Portfolio Challenge

Securities and Analysis 3FB3

February 1, 2016
Angus Chalmers
1327799

Portfolio Challenge-Assignment 1

For my investment strategy I decided to focus on all American securities as I believe

that the American economy is healthier and more stable right now and is more likely
to see higher rates of growth in the coming year. Within the US securities market I
focused on two sectors of the US economy that I felt had room for high growth over
the long term, healthcare and energy. On top of this I also invested in market wide
ETFs and blue chip companies that would have less risk and will provide steady
growth in the long term
US Healthcare
The US healthcare industry will be an area of growth over the next 20+ years as the
baby boomer generation ages and requires more and more medical services. There
are roughly 75 million baby boomers that will be entering retirement over the next
20 years and the number of Americans over the age of 65 will have grown by about
30 million from 2011-2029, the years when the baby boomers will be reaching 65.
This huge influx of aging citizens will require a huge expansion of the healthcare
industry, creating a huge boom for hospitals, drug companies, senior care facilities,
and any other company involved in medical services. In this industry I have invested
in an ETF based on an underlying healthcare index to follow the growth of the sector
in general as well as two individual companies that have potential for growth.
iShares US Healthcare ETF (IYH)

300 shares @ $136.03/share: $40809 in value, 4.09% of portfolio

Tracks the results of an index composed of US equities in the healthcare
sector. It generally invests at least 90% of its assets in securities of the
underlying index and in depositary receipts representing securities of the
underlying index. The underlying index measures the performance of the
healthcare sector in the US equity market
The fund holds many top US healthcare companies, the top three being
Johnson & Johnson (9.78% of assets), Pfizer (6.85%), and Merck (5.08%)
This fund has shown steady growth over the past 5 years with a total return
of 19.91%, and although it has struggled in the last year, it is still a fund that
has shown growth before and is based on an industry that will show long term
growth
Management fees are 0.43%

Mylan (MYL)

1000 shares @ $51.42/share: $51420 in value, 5.14% of portfolio

Mylan plans to seek approval for a generic version of Advair and Copaxone.
Advair is an $8 billion drug; Copaxone is $3.3 billion. Mylan also sells the
high-margin EpiPen where it has a 95% market share.
In the past four years revenue grew at a compounded annual rate of 9.1%.
Operating income grew by 17%, and earnings per share climbed 36%, to
$2.34, from 68 cents
Historically, Mylan has grown its annual revenue between 9% and 10%, it is
filing for all sorts of new drugs, and management has run the business well

UnitedHealth Group (UNH)

600 shares @ $114.91/share: $68946,60 in value, 6.89% of portfolio

UNH has a forward annual dividend rate of 2.00

It has grown from around $42/share to around $115/share over the past two
years and analysts predict that will grow to the $140-$145 range over the
next year

US Energy
In the past two years the energy sector has taken a huge hit. Largely driven by
slowing growth in developing markets such as China has seen oil prices plummet
from over $100 for a barrel of West Texas crude to just over $30. This has caused a
huge drop in the value of US energy stocks, but despite this the world has not
changed and there is still a huge need for oil in the world. While oil prices may
never reach the same heights they once were, they will almost assuredly not stay at
such a low level. This is a golden opportunity to buy low on strong, stable energy
companies that will be able to weather the storm and see growth in the long term.
(As a side note, while I do think energy stocks are a good option, I dont think
theyve bottomed out so I would not buy them right now if we didnt have to for the
project, but I would recommend them as a long term option)
iShares US Energy ETF (IYE)

2000 shares @ $31.61/share: $63220 in value, 6.32% of portfolio

Tracks the results of the Dow Jones US Oil & Gas Index composed of US
equities in the energy sector It generally invests at least 90% of its assets in
securities of the underlying index and in depositary receipts representing
securities of the underlying index. The underlying index measures the
performance of the energy sector in the US equity market
The fund holds many top US energy companies, the top three being Exxon
Mobil (25.43%), Chevron (13.27%) and Schlumberger (6.89%)
Management fees are 0.43%

PowerShares DB Oil ETF (DBO)

10000 shares @ $7.49/share: $74900 in value, 7.49% or portfolio

The PowerShares DB Oil Fund tracks changes in the level of the DBIQ
Optimum Yield Crude Oil Index Excess Return plus the interest income from
the Fund's holdings of primarily US Treasury securities less the Fund's
expenses. The Index is a rules-based index composed of futures contracts on
light sweet crude oil (WTI).
The value of the fund has dropped almost 75% from over $30/share in July of
2014, but the price has traditionally sat around $25/share, and when oil
prices rise the fund will grow again, making this a perfect opportunity to buy
low

Exxon Mobil (XOM)

