the million dollar investment

7/28/2019 The Million Dollar Investment

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The Million-Dollar Investment

Corporate Finance

Timothy Kerley


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Financial Portfolio

While creating my portfolio, I first thought about my personal risk

tolerance. I am a 23-year-old single male that was just given $1,000,000

to invest however I wanted. I am going to be taking a lot more risk now

than I would be as a 45-year-old man with a family. Secondly I thought

about my long-term financial goals, everything I plan on investing in is

for the long term. I am not trying to invest in order to get rich quick. I

would like to retire by age 50; key word is like. Now if I have invested

this $1,000,000 correctly I feel like most of the investment will grow

enough over a 27-year and help me reach my goal of retiring at 50.

I tried to invest in stocks that show I have a very diverse portfolio.

The way I did this was by choosing stocks from many different

industries. I ended up investing in a Bank, Natural Gas, Biotechnology,

Entertainment, Resorts & Casinos, Internet Information Provider and

Semiconductor Equipment and Materials. I also tried to diversify my

portfolio by choosing stocks that varied in risk, some high risk, a lot of

medium and a few low risks.

While trying to decide which stocks would be the most valuable to

me I looked a few factors. One of which is the companys dividend and


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dividend yield. This way I can see what they pay the investors and I

could compare the yield to others in the industry. I also looked at each

stocks beta in order for me to tell the risk factor associated with the

stock. I then took a look at market capital, PEG Ratio, P/E Ratio and

forward P/E Ratio. The P/E ratio will help me determine if the price of

the stock is relative to its earnings. Also the forward P/E ratio can give

you an estimate as to if the company predicts more earnings for the

upcoming year.

Another step I took was to look at the stock value over the past 5

years and compare it to the S&P 500 to see how it stacks up against the

market average. I also looked at graphs comparing multiple companies

in an industry to compare the value and trends. The more risky

investments showed a lot of up and downs following no pattern while

the safer, less risky, stocks followed an simple pattern of a steady climb

up.


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Las Vegas Sands Corp (LVS)

Las Vegas Sands Corp. is an American company based in Paradise,

Nevada that operates and runs resorts and casinos. The company is one

of the leading developers of destination properties in the world. The

resorts feature high-end accommodation, gaming and entertainment,

convention and exhibition facilities and celebrity chef restaurants and

clubs. Some of the most famous Las Vegas Sands resorts are located on

the Las Vegas Strip and they are The Venetian and The Palazzo both of

which are rated as Five-Diamond. After reviewing Las Vegas Sands Corp

I decided to purchase 1,872 shares at 56.49 a share, which cost me

$100,000.

Sands Corp has a P/E ratio of 28.87, which is extremely high, but I

expect the companys earnings to increase significantly over time and

that will make the investment well worth it. With that being said the

forward P/E ratio is 17.23 so earnings are expected to go up after this

year. The company also has a PEG ratio of 1.58, which shows that the

stock is a little over priced at the time but that is not always the case.

Comparing Las Vegas Sands Corp to the Industry and Competition

it shows LVS has a Market Capital of 45.13 billion while Caesars


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Entertainment Corp has a Market Capital of 2.06 billion and MGM

Resorts has a 6.38 billion-market capital. The industry as a whole has a

Market capital of 1.57 billion. This shows that LVS is a large cap

corporation, which usually means it will have a lower risk and lower

return than those companies that are mid to small cap. However, LVS

has a Beta of 1.72, which would mean that there is still quite a

significant amount of risk involved while investing in the company.

Some information I was able to calculate from the stock summary

on Yahoo Finance included the return on equity of 16.76%, which I was

able to get from using the Capital Asset Pricing Model. I also calculated

that the WACC of the company is 14.02%. Some investors use the WACC

to value companys shares in order to help them decide on investing or

not investing. A higher WACC is less likely to create value because the

company would have a higher borrowing cost.

The graph on the next page shows Las Vegas Sands Corp in

comparison to S&P 500 or the market average. You can see LVS has

been preforming just below the market average for the past couple

years but with earnings expected to go up in the future I would hope

LVS would jump north of the S&P 500.


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Time Warner Inc. (TWX)

Time Warner was founded in 1989 and is an American cable

telecommunications company that is based out of Manhattan New York.

They operate in 28 states throughout the country and Time Warner is

an S&P 500 Component on the NYSE. After reviewing Time Warner I

decided to purchase 1,661 shares at $60.19, which costs me $100,000.

Time Warner has a P/E ratio of 19.48, which, just like LVS, is a

little high but has some potential in the future because the forward P/E

ratio is 14.13. This indicates that earnings next year are expected to be

higher than the current years earnings. The PEG Ratio of TWX is 1.27.

