paper about investing stocks

Over the past week you have been conducting security-level analysis in creating your 5 stock portfolios. Today, 1/17, the Dow Jones closed at a record high of 29,348 points.  Many investors are predicting/hoping for a 35,000 point Dow by the end of 2020.  In contrast, other investors are more bearish. One such investor, Michael Burry, is pessimistic, arguing in the article below that all of the capital that has moved into index fund investing has promoted passive investing which has removed price discovery from the equity markets.

1) Provide your opinion on where the Dow Jones Index will be at one month prior to the 2020 Presidential election (the outcome of which could have an impact on stock market performance).

2) How does your market forecast affect your 5 stock portfolio and any prospective changes that you would make if our investment project was running until one month prior to the election?

3) Do you agree or disagree with Burry’s opinion on passive investing/index funds ( they reduce security analysis and will cause a crash in the equity/debt markets ) ?

Explain why.

I have attached my five stock portfolio here.

Yirou Xiao

FIN3340 Investment

John Hogan

1/15/2020

Project Part 1

The first company that I choose is Apple. Apple, Inc. is an American multinational technology company that’s headquartered in Cupertino, California. The company develops, produces and sells electronics, computer software, tablets, wearables and accessories worldwide. Apple provide iPhone, a line of smartphones; Mac, a line of multifunctional tablets; and wearables, home, and accessories comprising Air pods, Apple TV, Apple Watch, Ipod touch and Beats products. Apple also offers digital stores and streaming services, AppleCare services, and iCloud, a cloud service that stores music, contacts, mails, photos and documents. In addition, the company provides services such as Apple Card, Apple News, Apple pay and other related services. It sells third-party applications for its products through the Apple Store, Mac App Store and Watch App Store. In addition, Apple provides its products through its retail and online stores, wholesalers, retailers, resellers and direct sales force. There are two new products coming in this early year. 2020 iPad Pro, this model comes with 3D camera feature, and it will let 3D models be captured using the iPad Pro’s camera and then edited with Apple Pencil. And iPhone SE 2, it’s a low cost 4.7-inch device that’s said to feature an A13 processor and an iPhone 8 style design with a Touch ID home button and a single-lens rear camera. (Eadicicco, 2019) The top ten competitors in Apple’s competitive set include Lenovo, HP, Sony, Microsoft, Dwell, Samsung, ASUS, Google, Huawei and Phillips. They have raised over 2.0B together between their estimated 1.2M employees, and Apple is ranked fourth among these top ten competitors. (Investopedia, 2014) According to Yahoo, the reported beta of Apple is 1.24, they calculate it from monthly prices over time of 5 years. And the adjusted beta that I calculate is 1.1608 from the formula (0.67) *1.24+(0.33) *1. The beta is greater than 1, it indicates that the company’s stock price is more volatile than the market, investing in this stock is risky but provide a potential for high returns.

The second company I choose to invest in is Bank of America, it’s also the company where I deposit my money in. Bank of America Corporation is an American multinational investment bank and financial services company that’s headquartered in Charlotte, North Carolina, it’s the second largest banking institution in America after JP Morgan Chase. The company was funded in San Francisco and it was formed through National Bank’s acquisition of BankAmerica in 1998. The company operates in Global Wealth & Investment Management (GWIM), Consumer Banking, Global Banking and Global Markets segments. The Consumer Banking segment provides traditional saving accounts, noninterest and interest-bearing checking account and investment accounts. The GWIM segment offers brokerage, banking and retirement products… The Global Banking segment offers products and services such as leases, trade finance and treasury solutions. And the Global Markets segment provides financing, securities clearing and custody services. Bank of America’s revenue is the rank third among its top ten competitors. The top ten competitors in Bank of America’s competitive set include Awakened rose, Top Klass Clothing, Mature Match Life, Modern Prowear and AJ Morgan. (Wikipedia, 2003) According to Yahoo, the reported beta of Bank of America is 1.65, and the adjusted beta that I calculate is 1.4355. The higher the beta of the company, the higher the expected return should be to compensate for the excess risk caused by volatility. Since the beta is greater than 1, it indicates that the stock is risky to invest in but with a potential for high returns.

