gateway capital resubmitted final report

Let us provide a sure foundation for your future.

Analysts:

Jonathan White

Kaitlyn Allen

Kevin Putnam

Martin Lamar

LOCATION:

2015 SIUE Business DistrictEdwardsville, IL

[email protected]

1 | P a g e G a t e w a y C a p i t a l*Unless otherwise indicated information has been acquired from Yahoo Finance

Gateway Capit

Finance 430 - Instructor Demirer - 4/27/2015

TABLE OF CONTENTSSection I Client-Focused Philosophy of Gateway Capital………………………….……..3

Analyst Team

Section II Recommended Securities…………………………………………………………………4Apple Inc.CaterpillarThe Walt Disney CompanyActivision Blizzard, Inc.Suncor Energy Inc.PepsiCo, Inc.Hologic Inc. OpenText Corporation

Section III Summary Statistics for Individual Stocks…………………………………………10Average ReturnStandard DeviationCorrelationCovarianceBetaR-SquaredP-Value

Section IV The Optimal Portfolio…………………………………………………………………....12Efficient FrontierYour Optimal Portfolio

Section V 2015 Portfolio Performance Evaluation………………………………………….13

Section VI The Foundation for Your Future……………………………………………………..15

Appendix…………………………………………………………………………………………………………...16


Section IClient-Focused Purpose of Gateway Capital

Our promise at Gateway Capital is to provide in-depth analysis of the portfolio that is recommended to you as the client. The following sections will provide the background for each

sector and stock chosen as well as the data that was acquired in the analysis. Our goal is to provide our client with the optimal portfolio. We will evaluate this portfolio over a five year

period to gain historical data. We will then provide information regarding our portfolio’s performance in 2015 thus far. With expert analysts in each sector we can assure our clients that

we will help to achieve future gains while preparing for potential pitfalls.

Gateway Capital Team

Analyst Sector Company

Jonathan White Electronic Equipment Apple Inc.

Farm/Construction Machinery Caterpillar

Kaitlyn Allen Entertainment The Walt Disney Company

Multimedia/Graphics Software Activision Blizzard, Inc.

Kevin Putnam Independent Oil/Gas Suncor Energy Inc.

Food and Beverage PepsiCo, Inc.

Martin Lamar Medical Appliances/Equipment Hologic Inc.

Technology OpenText Corporation


Section IIRecommended Securities

A. Selected Stocks and Our Investment StyleThe stocks chosen by our company for your portfolio reflect a conservative investment style. Gateway Capital has striven to become a sure investment foundation for our clients. We believe that we can accomplish this with a conservative investment portfolio that provides a safe place for clients’ money. This portfolio was compiled after selecting stocks from various sectors. We believe that the utilization of diverse sectors will provide a healthy balance between risky and safe investments. Diversification of sectors also allows for continual growth. High performing companies will account for others that may be lagging within the market. This “insurance” aspect will benefit all investors.

After selecting our sectors, we chose stocks within companies that are known leaders in their respected industry as well as companies that are expected to dominate in the near future. We feel confident in investing with companies that boast a firm foundation such as PepsiCo Inc., The Walt Disney Company, and Caterpillar. We also believe in investing in the fledgling companies which have great potential of rewards in the future such as Activision Blizzard and Open Text. The stocks within our recommended portfolio provide a consistent amount of return. Pepsico and the Walt Disney Company are driving forces within our portfolio. They provide a significant amount of return in the growing sectors of food and beverage and Entertainment. These stocks provide a sense of stability within our portfolio. Diversification is also a desire within the selection of our stocks. We have invested in the Multimedia and Graphics Software, Farm and Construction Machinery, and the Food and Beverage sectors. The companies that we have chosen within these sectors have boasted modest returns.

B. Gateway Capital – Portfolio ReturnsAnalyst: Jonathan WhiteSector: Electronic EquipmentConsumer electronics is currently one of the fastest growing industries in the world. With the explosion in popularity of smart phones and tablets, there is a growing demand for these devices. The leaders in this industry are mainly Apple, Google, Blackberry, and HP. Apple is arguably the strongest competitor among this group which is why we have chosen it for our portfolio.

Company: Apple Inc. (AAPL) Apple Inc. is a multinational corporation that specializes in designing, developing, and selling consumer electronics, computer software, online services, and personal computers. It is publicly traded on the NASDAQ. Apple is headquartered in Cupertino, California. Apple’s core product lines include the iPhone mobile telephone, iPad personal computing tablet, and a variety of personal desktop and laptop computers. Apple was founded in 1976 by Steve Jobs, Steve Wozniak and Ronald Wayne. Apple was one of the first innovators in personal computing and revolutionized consumer electronics with the iPhone and iPod products. Today, Apple is the largest publicly traded corporation based on its market capitalization.