Anything over 1 for a PEG ration means the stock could be overpriced.

While comparing Time Warner to the competition and to the industry I

found that Time Warners Market Capital is 56.27 billion. This shows


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that TWX is a large cap company and should be a pretty safe investment.

However, the Industry has a Market Capital of 264.35 million and the

leader competitor Disney has a Market Capital of 111.83 billion. In

comparison with the other 149 companies in the industry Time Warner

is ranked 6th in Market Capital and ranked 4th in annual dividend yield.

Time Warner also has a Beta of 1.24 so there is some minor risk

involved while investing in the company.

While looking over the Time Warner stock summary I was able to

gather all of the necessary information needed in order to calculate both

the CAPM and the WACC. The return on equity came out to be 12.92%

while the WACC came to be 10.64%.


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Vertex Pharmaceuticals Incorporated (VRTX)

Vertex Pharmaceuticals Incorporated was founded in 1989 and is

based in Cambridge Massachusetts. Vertex is one of the leading

biopharmaceutical companies around. Their focus is in the business of

discovering, developing, manufacturing and commercializing small

molecule drugs for the treatment of serious disease. Some of the

diseases Vertex focuses on are Hepatitis C (HCV), Cystic Fibroses

Rheumatoid arthritis and influenza. After looking over Vertex

Pharmaceuticals I decided to buy 1,822 shares at $82.33 a share, which

costs me $150,000.

Now when reviewing the stock summary of Vertex it does not

look like a good investment right away. They have a PEG ratio of -8.39,

which should act as a red flag but is not necessarily a bad thing all the

time. From what I have read a company will not grow earnings while it

is improving its cash flow significantly so this could be the reason for a

negative PEG ratio. I was also able to gather all the information to

calculate both the CAPM and the WACC for Vertex. The answers I

received from my calculation include a return on equity of 5.16 % and


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WACC of 5.10%. With Vertex also have a Beta of .27 it is safe to say that

is a very non-risky investment.

In comparison with the industry on top competitors I was able to

see that Vertex has a Market Capital of 17.68 billion while Merck & co

has a Market capital of 144.92 billion and the industry has a 313.08

million Market Capital. Since I am not investing for quick cash but more

for a solid increase over time. I am basing this investment off of historic

data and trends with Vertex rather than basing my investment off of

todays numbers alone. Below shows the comparison of Vertex with S&P

500 over the last 5 years. The graph clearly shows a slight increase over

five years and is consistently above the market average, especially

recently with a huge spike to over 200%.


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Using the information I found on Google via Yahoo Finance. I was

able to calculate the return on equity at 12.20% by using the CAPM

formula. I also found that Google has a WACC of 11.98% by using all the

information needed for the WACC formula. Below is a graph that

compares Google to the S&P 500 over the past 5 years. You can clearly

see that Google and the S&P 500 reflect off each other and follow very

similar lines. However, Google has had more dramatic ups and downs.

This year shows a big increase with Google, as it is more than 20% over

the market average.


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Goodrich Petroleum Corp. (GDP)

Goodrich Petroleum Corporation is an independent exploration

and production company that drills for, acquires, develops and

produces natural gas and crude oil. They are based primarily in East

Texas and North Louisiana. Right now GDP is not looking good but I will

explain what I have found. After reviewing Goodrich Petroleum I have

decided to purchase 3,729 shares at $13.41 a share, which would cost

me $50,000.

Goodrich Petroleum Corp currently has a PEG Ratio of -1.36 and a

Market Cap of 522.71 Million. If we compare this to the Industry and

other competitors we find that the PEG for the Industry is at 9.08 and

has a Market Capital of 129.45 million. Also Abraxas Petroleum Corp, a

competitor of GDP, has a PEG of .96 and Market Cap of 202.95 Million.

The beta of Goodrich Petroleum is at 2.33 which indication a lot of risk

for your investment.

I looked at a lot of historical prices and data associated with

Goodrich Petroleum and they have been on a steady decline for over a

year now. However with one of the top Market Capitals in the industry I

feel like GDP will rebound and start creeping back up. With prices this


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low there is potential for a great reward. Buy lowsell high Warren

Buffet.

The graph below is showing the comparisons between Goodrich

Petroleum and S&P 500. While the S&P 500 has been on a slow climb

upwards, GDP fell for half the year and now is trying to recover. GDP is

currently around 20% below the market average. This is by far the most

risky investment I am going to make and I am very interested to see

what will happen over time.