1000 shares @ $75.78/share: 75780 in value, 7.58% of portfolio

Exxon is paying very favourable dividends at a forward annual rate of 2.92
Exxons stock price has dropped over 25% over the past since July 2014, and
while it could continue to fall, in the long run the stock will rise again as the
global economy picks up and oil prices start to rise again

Exxon, with its market cap of over $318 billion, is a massive company that
has the financial power to survive the drop in oil prices and then be a leader
in the industry as the energy sector recovers

Other Investments
Because some of the other investment strategies I took had a fair bit of risk I also
tried to manage that buy investing in blue chip companies that will provide steady
growth over the long term, and ETFs that follow the market.
SPDR S&P 500 ETF (SPY)

500 shares @ $193.11/share: $96552.90 in value, 9.66% of portfolio

The investment seeks to provide investment results that, before expenses,
correspond generally to the price and yield performance of the S&P 500
Index. It seeks to achieve its investment objective by holding a portfolio of
common stocks that are included in the Index, with the weight of each stock
in the portfolio corresponding to the weight of the stock in the Index.
Very low management fees, 0.11%, its consistent return over the past 5
years, and its use of a market index as its basis make this a safe, cheap
option for stable, long term growth

Vanguard Large-Cap ETF (VV)

1000 @ $88.18/share: $88180 in value, 8.82% of portfolio

Tracks the performance of the CRSP US Large Cap Index that measures the
investment return of large-capitalization stocks. The fund employs an
indexing investment approach designed to track the performance of the CRSP
US Large Cap Index, a broadly diversified index of large U.S. companies
representing approximately the top 85% of the U.S. market capitalization. The
advisor attempts to replicate the target index by investing all, or substantially
all, of its assets in the stocks that make up the index, holding each stock in
approximately the same proportion as its weighting in the index.
The low management fees, 0.09%, reliance on successful, high cap
companies, and its consistent return over the past 5 years make this a safe,
stable, long term investment

3M (MMM)

500 shares @ $148.65/share: $74323.75 in value 7.43% of portfolio

3M has demonstrated a pattern of earnings per share growth over the past
two years which should continue. During the past fiscal year, 3M increased its
EPS from $6.72 to $7.49. This year, the market expects another improvement
in earnings ($7.62 versus $7.49).
3Ms return on equity significantly exceeds that of both the industry average
and the S&P 500
3M has a very attractive dividend rate of 4.10

E. I. du Pont de Nemours and Company (DD)

1000 shares @ $53.99/share: $53990 in value, 5.40% of portfolio

John Linehan, manager of the T. Rowe Price Equity Income Fund, says
DuPonts earnings have been depressed by overspending, particularly on
R&D. He thinks $2 billion a year in costs can be wrung out of DuPont, which
recorded $3.6 billion in net income in 2014. Linehan believes those savings
would be worth an extra $20 a share
It is soon to be merging with Dow Chemicals Co and could save billions of
dollars on its taxes

Microsoft Corporation (MSFT)

1000 shares @ $54.70/share: $54700 in value, 5.47% of portfolio

Revenue growth has been on a decline due to the transition from an onpremise software model to a cloud-subscription model. The companys cloud
is currently growing fastest among all major cloud vendors. Microsofts
commercial cloud revenue expanded in triple-digits during the last quarter
and is currently on an $8B+ annual revenue run rate, or ~10% of Microsofts
revenue.
Microsofts stock is likely to rise as it continues to transition to the cloud.
Adobe Systems was the first company to successfully complete the move
from a traditional software company to a cloud company. Four years ago,
Adobe had a PE ratio of 25; now its PE ratio is 97.7. Microsoft has a PE ratio of
37.7 meaning there is room for growth

The Coca-Cola Company (KO)

1000 shares @ $43/share: $43000 in value, 4.3% of portfolio

Coke's net profit margin of 12.68% compares favorably to the industry
average and its return on equity exceeds that of both the industry average
and the S&P 500.
The stock price has gone down over the past year making it an attractive
time to buy low
Coca-Cola is an industry leader with a market cap of 187 billion and a globally
recognized brand. Coca-Cola has always being a strong, healthy company
that has shown regular growth over the long term and should continue to do
so

The Walt Disney Company (DIS)

1000 shares @ $95.18/share: $95180 in value, 9.52% of portfolio

Revenue growth has outpaced the industry average of 7.3%. Since the same
quarter one year prior, revenues slightly increased by 9.1%.
Net income increased by 7.3% when compared to the same quarter one year
prior, going from $1,499.00 million to $1,609.00 million.
Disney has a global reach as it is one of the most well-known brands around
the world

Disney has recently started to produce Star Wars movies and plans to
continue to do so, and the revenue from not just the movies, but the licensing
deals over the next decade could be astronomical