Apple is the dominant force in its industry. According to Yahoo Finance, its closest competitors are Blackberry, Google, and Hewlett-Packard. Last year Apple recorded a revenue of almost $200 billion; the closest competitor was HP at $111 Billion. Apple had a net income of $44 billion, almost four times of its closest competitor. Apple also has the second biggest EPS among its competitors at $7.39 per share with only Google beating them at $21.02 per share. Apple trails in terms of its five expected earnings growth per share at $1.09. Blackberry is the only competitor who has a better earnings growth per share outlook than Apple. Apple has the third largest profit margin at .39. Apple’s financial reports support its strong product lines. Apple is continuing to release innovative products such as the smart watch which is due to be released in Q2 of 2015. With these innovative products, we believe that the future of Apple’s financials and product line is bright. Therefore, we believe it is a good pick for our portfolio.

Sector: Farm & Construction MachineryAs the world’s population continues to grow, especially in Asia, there is growing reliance on farming and the food it produces. Emerging nations need strong agriculture in order to sustain economic growth. In order to build a strong infrastructure, nations need construction equipment to build it up. With all of this in mind, farming and construction machinery has a very bright outlook for the near future and beyond. This reason is why we decided to include it in our balanced portfolio.

Company: Caterpillar (CAT) Caterpillar is an American multinational company and is the world’s largest manufacturer of construction and mining equipment. It is publicly traded on the NYSE. Caterpillar has almost $90 billion in assets and according to Fortune 500, is the largest company in its respective industry. Caterpillar was created in 1925 through a merger of Holt Manufacturing and C.L. Best Tractor Company. Caterpillar is headquartered in Peoria, Illinois, and is 44th on the Fortune 500 list. Caterpillar specializes mainly in construction, mining, and farming equipment and is widely considered an industry leader.

Caterpillar’s main competitors are John Deere, Volvo and Komatsu. CAT has the largest Market Cap within the industry at $50.71 billion, with its closest competitor being John Deere at $30.65 billion. It also has the highest net income of $3.70 billion. It’s closest competitor is John Deere at $3.16 billion. CAT trails John Deere in terms of EPS with $5.88, while John Deere is at $8.63. Caterpillar’s gross margin is similar to its competitors at .27. John Deere is at .30 and Komatsu is at .29. Caterpillar’s projected five year earnings growth per share rate is 1.81. This is higher than John Deere’s at -7.22. Volvo has a similar outlook to Cat at 1.71 while Komatsu has the projected five year PEG at 6.39. John Deere is also projected to shrink. This allows opportunities for Caterpillar to acquire some of Deere’s market share. Caterpillar will look to pounce on emerging markets in Asia and South America in order to increase its market share and financial growth.

Analyst: Kaitlyn AllenSector: EntertainmentWe believe that the Entertainment Service Sector is a stable industry to invest in for our portfolio recommendation. There is a guarantee of global-wide utilization of entertainment regardless of market


fluctuations. Entertainment provides a way of escape from the world and uses this tactic to provide a profit. With the large influx of movie, television, and sports productions, we can be assured of continual growth for the Entertainment Sector. Entertainment companies include the giant companies of The Walt Disney Company (DIS), Time Warner Inc. (TMX), and Twenty-First Century Fox Inc. (FOXA). With the public’s ongoing need for more entertainment, we feel confident in selecting a stock from this sector.

Company: The Walt Disney Company (DIS)The Walt Disney Company was founded in 1923 and is based in Burbank, California. This large company is divided among the following segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products, and Interactive. Operations such as television channels, resorts, and retail companies exist within each of these segments. Disney’s massive global presence is also key for this company. With resorts spanning from Japan to Paris, Disney has advertised their company with pride.

The Walt Disney Company reported revenues, trailing twelve months, at $49.9 billion. This tops out competitor Time Warner Inc. with revenues of $30.77 billion. The Market Cap of the company is $173.39 billion. According to Yahoo Finance, revenue from Disney parks and resorts rose 9 percent to $3.9 billion in the last three months of 2014. Since January 1, 2015, the share price has increased by over 12%. Quarterly revenue growth (yoy) for the Walt Disney Company is 9 percent. This number dominates quarterly revenue growth of competitor Time Warner Inc. which reported growth of 3 percent. Twenty-First Century Fox reported a 1 percent decrease in growth. We are especially confident that this increase will continue due to the video productions that are set to appear in 2015. The Walt Disney Company provides a safe stock option for our balanced portfolio. We are especially confident that an investment with this company will yield significant portfolio returns. Thus, it has the second largest weight in our optimal portfolio.

