’s stock performance surpassed expectations and the result was the value of both Alibaba and Yahoo’s Yahoo ’s stocks skyrocketing. While many of our other stocks in our portfolio seemed to perform in-line with the market, Yahoo saw an initial dip, but then a consistent surge in price that continues to be the trend. Furthermore, we discussed in class the stock prices can be affected by some sort of market momentum and this could certainly be argued for Yahoo’s stock, who despite a downturn in the economy, was able to provide consistently high returns and positively affect our portfolio’s portfolio’s return.
After completing the Stock Trak assignment and receiving a negative return, we believe that going forward it is important to have an active role in managing future portfolios. Essentially with the portfolio constructed for the purpose of this assignment, we researched the companies that we believed would generate a positive return and we sat on these stocks until the last trading day. It would have been more advantageous for our portfolio if we actively watched w atched the news for these companies and pulled out our investments in times of severe drops, such as those that were experienced in mid-October. After the price drops these these securities could be repurchased repurchased at a point when the prices were at the bottom of their fall. Also, using models learned in class such as the CAPM equation, as well as the ORP equation would have contributed to earning higher returns than we experienced from from our passive strategy. However, with the constraint set set on investing time we were not able to generate the returns expected. In addition to managing our portfolio more actively, activel y, some early investment decisions may have been based on information that is not necessarily always indicative of future, p rofitable gains. For example, from class and the textbook we learned that past historical prices and returns do not accurately picture a painting p ainting of future returns. Early in the semester, we invested in BHP, a mining company based in the Midwest. The decision to take on this investment was based on analyzing the company and an d its fluctuations with the market. That being said, we mainly decided to invest in BHP b ased off historical prices and return fluctuations. We analyzed how BHP’s stock fluctuated almost every three months. We purchased BHP at what we thought would be a low-point of this fluctuating roller coaster. Unfortunately, instead of turning back around, BHP’s stock continued to decrease and decrease. Looking back at the project, our investment decision should have been based off more than simply looking at past performance. This was an important lesson learned throughout the semester.
Performance Measure
Portfolio Fund S&P 500 Index
Starting Value (9/3/2014)
$100,000.00
$2,000.72
Ending Value (11/19/2014)
$99,883.88
$2,048.72
Holding Period Return (%)
-19.80%
-12.99%
Average Weekly Return (%)(unannualized)
-1.79%
-1.13%
Standard deviation (%)(unannualized)
2.65%
2.36%
Average Return (%)(anualized)
-7.52%
-4.79%
Standard Deviation (%)(annualized)
19.12%
17.05%
Beta from excess return regression
1.011571368
1
-0.6890
-0.5482
-0.0180544190
-0.01152167842
Sharpe Ratio (unnanualized) Treynor Measure (unnanualized) Jensen's alpha (unnanualized)
-0.647342%
-
