As an investment manager in XYZ Company, the CEO has requested an investment portfolio analysis document for five companies selected as best choices for an investment plan. This paper therefore analyzes the portfolio providing justification the choices made in the course of these investment choices.
Industry Trends
Apple Inc., while one of the most successful corporations in the United States and the international market, maintains highly competitive services and products and continually faces intense competition in all aspects of its operations. Prior to the release of the new iPhone X, Apple Inc., stock had fallen by over 1%, while the Dow Jones Industrial Average (.DJI) continued to increase (Ungarino, 2017). With the release of the new iPhone X in November 2017, Apple stock has increased, generally quicker than both the .DJI and the S&P 500 (.INX). However, from late January to mid- February 2018, the .DJI increased above Apple Inc. stock. Over the past year, Apple stocks have increased over 45%, compared to Microsoft at a 35% increase.
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Caterpillar Inc., compared to its competition within the Construction and Mining Machinery Industry, has done well. As of December 2017, Caterpillar reported a growth increase of 32.85% while the industry averaged a 22.70% growth increase from this past year. Additionally, Caterpillar Inc.’s return on equity is much higher at 28.69% compared to the industry average of 8.80%, but its net profit margin trails the 2.95% industry average at 1.66% (Caterpillar Inc. (CAT), 2018).
According to zacks.com, Northern Trust ranks in the top 44% of the Banks-Major Region Industry, but in the bottom 13% for its sector. However, compared to the 22.30% average growth for the industry, Northern Trust has done comparatively well with a growth rate of 26.29%. Northern Trust has also maintained a higher return on equity (12.77%) compared to the industry average (10.67%) (Northern Trust Corporation (NTRS), 2018). Northern Trust currently stands at $107.59 per share as of the close. With new rules and regulations stocks in the asset management field could be in trouble. Laws such as the Dodd Frank act and the DOL rule for investors could have an impact on how the stocks perform (Miller, 2016).
Consolidated Edison has increased in stock price and has stayed above the competition in the regulated electric field. The government has many controls when it comes to Utilities and depending on new laws and regulations that come into affect, consolidated Edison could be negatively impacted as a company. Energies such as wind, solar and coal power could become a more popular way to energize than electric.
Having stock in the retail sector is getting more and more difficult because of the trends of customers online shopping. Macys stock has recently has been gaining recently after sales from the holiday season. Macys has been increasing and doing better than competitors like JCPenny, which is closing stores after a debt to equity percentage of 394% compared to Macys at 148% (Hoy, 2017).
Portfolio
Assets
While building the portfolio, asset classes was considered. Notably, four main classes of assets exist, namely equities, bonds, cash equivalents and real estate. These are the most liquid asset classes available. On the other hand, individuals may choose to invest in less liquid environments such as hedge funds and venture capital. However, this does not mean that they have better earnings. Instead, liquidity only speaks to the capability to obtain money back from their investment. In this case, this portfolio will largely consist of equities, as only company equities have been chosen.
Looking at the nature of the companies selected for the investment, it is noted that these are large cap companies. These are normally ones with a market capitalization of $10 billion. To make investments that balance risk and rewards, it is necessary to make choices between equity, cash and debt choices. Determining the trends of the investor from their investment choices, it is clear that the potential investor is after growth and value investment as the main purpose of their asset allocation plan. Large cap investments, such as those chosen above, provide the investor with various advantages including clear valuations, steady dividend payouts and stability.
| Company | Invested Amount | Weighted Amount |
| Apple | $300,000 | 20% |
| CAT | $150,000 | 10% |
| Consolidated Edison | $300,000 | 20% |
| Northern Trust | $300,000 | 20% |
| Macy’s | $450,000 | 30% |
An analysis of the securities section of the companies is done below:
Securities
Apple is projected to see 21.34% growth in its revenues by 2021, currently registering over $229.3 billion in revenues. However, the expected earnings per share is set to drop from 8.35 to well over half the value of 4.6. This presents one of the major challenges with investing in this company according to the projections provided. The story is quite different for CAT, as the earnings per share are currently standing at -0.09 but are set to grow to well over $7.5 per share. This presents an interesting investment opportunity over the next five years. Consolidated is not expected to make major moves in the five-year period, maintaining a 0.5 gap in the earnings per share for the five years. Northern Trust is on the downward trend, with investors expected to lose their earnings per share from $4.5 in 2016 to $2.5 in 2021. Macy’s presents the highest jumper in this portfolio, expected to jump prices by up to $9 due to its recent bump in sales. Nevertheless, this investment choice leaves questions in the investor’s mind regarding its stability in light of recent concerns about the seasonality of its sales.
