In an attempt to integrate real-world investment management experience into the classroom, our class was assigned to make and manage a portfolio of different chosen securities. With teams of no larger than two individuals, we were given $1,000,000 in fantasy money to invest, track and write about our results. At the project initiation time, we thought it was smart to first purchase some securities that we were already familiar with and have in our personal portfolio’s. This allowed us to purchase some securities immediately because the necessary due diligence had already been completed.
Our investment style consisted of not just one individual type but a couple different styles. These included value, growth, small cap, mid cap and large cap as well as conservatively always keeping cash on hand. The growth style seeks to find companies that are expected to increase by 15%-25%. While only a few of our securities increased by this much, we believe this was due to the short seven-week time period we were allotted for this project. In due time many of these securities will show their true growth potential. We also incorporated value investing during this simulation.
Value investors look for bargains and cheap stocks that are often out of favor and may be cyclical and at the low end of their business cycle. Value investing allows one to implement an abundance of inexpensive shares of a company into a portfolio, which could turn into a fantastic return. In implementing both growth and value investment strategies into the same portfolio, this allowed for a diversification effect to occur. We found that returns on growth stocks and value stocks are not highly correlated and by diversifying between growth and value, this helped us to manage risk while still having high long-term return potential.
We also invested in small cap, mid cap and large cap securities. Companies are given these names relating to the size of the company or their market capitalization. Small cap companies have market capitalizations under $500 million while mid cap companies market capitalizations are between $500 million and $8 billion and large cap companies market capitalizations are above $8 billion. We found that the large cap securities were relatively safe to invest in compared to the small cap securities. Small cap stocks have a higher price volatility, which translates to a higher risk.
Investing in mid cap securities is like choosing the middle ground and seeks a tradeoff between volatility and risk. The potential return may not be as high as the small cap but the risk is not as high either. Below, the different securities are listed which we incorporated into our portfolio as well as a small description about the securities, why we invested in them and the amount invested. Cel-Sci (CVM) is a biotechnology company formed in 1983 and is involved in the development of immunotherapy products for the treatment of cancer and infectious disease.
The companies’ core capabilities include drug discovery, research, development and manufacturing of biological substances. Their flagship product, Multikine, is the first immunotherapeutic agent being developed as a first-line standard of care treatment for cancer. Multikine has been cleared in the U. S. and Canada for study in a global Phase III clinical trial in advanced primary head and neck cancer patients. 20,000 shares @ $1. 48 20,000 shares @ $1. 05 Average 40,000 shares @ $1. 265 Closing Price 11/23 – $1. 26 Market Cap – 192. 92M (Small Cap) Beta – 2. 42 Return – (. 40%)
This security was purchased as a small cap investment with serious growth potential. Being at a very inexpensive price, this allowed for the accumulation of multiple shares of this security. We do not believe this stock is undervalued or overvalued but correctly priced given the company’s current situation. This company is on the verge of starting their Phase III clinical trial and with solid results, this stock could have great returns. We originally purchased 20,000 shares at the beginning of the simulation but half way through when the stock dipped, the thought of picking up 20,000 ore at a cheaper price seemed like the right move to make. This dollar cost averaged out to $1. 265 per share which is currently under the closing price however, this security was purchased for the long-run, not the short-run and a seven week simulation is just not long enough to see this securities true potential. CVMs beta is relatively high at 2. 42 which suggests there is some serious volatility with this security and it has much wider swings relative to the market. MGM MIRAGE (MGM) is a collection of resort-casinos, residential living and retail developments providing unsurpassed service and amenities to all of their guests.
A list of some of their Las Vegas resorts and casinos are as follows: •ARIA •Bellagio •Vdara •MGM Grand •And many others MGM Mirage owns 16 properties located in Nevada, Mississippi and Michigan and has 50% investments in four other properties in Nevada, New Jersey, Illinois and Macau. 2,000 shares @ $12. 17 Closing price 11/23 – $10. 66 Market Cap – 4. 66B (Mid Cap) Beta – 4. 63 Return – (12. 41%) This was a mid cap investment which seemed like a fairly good deal considering the security was trading in the $80 range two years ago.
We believe this companies share price will bounce back eventually considering it is in the entertainment and hospitality industry however this may take some time considering the current state of the economy and the impact its had on travel and luxury spending. This company has a lot of debt, which can make it a fairly risky investment especially with its relationship to the market. MGM has an extremely high beta of 4. 63 insinuating high volatility with the market and we believe this stock was definitely overvalued when it was trading at $80/share and it is still overvalued now with the amount of debt and risk that comes with this security.