Sector: Multimedia & Graphics SoftwareWe believe that the technology industry would be an excellent addition to this diverse portfolio. The technological sector is ever-changing and provides an element of risk for our clients. With the continual production of new products we can be assured of the growth in the technological sector. The global presence of technology has also helped to expand the utilization and production of new products.

Company: Activision Blizzard, Inc. (ATVI)According to the Activision Blizzard website, Activision Blizzard was founded in 1979 as the first independent video game software developer and distributor. The company is based in Santa Monica, California, and operates in fifteen different countries. According to Yahoo Finance, the company publishes online, personal computer (PC), video game console, handheld, mobile, and tablet games. We believe that the diversity of the services of Activision Blizzard will provide impressive returns within the next few years.

Activision Blizzard reported revenues, trailing twelve months, at $4.41 billion which exceeds the Industry average of $208.92 million. The Market Cap of the company is $15.92 billion. Within the past year, the


stock price has increased by 14.20%. Quarterly revenue growth of 4 percent is on track with the Industry average of 4 percent. According to Jeff Berman, a freelance technology reporter for The Street, 2016 should be a year of growth for Activision Blizzard. Growth in various game franchises such as CALL OF DUTY CHINA, HEROES OF THE STORM, HEARTHSTONE, OVERWATCH and the WORLD OF WARCRAFT (WOW) will provide diversification for Activision Blizzard and enable future growth. However, until this future projected growth, historical data exemplifies that we should profit on less than expected earnings through short selling.

Analyst: Kevin PutnamSector: Independent Oil and GasWe feel that the oil and gas industry is in a correction period. Over the past six months, this industry has experienced huge losses. However, with inventories stabilizing and the charts beginning to favor the industry, a rebound seems to be in the near future. The charts are due to show a nice V shape, and we believe that this will indicate a very nice rebound to previous levels. Gas is a staple of most economies and will continue to be so for some time. Therefore, we believe that this is a safe play moving forward in the later part of 2015. For the time being we feel shorting the oil industry will provide superior returns to buying the stock outright.

Company: Suncor Energy Inc. (SU)Suncor Energy Inc., operates as an integrated energy company. Their primary focus is to develop petroleum resource basins in Canada’s Athabasca oil sands. In addition to exploring, SU also develops, produces and markets crude oil and natural gas in Canada and internationally. These operations combined show why Suncor will continue to succeed and persevere when tough times arise.

Suncor Energy has the largest market capitalization of its competitors and is also the fifth largest energy company in North America. Oil has experienced over a 50% drop in the past six months, and we feel that it isn’t due for a rebound any time soon. Fluctuations in the price of oil are a common thing due to the commodity being traded on the open market. Once the demand for oil rises, the price will mirror the increase. Suncor has also maintained a best in class dividend yield of 3.3%. This yield is nearly three times Imperial Oil which is at a 1.2% yield. Despite lower prices in the last quarter, Suncor still outpaced its competitors with revenue topping $32 billion. SU also had gross profit at $19.76 billion, while closest competitor Imperial Oil Ltd (IMO) had a gross profit of $6.74 billion. Clearly SU has found a way to remain profitable and traverse through this tough time for oil and gas companies, although its profits are minimal because of the entire industry being on the downturn. Due to dropping oil prices, we will be shorting Suncor within our portfolio. We will be shorting SU for at least the first half of the year, or until we feel that oil has bottomed and is a safe investment moving forward.

Sector: Food and Beverage We believe that the Food and Beverage Industry is very stable and will continue to grow exponentially for years to come. The food segment has continued to grow at a very healthy pace. People will always have need for chips or other snack foods. Giant companies such as PepsiCo or closest competitor Coca-


Cola will continue to be there to serve the consumers with staple products like Doritos and Frito-Lay. We feel comfortable that this industry will continue to flourish and see increased revenues because of these household names. The Beverage Industry is a bit trickier due to less demand in carbonated beverages and more demand in healthy drinks and sports drinks. But the powerhouses in this industry, such as PepsiCo, have product lines like Gatorade and Tropicana drinks to cover this segment and continue to see revenue growth.