When analyzing the intrinsic value of a company, the financial advisor is normally considering the actual value of a company based on the underlying perceptions, which include both their tangible and intangible assets. By providing the intrinsic value to the actual stock price, an investor is able to determine the value of the company, including its intangible assets. In the case of Apple, the intrinsic value is $174.48, whereas the current stock price is $178.02. In this case, therefore, the stock price to intrinsic value ratio is 1.0 meaning that the company is not undervalued. For CAT, the intrinsic value is projected at $70.29 while its share price stands at $156. The stock price to intrinsic value ratio is thus 2.2. This means that in the public eye, this option is grossly undervalued. Values for the rest of the companies are provided below:
| Consolidated Edison | $77.45:$44 = 1.8 | Undervalued |
| Northern Trust | $107.21:484.78 = 1.3 | Undervalued |
| Macy’s | $53.78:$28.9 = 0.5 | Overvalued |
Rates of return
The expected rate of return is the profit or loss expected for an investment with different rates of return. Considering the above valuations, it is possible to assign the different stocks their respective rates of return and thereby determine an overall rate of return for the entire investment. If we consider that the total invested amount for the stocks above is $1,500,000, then the distribution below will be done:
| Company | Expected Company Rate of Return | Weighted Amount | Expected Return |
| Apple | 1.8% | 20% | 0.0036 |
| CAT | -9.31% | 10% | 0.00931 |
| Consolidated Edison | 5.4% | 20% | 0.0108 |
| Northern Trust | 12.16% | 20% | 0.02432 |
| Macy’s | 12.1% | 30% | 0.0363 |
| Total expected | 0.30321 |
The total expected return of the portfolio is 0.30321%, which represents an overall profit of $4,548.15 for the initial investment.
Conclusion
Considering the different methods for asset valuation and the ability to determine the viability of an investment, the low risk investment sampled above has provided the customer with the correct measures which will influence their investment within the large cap stocks that they have selected. Nevertheless, since this data is based on historical data, it is not possible to determine the impacts of unforeseen circumstances on these predictions. Hence, it is important to qualify these outcomes as ones which are largely dependent on similar economic environments for these companies.
References
Apple Inc. (APPL) . (2018, March 13). Retrieved from zacks.com: https://www.zacks.com/stock/research/AAPL/industry-comparison
Caterpillar Inc. (CAT) . (2018, March 13). Retrieved from zacks.com: https://www.zacks.com/stock/research/CAT/industry-comparison
Consolidated Edison Inc (ED) . (2018, March 13). Retrieved from zacks.com: https://www.zacks.com/stock/research/ED/industry-comparison
Hoy, L. (2017, November 30). Now Might Be a Good Time to Buy Macy’s Inc Stock . Retrieved from InvestorPlace.com: https://investorplace.com/2017/11/now-time-buy-macys-m-stock/#.WkrJ6yM-IfE.
Macy's Inc (M) . (2018, March 13). Retrieved from zacks.com: https://www.zacks.com/stock/quote/M?q=m?q=M
Miller, B. (2016, February 8). Financial Asset Management Stocks For Long-Term Income? Think Again! Retrieved from SeekingAlpha: https://seekingalpha.com/article/3873936-financial-asset-management-stocks-long-term-income-think
Northern Trust Corporation (NTRS) . (2018, March 13). Retrieved from zacks.com: https://www.zacks.com/stock/research/NTRS/industry-comparison
Ungarino, R. (2017, October 18). Economist lays out a ‘concerning’ trend for Apple stock . Retrieved from CNBC.com: https://www.cnbc.com/2017/10/17/economist-lays-out-a-concerning-trend-for-apple-stock.html