Less Is More Energy (LIME) is a company, which strives to improve physical environments where we live, work and play. LIME enables clients to spend dramatically less on energy while yielding more ROI, a more comfortable and productive physical environment, and more pure natural environment. LIME’s energy efficiency solutions allow clients to spend dramatically less on energy and building operations. They produce less waste, allowing a cleaner natural environment. 1,300 shares @ $6. 05 Closing price 11/23 – $4. 40 Market Cap – 109. 94M (Small Cap) Beta – 0. 65 Return – (27. 27%)
LIME is a small cap company and investing in this security we believed help to diversify the portfolio and add to our overall investing strategy. One of the main reasons we purchased this security as an investment was because of the vision behind the company working to help businesses reduce their energy use. At the current state of our economy, it seems that everybody is trying to become ‘green’ one way or another and LIME is helping others achieve that every day. With that being said, we thought this security was going to increase the amount in our portfolio because its services are currently at a high demand.
Unfortunately, at about week six of this simulation, bad third quarter earnings were recorded dropping the shares $1. 50 in a single trading day. This put a solid dent in our portfolio’s return but we believe in the long run shareholders will be proud Chicago Bridge & Iron (CBI) designs, engineers and constructs some of the world’s largest energy infrastructure projects, providing a full spectrum of engineering, procurement, fabrication and construction and proven process technologies. With more than a century of experience and the expertise of approximately 17,000 employees worldwide, CBI reliably executes more than 600 projects a year. 0,000 shares @ $19. 12 2,000 shares @ $19. 88 Average 12,000 shares @ $19. 50 Closing price 11/23 – $18. 78 Market Cap – 1. 79B (Mid Cap) Beta – 2. 67 Return – (2. 42%) CBI is a mid cap company and was chosen for the portfolio because we currently have shares of it in our personal portfolio and they have given us a superb return. While that return was made right after the market had hit its floor, we got into this security for the simulation a little later at $19. 12. Two years ago this security was trading near $60. 0 per share and while that price puts it way overvalued, we think at its current share price it is a great investment and an undervalued security. After purchasing the original 10,000 shares, anticipation brought on by daily news and message board bloggers had us thinking it was going to hit in the mid twenties. That brought on the additional 2,000 shares which unfortunately dollar cost averaged us out at $19. 50. With a market price of $19. 31 at the end of the simulation, this additional accumulation of shares took us from a gain to a loss.
Regardless of the current share price, we believe this security is a good investment for the long run and plan on purchasing additional shares for our personal portfolios. Google (GOOG) is an American public corporation, earning revenue from advertising related to its Internet search, e-mail, online mapping, office productivity, social networking, and video sharing services as well as selling advertising-free versions of the same technologies. Google has also developed an open source web browser and a mobile operating system and is the premier search engine on the World Wide Web.
Currently, the company has 19,786 full-time employees and runs thousands of servers worldwide, which process millions of search requests each day. Google has been identified multiple times as Fortune Magazines #1 Best Place to Work, and as the most powerful brand in the world. 300 shares @ $523. 61 Closing price 11/23 – $582. 35 Market Cap – 183. 94B (Large Cap) Beta – 1. 05 Return – 11. 36% To go along with our investment strategy, we had to incorporate a large cap company in the portfolio.
It is a no-brainer to investors out there that Google is a solid large cap company with exceptional return relative to the risk. Unfortunately for many young investors, the current share price of Google makes it hard to own a solid amount of shares because the price is so high. With the simulation giving us $1,000,000 to play with, this was more than enough to purchase some shares and watch the results. Google ended up giving our portfolio an 11. 36% return proving that although expensive it is also rewarding.
Ford (F) is an American multinational corporation based in Dearborn, Michigan and is currently the fourth-largest automaker in the world based on number of vehicles sold annually. Ford is also the seventh-ranked overall American-based company in the 2008 Fortune 500 list, based on global revenues of $146. 3 billion. In 2008, Ford produced 5. 5 million automobiles and employed about 213,000 employees at around 90 plants and facilities worldwide. Ford has received more initial quality survey awards from J. D. Power and Associates than any other automaker.
Five of Ford’s vehicles ranked at the top of their categories and fourteen ranked in the top three. 2,000 shares @ $7. 59 Closing price 11/23 – $8. 81 Market Cap – 28. 87B (Large Cap) Beta – 2. 71 Return – 16. 07% We decided to incorporate Ford into our portfolio because the share price was relatively inexpensive and the potential for a gain versus risk was one we were willing to take. Considering the recent fall of GM, we felt it was safe to say Ford wasn’t going anywhere but up and if the opposite had happened, our country as a whole would have yet another major problem to add to our current situation.