Company: PepsiCo, Inc. (PEP)PepsiCo is a brand that will exist for the foreseeable future. We believe that Pepsi is a company that you can feel comfortable with putting in your portfolio and letting it ride for the next 20+ years with few worries. PepsiCo Inc., had a best in industry ttm revenue of $66.85 billion, far exceeding top competitor Coca-Cola’s $46.17 billion and next closest Mondelez’s $34.9 billion. PepsiCo is very diverse with product lines such as Pepsi, Gatorade, Tostitos, Frito-Lay, and Quaker Oats. This allows the company to handle severe economic conditions across the globe. Pepsi recently saw international sales grow to 48%. This proves that PEP is apt to handle another downturn in the U.S. economy. Even with a best in industry ttm revenue, PEP still had the second best quarterly revenue growth of .02 while Coca-Cola (KO) saw no growth for the past quarter. The only company to see better quarterly revenue growth than PEP was Dr. Pepper Snapple (DPS), which came in at .03. EPS ttm for PEP was 4.52, which exceeded everyone in the industry by a wide margin. EPS for competitors are as follows: KO: 1.80, DPS: 3.56. The industry average EPS is .27. PEP has had a very good run the last few years and we feel that this can be a profitable asset within our portfolio.

Analyst: Martin LamarSector: Medical Appliances and EquipmentMedical appliance companies offer attractive features, especially for the growth investor. It has similar risks to the pharmaceutical industry. There are many risks associated with this sector, but we feel as though penetration in this market can yield significant advantages. Companies that obtain patents can improve profit margins and sequentially can improve earnings. In a field as competitive as this, innovation is a necessity. As analysts, we must keep a close eye on spending for research and development, authority filings, and regulatory approvals. This allows us a unique diversification benefit in this sector. Medical equipment is a necessary expense in this Industry and we feel as though the company we chose has a good chance of Return on Assets.

Company: Hologic Inc. (HOLX)Hologic Inc., is a manufacturer or image systems diagnostics and surgical products. They are most known for their prominence in the women’s medical field. They sell their products through direct sales and service forces and also in the independent circuit. They use a variety of avenues to distribute their diagnostic systems. Hologic Inc. is primarily focused on STD and AIDS screening. Recent mergers and acquisitions including that of *Cytyc and Gen-probe have pushed the market capitalization of Hologic (a member of the Russel 3K) over $8 billion. This is comparatively larger than a number of the smaller firms in the S&P 500.


Hologic operates in the healthcare industry, which is dominated by continuous innovation in technology. The company offers a wide range of products used in the diagnosis of human diseases. They utilize advanced tools, such as “The Thinprep” system, and the Aptima family of assays. They also market breast health products. Total revenues for 2014 $2.4 billion. According to Yahoo Finance, the rate of growth over the last three years was 12.5%. The company posted a net Income of $17.3 million in 2014 with an annual growth of 4.14% over the past three years. Within the industry, Hologic Inc. competes with companies such as Alec, GE Healthcare, and Siemens. Hologic has a higher market capitalization than its closest competitors, at $8.3 billion. Hologic enjoys a higher earnings per share, price earnings growth, and price to share ratio than its closest publicly held competitor Alere. In the medical appliances industry, there is significant volatility as it is dominated by innovation. As investors, we believe this is an opportunity to add some risk to our portfolio. This will hopefully increase our returns by short selling.

Sector: TechnologyThe Software Application industry comes with its own unique set of risks which can lead to overvaluation and volatile shifts in stock price. Key drivers in this industry include: revenue streams, subscription items, renewal contract value, and a diverse customer base. With recent security threats threatening the biggest corporate players, customers often have to see the value in the company before accepting price increases. The opportunity for profit is derived from the ability of most software application companies to penetrate multiple industry segments.

Company: OpenText Corporation (OTEX)Open Text Corporation is Canada’s largest software company. It is an independent company providing a comprehensive suite of information management software products that help people in organizations work, interact, and innovate in a productive way. It is a key player in the management software industry. Products also include social/mobile media and cloud computing. It primarily generates revenue through its license, customer support, and professional services.

Open Text Corporation had total revenues of almost $2 billion and a market capitalization of over $7 billion. Quarterly data for 2014 indicates an average growth of 2.19%. It primarily conducts business in the software company industry. Competitors include EMC Corporation, IBM, and the Oracle Corporation. Open Text is significantly smaller in comparison of Market Capitalization which normally implies higher volatility. Open Text Corporation has the smallest market capitalization and revenue out of its closest competitors. This provides an opportunity to profit as its revenues can grow faster than its competitors. Due to the previously stated facts, we believe that OTEX has the most optimistic growth potential. This is also reflected in its earnings ratio which exceeds the average price. It also has the highest gross margin due to its lack of size.