The Third Company I choose is Honda. Honda Motor Company, Ltd. is a Japanese public multinational group company that’s known for a manufacturer of automobiles, motorcycles and power equipment. The company also operate through these four segments, automobile business, motorcycle business, financial service business and power product and other services. The automobile business segment sells cars, trucks and vehicles that use alternative fuels such as battery electric. The motorcycle business segment produces sport motorcycles motor cross racing. The financial services business segment provide customer many kinds of financial services such as leasing services. The power product and other businesses segment produces and sells generators, lawn mowers, brush cutter and tillers… As the world’s largest motorcycle manufacturer since 1959, Honda is achieving a mass production of 400 million by 2019. According to Honda Auto News, the company just released 2020 Civic Type R launching later in this winter for the U.S market. The automobile comes with refreshed model includes several performance improvements, with advanced aerodynamics, suspension, upgraded brakes and engine cooling. The top ten competitors in Honda’s competitive set includes Ford, BMW group, Mercedes-Benz, Toyota, Hyundai, Nissan, Audi, Porsche, Volkswagen and Chevrolet, Honda is ranked fourth among its top ten competitors. (Wikipedia, 2001) The reported beta on Yahoo finance indicates that Honda has a beta of 1.28, they calculate it from monthly prices over time of five years. And the adjusted beta that I calculated is 1.1876 from the formula (0.67) *1.28+(0.33) *1. Since the beta is greater than 1, it indicates that Honda’s stock price is more volatile than the market. Although it’s risker, it also indicates there is a higher expected return.

The Fourth company that I choose is Starbucks, an American coffee company and coffeehouse chain. Starbucks was founded in Seattle, Washington, in 1971, and the company operate as a marketer, roaster and retailer over 30,000 locations worldwide. The store provides coffee and tea beverages, ground coffees and roasted coffee bean, as well as food products such as breakfast sandwiches and pastries. Starbucks adds new drinks to holiday menu frequently, it has just added a new beverage called the Irish Cream Cold Brew to its holiday lineup. The top 10 competitors in Starbucks’s competitive set are McDonald’s, Dunkin Donuts, Costa Coffee, Tim Hortons, Café Coffee Day, Peet’s, Caribou Coffee, Barista coffee, Lavazza and Tullys. Together they raised over 762.7 M between estimated 259.3 K employees, and Starbucks’s revenue is the ranked first among its top ten competitors. (Starbucks, 2019) The reported beta of Starbucks is 0.5 based on monthly prices over time of five years, and the adjusted beta that I calculated is 0.665 from the formula (0.67) *0.5+(0.33) *1. As all we know, Starbucks is a well-known company which made its stock pretty steady. This low-beta stock poses less risk, meanwhile it indicates it has lower returns.

The last company that I choose is Facebook, an American online social media and social networking service based in Mento Park, California. The company was funded by Mark Zuckerberg, along with fellow Harvard college students and roommates Eduardo Savarin, Andrew McCollum, Dustin Moskovitz and Chris Hughes. Facebook Inc. offers many products to connect and share through mobile devices, computers and other electric devices worldwide. The company’s products provide a community for people to communicate and share with each other by sharing photos, messages and videos. Facebook is a social networking company that has acquired 82 other companies, and WhatsApp is one of them. As of the end of 2018, it had approximately 1.52 billion daily active users. On September 18, 2019, Facebook announced three new products as part of the Portal family of smart home gadgets, and two smaller versions of its flagship video chat device. The company claims that the Facebook’s second-generation portal devices are cheaper, smaller, and support WhatsApp. The top ten competitors in Facebook’s competitive set include Google, Amazon, Apple, YouTube, Microsoft, Twitter, WeChat, Snap, LinkedIn and Pinterest. Together they raised over 15.4B between their estimated 1.1M employees, and Facebook is ranked fifth among its top ten competitors. (Wikipedia, 2004) According to Yahoo, the reported beta for Facebook is 1.06 based on monthly prices over time of five years, and the adjusted beta that I calculated is 1.0402 from the formula (0.67) *0.5+(0.33) *1.As we can see, the beta of Facebook is pretty close to, it implies the security’s price tends to move with the market, and the stock’s price is steadier than most stocks.

The beta of my initial portfolio would be 0.493 based on the formula (26,371/997,424) *1.24 + (59,551/997,424) *1.65 + (47,651/997,424) * 1.28 + (153,901/997,424) *0.5 + (209,950/997,424) * 1.06. Overall, my beta portfolio is less than 1 which indicates that the five stocks that I choose are less volatile than the market and less risky.

Bibliography

Eadicicco, L. (2019, December 1). Here are all of the new products Apple is expected to launch next year. Retrieved from

https://www.businessinsider.com/apple-products-launching-2020-iphone-12-apple-watch-ipad-2019-11

Who Are Apple’s Main Competitors in Tech? (2014, December 3). Retrieved from

https://www.investopedia.com/ask/answers/120314/who-are-apples-aapl-main-competitors.asp

Bank of America. (2003, October 23). Retrieved from

https://en.wikipedia.org/wiki/Bank_of_America

Honda. (2001, September 25). Retrieved from

https://en.wikipedia.org/wiki/Honda

Starbucks. (n.d.). Retrieved from

https://stories.starbucks.com/press/2019/starbucks-launches-new-spring-products/

Facebook. (2004, April 30). Retrieved from https://en.wikipedia.org/wiki/Facebook