Fin paper re

Situation: A potential new client has just been left $1,100,000 (on an after-tax basis) from a wealthy grandparent and is deciding between your firm and Brandywine Asset Management in terms of who will manage their new wealth. As part of the process, the client would like you to put together a mock portfolio, detailing all potential assets to be included in the portfolio, as well as your forecast of the economy, markets, etc. and why SDI will provide a higher risk adjusted rate of return than other managers.

Client : Your clients are Sam and Amy Kratchman both 39 years old (10/17). They have two children, ages 7 and 3 and a Goldendoodle named Shaggy. They would like your help to refinance their current mortgage, buy a vacation house, plan for their retirement at age 65 and pay for a 4-year college education for each of their children. If necessary, they are willing to work until 67-68.

Historical Savings (assume month-end purchases and reinvestment):

Northrup Grumman: Amy’s Dad worked for Northrup Grumman and for her 18th birthday and high school graduation, he gave her 25 shares in June 1995. She didn’t know anything about stocks so of course at the time, thought this was boring. For college graduation (May 1999), he bought her 35 shares, although this time she understood a little more about the value of money and started gaining interest in the stock market. Once she had some stability to her own income (2001), she decided to buy 50 shares every October. Her Dad always felt like Grumman was a Company that would be around, so Sam and Amy continued this strategy until the stock went above $100. At that point, they stopped buying additional shares. In 2005, Grumman spun off Huntington Industries. Soon after the split, Huntington’s price dropped below $25 so Sam and Amy bought an additional 50 shares. Having no idea of really anything about these companies, they are looking to you for advice on both positions as they’ve risen in value due to recent the recent Presidential election in the USA and geopolitical events around the world.

Microsoft: Sam’s Dad was always forward looking and persuaded him to take his hard-earned summer money and invest in the stock market. He had heard a lot about Microsoft and decided it was a good investment for Sam. Sam bought 30 shares at the end of summer 1996 (August). He was so excited because the stock did well, that the following summer he bought another 30 shares. Again, it’s price kept rising, and although Sam was making money, since he didn’t really understand the Company (although he used Windows all the time), he cut back his purchase the following August to 25 shares. During his senior year, he bought a Mac laptop and decided that Windows would never last. He still held onto his position but no longer bought additional shares. It turned out to be a good decision in terms of not adding to his position, as the tech market blew up in 2000. Microsoft went through tough years due to Bill Gates retirement and competition from Apple. At the worst point in the financial crisis, end of 2008/ beginning of 2009, the stock dropped below $20. Sam thought the stock was cheap (cheap in dollars not necessarily valuation) and he and Amy decided to buy 100 shares in February 2009. Following the crisis, MSFT didn’t do as well as other technology companies and they were thinking of selling their position. In February 2014, Satya Nadella was announced as the new CEO and given his strong background, Sam and Amy decided to buy another 100 shares. The stock has done well under Nadella but they’re not sure if tech is too highly valued at this point.

Macy’s: On the same thought of investing in the products/ services you use, Sam and Amy were avid shoppers at Macys and its affiliates. In September 2000, the stock seemed cheap so they bought 100 shares. They continued to buy 100 shares every September until 2005 when the price started to increase. At that point, they cut back their purchases to 50 shares and continued this every September until the current period. Amy has always been a big shopper but realizes this was a blind way to invest and is concerned about the current “disruption” in retail and how it is impacting Macy’s.

Written Work:

1) Purpose / Objective

a. Introduction of manager and client’s overall portfolio objectives (completed already)

b. Risk and return of the portfolio

c. Assess current holdings including a decision on what they should do with their investment holdings today. Include any calculations as well as a basic overview of why this company belongs or does not belong in their portfolio in your decision.

d. Data sources

e. Research sources

EXAMPLE

Current Selections: All data or analytical quotes have been footnoted

AIG

AIG stands out as a security that has suffered particularly hard during the financial crisis, losing almost its entire value in just a few months. This is reflected in a negative annualized return of -9.0% over your holding period, a high standard deviation of 75.6% and a negative Sharpe ratio of -0.15. Besides these negative statistics, the company is also in the currently unfavorable financials sector, which has a high exposure to low interest rates that press on margins. However, recent M&A activity in the insurance industry could turn out to be favorable for AIG. Since their recovery, AIG has engaged in several small acquisitions in their insurance division mostly related to commercial properties and has sold off some of its less profitable ones. Furthermore, analysts estimate the recent EPS miss in Q1 is largely attributable to investment items, whereas the underlying underwriting results in North America Commercial and the whole Consumer segment and the underlying profits for consumer property & casualty are favorable[footnoteRef:1]. Therefore, several analysts have rated the stock “buy”, as the core business is healthy and an upside is likely if the company chooses wiser investment policies, and I would recommend to hold this stock in the near term. [1: http://www.benzinga.com/analyst-ratings/analyst-color/16/05/7921843/goldman-sachs-reviews-aigs-q1-miss?utm_campaign=partner_feed&utm_source=marketwatch.com&utm_medium=partner_feed&utm_content=analyst_ratings_page]

Time Warner Cable

TWC provides video, high-speed data and voice services for residential and business services customers with video, high-speed data and voice services over its broadband cable systems (footnote). At the beginning of 2014, TWC and Comcast initiated a merger, which was finally approved by shareholders October 9, 2014. Like TWX, this industry is looking at a tough time ahead. Cable profits have continued to drop, and subscriptions wane all while anxiously awaiting the regulatory review of the pending merger with Comcast. The merger between Comcast and TWC finally failed after a very costly amount of merger-related and restructuring costs over the past year. There has most recently been talks with Charter Communications Inc. where Comcast left off. The cumulative return for the stock has been 188%, with and annual return of 31%, and a Standard Deviation of 7% is significantly lower than its old relative TWX. The stock has been extremely volatile due to merger talks, so it would be a great time to trim back the position to take gains on the stock. I believe we should still hold the stock due the added benefit of the Charter Communications merger as the current valuation as measured by P/E of 15x is still showing value.

Dollar Tree

Although our client has earned a significant return from their investment, I have decided it is the time to sell Dollar Tree. Dollar Tree is at an all-time high and has returned 49.5% to its shareholders over the last 12 months and 10.4% year to date. Most of these gains are based on two factors. First, lower gas prices give consumers more disposable income to spend on discretionary items such as retail. This is particularly important for the low to middle income class which makes up most the consumers at discount retailers. Secondly, the impending acquisition of Family Dollar is viewed by the market as creating positive synergies for Dollar Tree. Although I see the Family Tree acquisition as eventually adding value to the company, I think there will be a period of transition which will negatively impact its stock price. In addition, gas prices have already started to creep back up as oil remains over $40 a barrel, and I don’t see this changing anytime soon because I believe the global economy is showing signs of recovery, rather than recession, which will increase demand. In terms of financials, revenue growth slowed significantly in the last several years and earnings growth has been negative. Given this potential downturn, I believe there are better places to invest our clients’ funds over the next 6-12 months.

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