Section IIISummary Statistics for Individual Stocks

Average ReturnAverage Return represents the return that we should expect for the amount that we invested in our stock. We believe that this number will provide our Investors with accurate information about their stocks’ future potential.

The stock with the highest average return within our Portfolio is AAPL at 2.74%. Over the past four years, Apple has been the fastest growing company within our portfolio. This is mainly due to its great success with the iPhone and iPad products. This fact supports the high return within the five-year selected period. According to Table 1, The Open Text Corporation and the Walt Disney Company have similar returns at 2.27% and 2.26% respectively. As stated previously, we believe that Open Text has great potential in the future. The Software sector is continually growing and Open Text is no different. According to Yahoo Finance, Open Text has expanded through the improvement of SAP, Microsoft packages, and Enterprise Management Information within their product. In November Open Text announced to expand their “strategic agreement” with SAP SE. These partnerships will help to expand the influence of Open Text. The Walt Disney Company provides an average return of 2.26%. Disney’s historical prices exemplify a steady increase since 2011. The continual production of entertainment sources supports the positive average return for this stock. We believe that this stock will continue to provide positive returns for your portfolio.

Activision Blizzard has an average return of 1.54%. This stock provides a risk element to our portfolio that we believe will produce rewards in the future. According to USA Today, Activision Blizzard is one of the three stocks that they would recommend to be purchased. The company plans to incorporate the top 10 franchises in the Video Game industry within their own portfolio. They also plan to implement “free-to-play” strategies (Stoffel). The revamp of Guitar Hero is a recent announcement that helps to support Activision Blizzard’s goal of continual improvement. This will help to increase the average return. Caterpillar and Hologic Incorporated have similar returns at 1.49% and 1.28% respectively. Caterpillar is the largest company in the Farm and Construction Machinery sector according to Fortune 500. Hologic Inc. has seen a steady growth in stock prices over the past five years. According to Yahoo Finance, Hologic Inc. reported better results in the first quarter than was previously expected. It is a stock that has continued to produce results. In our current portfolio we have chosen to short this stock. However, we believe that in the future Hologic Inc. will be a stock that is positively utilized.

The smallest average return was Suncor at 0.54%. This is due to the recent downturn in the oil industry. Pepsico has the next smallest return at 1.1%. This is possibly due to an overall shift in consumer preferences.

Standard Deviation


Standard Deviation reflects the amount of risk that is within the Portfolio. A higher standard deviation reflects a larger amount of variation within the portfolio. A smaller standard deviation reflects a smaller amount of variation within the portfolio resulting in less risk. Our goal is to find a stock that has the largest return with the smallest amount of risk.

The Walt Disney Company exemplifies one of the larger returns within our portfolio with one of the smaller standard deviations at 5.63%. Our optimal portfolio has the second largest weight in Disney partially due to this factor. According to Table 1, Suncor and Open Text reflect the largest amount of risk within our portfolio. Suncor’s Standard Deviation of 8.71% reflects the riskiness of the current oil sector. According to the Financial Times, lower oil prices are expected into the future (Skypala). Due to this larger amount of risk we have decided to short Suncor in our portfolio. The least volatile stock is PepsiCo Inc. with a standard deviation of 3.38%. PepsiCo’s low amount of risk corresponds with its low amount of average return reported at 1.1%. The low amount of risk in Pepsico helps to support Pepsico as the largest weight within our optimal portfolio.

CorrelationCorrelation is the measure of two variables’ relationship to one another. This relationship is measured between -1 and 1. -1 would imply that the two stocks are 100% negatively correlated. A negative correlation implies that when one stock’s returns increases, the other stock is going to decrease. A correlation of 1 would mean that the two stocks are perfectly correlated and move in unison with one another. A correlation of 0 would represent that the two stocks are not at all related. Correlation is not to be confused with regression because correlation does not represent causation. All else equal, we would prefer two stocks to be negatively correlated in order to maintain a balanced portfolio.

According to Table 3, our highest positively correlated stocks within our portfolio were Caterpillar and Suncor at approximately 76%. These stocks are highly correlated with one another. This factor could be due to the dependence on oil in both companies. The remainder of our correlations are lower than this number. We had one negative correlation within our portfolio. The negative correlation is between Open Text and Pepsico at -4.15%. We are confident in the diversity of our portfolio because we do not have extremely high-correlated stocks. Therefore, we can maintain a balanced and strong portfolio for our clients.