This ended up being a great investment, which netted us, our highest return from the portfolio. Even though there is a relatively high beta of 2. 71 indicating market volatility, if you are going to be a successful investor, you must take on a little risk. This risk created high reward and we believe this stock is undervalued and wish we had purchased more shares. Gold (GLD) is a highly sought-after precious metal for coinage, jewelry, and other arts. It has served as a symbol of wealth and a store of value throughout history. 1,000 shares @ $103. 59
Closing price 11/23 – $114. 73 Beta – 0. 42 Return – 10. 75% Investing in gold was a more conservative approach considering the other securities in our portfolio but it allowed for a low risk investment and added to the diversification effect of the overall portfolio. This security gave us a solid return and the beta of 0. 42 indicates a sleepier stock in relation to the market. Harvest Natural Resources Inc (HNR) is an independent energy company engaged in the acquisition, development, production and disposition of oil and natural gas properties.
HNR is currently engaged in new exploration projects in proven hydrocarbon basins worldwide to complement their production, appraisal and development assets in Venezuela. In 2008, HNR grew daily oil production by more than 50 percent in only 8 months of drilling and received more than $70 million in dividends. 7,500shares @ $5. 66 Closing price 11/23 – $6. 03 Market Cap – 189. 88M (Small Cap) Beta – 1. 43 Return – 6. 54% Harvest Natural Resources Inc is another small cap company which seemed like a great buy for a company with a good vision and potential. The current return of 6. 4% was solid for seven weeks however we believe this company is on the rise and should be held for the long term. PowerShares QQQQ is an exchange-traded fund (ETF). An ETF is an offshoot of mutual funds that allow investors to trade index portfolios just as they do shares of stock. Unlike mutual funds, which can be bought or sold only at the end of the day when the NAV is calculated, ETFs can be traded throughout the day, just like any other share of stock. QQQQ is a unit investment trust designed to correspond generally to the performance, before fees and expenses, of the Nasdaq-100 index.
The fund holds all the stocks in the Nasdaq-100 index, which consists of the largest non-financial securities listed on the Nasdaq Stock Market. The fund issues and redeems shares of Nasdaq-100 Index Tracking Stock in multiples of 50,000 in exchange for the stocks in the Nasdaq-100 and cash. 1,400 shares @ $42. 54 Closing price 11/23 – $44. 14 Beta – 1. 09 Return – 3. 41% While we had not yet gone over ETFs in class prior to the beginning of the simulation, we had some small knowledge of how they worked and what they consisted of and thought investing in this security would add more diversification to the portfolio.
This ended up giving our portfolio some positive return while helping to offset any negative return we had received from other securities. This ETFs beta of 1. 09 indicates the security rises and falls in sync with the overall market. Considering that this security holds all the stocks in the Nasdaq 100 index, it is easy to understand why it follows the markets path. iShares Dow Jones Select Dividend (DVY) is an exchange-traded fund (ETF). The investment seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones Select Dividend index.
The fund generally invests at least 90% assets in securities of the underlying index and depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in securities not included in its underlying index and in futures contracts, options on futures contracts, options and swaps as well as cash and cash equivalents. 500 shares @ $40. 68 Closing price 11/23 – $43. 26 Beta – 0. 94 Return – 6. 34% This ETF is similar to the one above except it is related to the Dow Jones Select Dividend index not the Nasdaq.
We purchased this ETF for diversification purposes but also as an experiment to see which one would perform better. DVY gave us a return of 6. 34% more than 1. 5 times the QQQ ETF and this shows the difference in performance between the Nasdaq index and the Dow Jones Select Dividend index. The beta is at 0. 94 just below one which indicates it rises and falls with the market and it should considering it is compiled from the Dow Jones. Below is a graph of our portfolio’s performance relative to the S&P 500. As you can see, our portfolio underperformed compared to the market however it followed the trends of the market consistently.
At the end of the simulation, our portfolio achieved a 3. 5% return while the S&P achieved a return of 6. 3% These similar trends correspond to the systematic or market risk that corresponds with investing and is unavoidable. However, having a well-diversified portfolio allowed our weekly changes to mimic the markets returns. Unfortunately for our portfolio, market timing became a factor and a few of the securities received bad earnings reports or bad press. This severely impacted the success of our portfolio and contributed to the underperformance to the market.