Thesis on "Portfolio Management Project"

Thesis 15 pages (3995 words) Sources: 1+ Style: MLA

[EXCERPT] . . . .

Finance Portfolio

FedEx Corporation (NYSE: FDX)

Industry: Air delivery & freight services

Investment Style: Large Blend

Microsoft (Nasdaq: MSFT)

Industry: Application software

Investment Style: Large Growth

Target (NYSE: TGT)

Industry: Discount, variety stores

Investment Style: Large Blend

Johnson & Johnson (NYSE: JNJ)

Industry: Drug manufacturers

Investment Style: Large blend

Ford (NYSE: F)

Industry: Automobiles

Investment Style: Large Blend

Citigroup (NYSE: C)

Industry: Banking

Investment Style: Large Blend

Altria (NYSE: MO)

Industry: Cigarettes

Investment Style: Large Blend

Berkshire Hathaway (NYSE: BRK-B)

Industry: Property & casual insurance

Investment Style: Large Growth

Exxon Mobile (NYSE: XOM)

Industry: Oil & Gas

Investment Style: Large Growth

JetBlue (Nasdaq: JBLU)

Industry: Airlines

Investment Style: Large Growth

Portfolio, based on November 2 purchases, as of November 24th, 2009.

Economic Indicators

The leading economic indicators that I have chosen are the Dow Jones Industrial Average and the money supply growth rate (M2). The Dow Jones Industrial Average has been improving steadily since early March, when the index declined to just above 6500. The Dow now sits at 10,433, representing an improvement of 59.5% in that span. The Dow is considered a leading indicator because investors trade based on presumptions of future earnings. Therefore, the sharp rise in the Dow is indicative of investor sentiment that earnings will increase sharply in the coming months and years.

The M2 money supply is the amount of available money in the economy at a given point in time. M2 consists of funds readily available for spending (M1) plus savings deposits, time deposits under $100,000 and money market accounts for individuals. The money supply is considered a leading indicator because it hints at future spending patterns. In recent months, M2 has fluctuated (Federal Reserve, 2009). The seasonally-adjusted M2 is $8.359 trillion. This represents a slight upward trend in the past three months and is the highest level -- except for a spike in June 2009 in the past several years. This indicates that the economy is growing, and there is more money in the economy to continue that growth trajectory.

The coincident indicators I have selected are the gross domestic product and personal income. The gross domestic product (GDP) is an indicator of the value of the output of the nation, from within its borders. The real GDP of the United States increased in the third quarter by 2.8%. This comes on the heels of a second quarter GDP decline of 0.7% (Bureau of Economic Analysis, 2009). The medium-term trend, however, is towards a declining GDP. There is debate among economic experts as to whether the third quarter GDP increase represents a reversal of the trend, or is merely a blip caused by economic stimulus.

Personal income is another coincident indicator, and reflects the amount of money that consumers have to spend. Personal income decreased by $0.1 billion in September, or less than 0.1%. This continues a trend of flatlined personal income. The metric saw its last significant move in June, with a 1.1% decline coming on the heels of a 1.3% gain in May. This trend shows that the economy is stabilizing, but is not yet showing significant signs of improvement. It hints that the GDP increase in the third quarter may well be the result of stimulus, rather than long-term growth as the skeptics have suggested.

The lagging indicators that I have selected are the unemployment rate and the average prime rate charged by banks. The unemployment rate continues to decline. The rate for October 2009 was 10.2%, which represents an increase from 9.8% in September. The unemployment rate reflects the economic struggles at the beginning of the year. The current rate is the highest since April 1983 and is 5.3 percentage points higher than at the outset of the recession (Bureau of Labor Statistics, 2009). This rate is to be expected. Unemployment is mirroring the economic slowdown. It is not expected that there will be significant improvement in the unemployment rate for another six to nine months.

The second lagging indicator is the prime mortgage rate charged by banks. Banks seek to have a competitive edge over the competition, which keeps rates lower than the U.S. prime rate for longer periods of time. The bank rate has been dropping for the past several months and is expected to drop for several more. Analysts predict that by spring the bank mortgage rates will begin to increase again (Financial Forecast Center, 2009). What this indicates is that mortgage rates are following the pattern of the economy as a whole. Furthermore, significant change is not expected until spring, which as with unemployment rate expectations supports the idea that recovery has begun this fall.

Stocks and Their Economic Indicators

FedEx Corporation

FedEx is considered to be an economic bellweather. The company has a broad customer base including both businesses and consumers. FedEx is engaged in the logistics business, with its core business being the overnight courier business. FedEx also has a ground shipping business and a variety of smaller businesses that allow the company to be an all-round logistics supplier.

FedEx is subject to high fuel prices, which cut into its profit margins. The company has high fixed costs for its stations and airplanes, although they rely on airplane leases and casual labor to give them some degree of flexibility. The company was founded in the early 1970s and has grown rapidly to become an international firm, operating in all corners of the world. The company also faces intense competition from UPS. Overall, analysts are impressed with the quality of FedEx's operations and the strength of its brand, but are lukewarm about its financial prospects in a rising fuel cost environment and sluggish economy.

FedEx has performed roughly in line with its expectations. The company's stock price has improved over the course of the fall, in line with the indicators of economic performance. The improvement in the economy comes with expectations of FedEx having a strong peak season (November-December) with renewed consumer spending and economic growth.

JetBlue

JetBlue is a regional discount airline that operates hubs around the east coast, as well as its first hub at Long Beach International Airport in California. The airline began in 1999 and has focused on capturing the low-cost market by differentiating itself from other low cost carriers. To that end, JetBlue offers a wider range of amenities on its flights that do most of its competitors.

As with FedEx, JetBlue's performance is highly correlated with that of the economy as a whole, since the economy is a key determinant of air travel. The cost of jet fuel is another key input, and fluctuations in that commodity can impact JetBlue's ability to offer competitive pricing profitably.

It would be expected that JetBlue's stock would improve with the recent upswing in the economy, and this has proven to be the case. The company's stock has risen gradually over the past several months, with investors being tentatively willing to support JetBlue. The company's stock has declined slightly in recent months, but as with FedEx, JetBlue's fortunes rest on a busy holiday season.

Microsoft

Microsoft is primarily engaged in the software business. The company was founded in 1975 and grew rapidly from there. It went public in 1986, and hit big when its Windows operating system became the dominant platform for personal computers. The company has continued to expand its business beyond its core software offerings, by investing in online content and in the video game console industry. Microsoft is a highly profitable company, with strong margins driven by its near monopoly pricing power.

Microsoft's business is largely tied to the state of the broad economy. A substantial portion of its revenue base in corporate, in particular with respect to its software business. As such, Microsoft's business is tied largely to the GDP. In light of this, the company would be expected to have shown healthy gains in the past few months as the GDP has improved and the Dow Jones, of which Microsoft is a component, has improved as well. Indeed, Microsoft has seen a steady gain in its stock price over the past several months in response to this improvement in business conditions.

Target

Target is a discount retailer. Although the company has a long history dating to the beginning of the 20th century, the company has only engaged in the discount retailing segment in recent decades. Despite being one of the largest and most successful American companies, Target nonetheless is a distant second to Wal-Mart in its business. Competition is fierce, as the segment also competes against traditional department stores and against warehouse clubs such as Costco.

Discount stores have a negative correlation to the state of the economy. Many consumers "trade down" to discount stores during difficult economic times in order to stretch their shopping dollars. Both Wal-Mart and even the perennial industry dog K-Mart have seen upturns in business over the course of the recession. Target should, therefore, be subject to a similar phenomenon. It is not that economic improvement is bad for the company, but… READ MORE

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