BetaBeta is a measure of a stock’s market risk. In order to determine our beta value, we ran regression analysis for each of our stocks’ returns against the S&P 500. We locate our beta by finding our estimated coefficient value in our regression table. Our riskiest stock is CAT which had a beta of 1.67. This means that if the S&P 500 returns increase by 1 percent, CAT’s will increase by 1.67 percent all else equal. Caterpillar has the highest risk because the industry CAT serves is very dependent on how the general economy is doing. The S&P 500 is a good measure of the important companies that represent the different industries within the economy. In order for Caterpillar to do well, the market must do well. This


also means that if the market were to have a downturn, CAT would decrease more than the decrease within the market.

R Squared R squared is a measure of how much of a stock’s variation can be explained by the change in market (S&P 500) returns through the use of our given regression model. Our highest R2 value was found for DIS at .58. This means that 58% of the variation in the returns for DIS can be explained using our model.

P-ValueThe p-value of a model is the measure of its statistical significance. For example, at a significance level of 5%, if our p-value is less than .05 we would reject the null hypothesis that the returns of our stocks and the returns of our model are not related and therefore we would conclude that there is some relationship. All of our stocks had a p-value of less than .05. This means that all of our stocks are statistically significant.

Section IVThe Optimal Portfolio

A. The Efficient FrontierIn a graphical representation, we can identify the efficient frontier as the portion with the highest amount of return for each level of volatility. This process is also known as portfolio optimization. In order to perform portfolio optimization, we have used the Solver function in Excel. We first identified the stocks with the lowest and highest expected return. These returns were taken from Table 1 in the Appendix at the conclusion of this report. Suncor stock had the lowest expected return with 0.54% while Apple stock had the highest expected return with 2.74%. We used the range of these two stocks to determine 17 possible expected returns separated by equal distances. We then applied these 17 target returns to the Solver function to determine the expected returns for each stock. We accomplished this with the goal of achieving the lowest possible variance.

The efficient frontier graph also allows us to determine the minimum variance portfolio. As shown in the following figure, this point is located on the leftmost portion of the curve. The minimum variance portfolio exemplifies the highest possible return at the lowest amount of risk. The minimum variance portfolio indicates the leftmost portion of our efficient frontier. Notice that as we move northeast on the efficient frontier we receive a higher amount of return for a larger amount of risk.

Short selling is a method used by investors. It is accomplished when investors sell shares that they do not own by borrowing them and selling them immediately. Investors will then buy the same share of stock back in order to repay the original lender. The goal of short selling is to buy back the borrowed shares of stock after the stock price has fallen. This will provide a profit for the investor when replacing the shares that were purchased at a higher original price. A profit is not always guaranteed in the


process of short selling. If the price of the stock increases, a profit will be difficult for an investor to make.

Efficient Frontier

0.025 0.03 0.035 0.04 0.045 0.050

0.005

0.01

0.015

0.02

0.025

0.03

Standard Deviation

Retu

rn

B. Your Optimal PortfolioThe tangency line above shows the optimal portfolio for you as the client. In order to determine the tangency line we had to calculate the Sharpe ratio. The Sharpe ratio will allow us to determine what level of return is acquired with each new level of risk. We maximize the Sharpe ratio within the Solver function to determine the weights for the optimal portfolio. After completing the solver function we have determined the following investment weights for your optimal portfolio:

AAPL CAT DIS ATVI HOLX OTEX PEP SUN29.94% 8.76% 36.27% -5.26% -8.43% 12.96% 48.94% -23.18%

This portfolio exemplifies a large investment in Pepsico and the Walt Disney Company. We also will be shorting three of our stocks. The expected average return for our stock within the last four years is 2.29% with a standard deviation of 3.8%.

Section V


2015 Portfolio Performance EvaluationWe acquired data for daily performance from January 2015 to the present for our portfolio as well as the S&P 500 index. This data is summarized in Table 4. The primary measure that we are using for the overall stock market is the S&P 500 index. In 2015 the S&P 500 had an average return of 0.038%. Comparatively, our portfolio had an average return of .098%. This return is not equivalent to our return in the past few years, however, we are confident that this return will continue to increase throughout the year. Another benchmark performance measure we used for our portfolio was comparing Sharpe ratios. The Sharpe ratio is defined as each excess return that is available per unit of risk, or standard deviation. The Sharpe ratio for our portfolio is found by subtracting the risk free rate from the portfolio’s return and dividing it by the portfolio’s standard deviation. The market’s Sharpe ratio is found using the same method. Our portfolio’s Sharpe ratio was 0.0776, whereas the market’s Sharpe ratio was lower at 0.0456.