14/20

Bank of America Corporation

Bank of America Corporation is an American multination banking

and financial services corporation. They are based out of Charlotte

North Carolina and are the second largest bank holding company in The

United States by assets; Forbes Magazine also lists Bank of American as

the third biggest company in the world. They are traded as an S&P

Component along with the Dow Jones Industrial Average. After

reviewing Bank of America I have decided to purchase 8,532 shares at

$11.72 a share, which will cost me $100,000.

Using Yahoo Finance I was able to determine some key factors in

investing in Bank of America. They have a beta of 1.78, which shows

there is a pretty good amount of risk involved with this investment.

They have PEG ratio of .53, which indicates the price for the stock is

under valued and is a good purchase. Also, Bank of America has a P/E

ratio of 27.77 and a forward P/E of 9.02. I may be wrong but this is huge

estimate for next years earnings. The drastic drop in P/E indicates that

earnings next year are expected to be a lot more than the current year.

That combined with the undervalued stock price already proves this is a

good buy.


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With the information given on Bank of America, under key

statistics, I was able to calculate the return on equity and WACC. What I

found was a return of equity of 17.24% and a WACC of 9.63%.

The graph below shows a big increase over the passed year for

Bank of American when being compared to the market average of S&P

500. The last half of the year is almost triple what the market average is

which is a very good sign and great information to know when investing

into the company.


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Cree, Inc. (CREE)

Cree Inc is a multinational, manufacturer of semiconductor

materials and devices. They are based out of Durham, North Carolina

and are widely known for their improvements in light-emitting diode

(LED) technologies. They were founded in 1987 by researches from

North Carolina State University and is traded as NASDAQ. After

reviewing Cree Inc I have decided to purchase 2,701 shares at $55.54 a

share, which will cost me $150,000.

While looking over the summary of the Cree stock, we can see that

they have a Market Capital of 6.44 billion along with a P/E ratio of

115.71, a forward P/E ratio of 31.20 and a PEG ratio of 2.46. This tells us

that currently I am paying a little too much for the stock but if the

estimated for the forward P/E are correct, earnings for next year will

jump up and gain me more value. A market capital of 6.44 billion lets us

know that there is some risk involved with the company because it is a

mid-cap company. We also know there is potential risk because Cree

has a beta of 1.47 and anything over 1 is considered to be more risky.

Some other information I was able to gather off of the stock

summary is that Cree has a return on equity of 14.76% and a WACC of


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around the same, 14.75%. While being compared to the Industry as a

whole Cree Inc seems to be a good purchase. The Industry has a market

capital of 235.65 million and PEG ratio of 7.19, which is really high.

Below is a graph comparing Cree Inc. to the market average using

the S&P 500. You can clearly see that towards the second half of the year

Cree Inc. jumped up a lot and is more than 50% above what the market

average is at the time.


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Conclusion

After looking over all of my investment I am pretty proud of the

ones I was able to find and invest in. I attempted finding companies out

of the norm but also ones that would give me the return I want.

Spreading out the 1,000,000 over 7 different stocks in 7 different

industries should work out in the long run. I also calculated that the my

portfolio beta is currently at 1.43 which lets you know that I am taking a

lot of risk with the stocks I decided to purchase but I also believe some

of the stocks are still a pretty safe bet. I am basing this off of the 5-year

graph, which shows a steady increase over time. As time goes on the

stocks will eventually go up. On the following page there are two graphs

that explain my portfolio a little bit more.


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Stock Price Value Historic1yrReturn

Beta LastDividend

No. ofShares

TotalInvestment

LVS $56.49 $140.41 3.43 1.72 1.40 1,872 $100,000

TWX $60.19 $100.77 11.69 1.24 1.15 1,661 $100,000

VRTX $82.33 $6.79 8.69 0.27 N/A 1,822 $150,000

GOOG $811.16 1469.45 61.48 1.15 N/A 312 $250,000

GDP $13.41 $0 -4.41 2.33 N/A 3,729 $50,000

BAC $12.51 $3.84 6.05 1.78 .04 8,532 $100,000

CREE $55.54 $29.18 11.94 1.47 N/A 2,701 $150,000

Listed above is a graph of my entire portfolio. The betas highlighted in

red indicate above average risk and as you can see I am taking a lot of

risk with my investments. The beta highlighted in blue indicates it is a

very safe investment with little risk involves.

The graph on the final page shows how I diversified my portfolio

into seven different industries. I did this in order to spread out by

investments in hope of gaining higher values. It would not be smart to

invest in two companies that are competing in the same industry. I

know how you like colorful graphs so I did my best to make them pretty.


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Portfolio Overview

Independent Oil & Gas

Internet InformationProvider

Semiconductor Equipment &Materials

Banks

Entertainment

Resorts & Casinos

the million dollar investment

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