Our next performance measure is to compare our portfolio’s Treynor index to that of the market’s. The Treynor index is similar to the Sharpe ratio formula in that it uses the same numerator, however the denominator uses beta as a measure of risk instead of standard deviation. Beta is a measure of a portfolio or a stock’s performance compared to the market. Beta is one for the market. In order to calculate beta for our portfolio, we ran a regression analysis with our portfolio’s daily returns as the dependent variable and the market’s daily returns or the S&P 500 as our independent variable. Our beta coefficient has a value of 0.96. Based upon our estimate, if the markets average return increases by percent, our portfolio’s return will increase by 0.96%. Our portfolio had a Treynor index of 0.001 whereas the market’s Treynor was 0.0004.

Another performance measure we will consider is Jensen’s alpha, which is found using our regression model that was previously mentioned. Alpha is a measure of a portfolio’s excess returns that it can gain compared to what CAPM says that it should return. A negative alpha would represent an overpriced portfolio, whereas a positive alpha would represent an underpriced portfolio. Our alpha for the time period was 0.0006 which shows that our portfolio was slightly over performing from what it should be accomplishing in terms of CAPM. Another performance measure that we utilized was M2. This figure is found by subtracting the Sharpe of the market from the Sharpe of the Portfolio and then dividing that number by the standard deviation of the market. Our M2 was 3.85. This number is greater than 0 thus indicating that the portfolio has beaten the benchmark. Our final portfolio performance was T2 this value is determined by subtracting the Treynor of the market from the Treynor of the portfolio. We then divided that answer by the beta of the market. This value was greater than 0 this indicating that the portfolio has beaten the benchmark.

Our portfolio outperformed the market in all of the performance measures that we looked at. This is not consistent with what CAPM says, however we are confident that we can outperform the market based on the positions we’ve chosen with our portfolio.


Section VI

The Foundation for Your FutureOur portfolio has been delicately positioned to build wealth for our clients. From January 2010 to December 2014 our portfolio experienced returns of 2.29%. However, over the past four months, we have seen the overall market steadily decline along with our portfolio. We feel that we have allocated our stocks within our portfolio to maximize the potential of the market moving forward. Within our portfolio, we have had some stocks experience pullbacks due to inventory worries (SU). However, the future of these companies looks bright due to continued dividend increases and company growth. For example, there are several analysts, including ourselves, who believe Apple will become the world’s first corporation to be valued at $1 trillion. These are just a few examples of why we are confident of the future success of our portfolio. We have diligently designed a portfolio that we believe will heed our investors’ monetary success in the coming months.


Appendix

Table 1: Summary Statistics

AAPL CAT DIS ATVI HOLX OTEX PEP SUN

Avg Returns 0.0274 0.0149 0.0226 0.0154 0.0128 0.0227 0.0110 0.0054

Std Dev 0.0724 0.0843 0.0563 0.0745 0.0786 0.0874 0.0338 0.0871

Beta 0.8782 1.6720 1.1646 1.0031 1.3991 0.9565 0.4208 1.6476

R^2 0.2020 0.5396 0.5878 0.2488 0.4348 0.1641 0.2120 0.4906

P Value 0.0004 0.0000 0.0000 0.0001 0.0000 0.0015 0.0002 0.0000*Data acquired from regression output and Yahoo Finance

Table 2: Covariance

AAPL CAT DIS ATVI HOLX OTEX PEP SUAAPL 0.005234 CAT 0.00179 0.007106 DIS 0.001274 0.002277 0.003168 ATVI 0.001309 0.001503 0.001326 0.005545 HOLX

0.001518 0.003606 0.001854 0.001385 0.006174

OTEX 0.00126 0.002523 0.001659 0.00076 0.002022 0.007644 PEP 0.000118 0.000636 0.000642 0.001161 0.000863 -0.000123 0.001146 SU 0.002063 0.005609 0.002615 0.001248 0.003136 0.002104 0.000192 0.007588

*Data acquired from Yahoo Finance

Table 3: Correlation

AAPL CAT DIS ATVI HOLX OTEX PEP SUAAPL 1 CAT 0.2936 1 DIS 0.3129 0.4798 1

ATVI 0.2432 0.2398 0.3164 1 HOLX 0.2671 0.5444 0.4195 0.2376 1 OTEX 0.1991 0.3422 0.3373 0.1171 0.2943 1 PEP 0.0480 0.2228 0.3373 0.4608 0.3245 -0.0415 1 SU 0.3273 0.7639 0.5336 0.1924 0.4582 0.2762 0.0652 1


Table 4: Portfolio Performance

Avg Rtn Standard Deviation

Beta Sharpe Treynor Alpha M2 T2


Port 0.10% 0.0127 0.96 0.0776 0.0010 0.0006 3.849 0.000651S&P50

00.04% 0.0083 1.00 0.0456 0.0004 N/A N/A N/A


Table 5: Efficient Frontier with Short SellingAAPL CAT DIS ATVI HOLX OTEX PEP SUN

2.74% 37.98% 16.63% 53.00% -4.70% -10.11% 13.57% 32.65% -39.02%2.60% 35.54% 14.24% 47.90% -4.85% -9.60% 13.39% 37.60% -34.20%2.46% 33.09% 11.84% 42.82% -5.03% -9.09% 13.20% 42.55% -29.38%2.33% 30.64% 9.47% 37.73% -5.17% -8.59% 13.01% 47.48% -24.57%2.19% 28.20% 7.05% 32.65% -5.38% -8.06% 12.82% 52.46% -19.75%2.05% 25.75% 4.66% 27.56% -5.54% -7.55% 12.64% 57.41% -14.93%1.91% 23.31% 2.27% 22.47% -5.71% -7.04% 12.45% 62.36% -10.11%1.77% 20.86% -0.13% 17.39% -5.88% -6.53% 12.27% 67.32% -5.29%1.64% 18.41% -2.52% 12.30% -6.05% -6.01% 12.08% 72.27% -0.47%1.50% 15.97% -4.92% 7.22% -6.24% -5.49% 11.89% 77.23% 4.34%1.36% 13.52% -7.31% 2.14% -6.41% -4.98% 11.70% 82.18% 9.16%1.22% 11.07% -9.71% -2.95% -6.58% -4.47% 11.51% 87.14% 13.98%1.09% 8.63% -12.10% -8.03% -6.75% -3.95% 11.33% 92.09% 18.79%0.95% 6.18% -14.49% -13.12% -6.91% -3.45% 11.14% 97.04% 23.62%0.81% 3.73% -16.89% -18.21% -7.08% -2.94% 10.96% 101.99

%28.43%

0.67% 1.29% -19.28% -23.29% -7.27% -2.41% 10.77% 106.95%

33.25%

0.54% -1.16% -21.68% -28.37% -7.44% -1.90% 10.58% 111.90%

38.07%


Table 6 AAPL & Competitor Financial Ratios

AAPL BBRY GOOG HPQ IndustryMarket Cap: 692.74B 5.21B 361.17B 69.60B 822.52MEmployees: 92,600 8,057 53,600 302,000 840Qtrly Rev Growth (yoy): 0.3 -0.34 0.07 -0.03 0.16Revenue (ttm): 199.80B 3.65B 66.00B 111.45B 560.07MGross Margin (ttm): 0.39 0.51 0.61 0.24 0.23EBITDA (ttm): 67.66B 696.00M 21.48B 13.15B 20.99MOperating Margin (ttm): 0.3 -0.01 0.25 0.08 0.03Net Income (ttm): 44.46B 755.00M 13.93B 5.01B N/AEPS (ttm): 7.39 -1.43 21.02 2.62 0.02P/E (ttm): 16.1 N/A 25.26 14.48 24.78PEG (5 yr expected): 1.09 -1.23 1.53 1.96 1.24P/S (ttm): 3.5 1.44 5.44 0.62 1.22


*Data acquired from Yahoo FinanceBBRY = BlackBerry Limited GOOG = Google Inc. HPQ = Hewlett-Packard

Table 7 CAT & Competitor Financial Ratios

CAT DE KMTUY VOLVY IndustryMarket Cap: 50.71B 30.65B N/A N/A 1.39BEmployees: 114,233 59,600 47,208 92,822 2.63KQtrly Rev Growth (yoy): -0.01 -0.05 0.06 0.01 0.2Revenue (ttm): 55.18B 36.07B 17.02B 34.29B 959.95MGross Margin (ttm): 0.27 0.3 0.29 0.22 0.25EBITDA (ttm): 8.93B 6.03B 3.01B 1.76B 73.23MOperating Margin (ttm): 0.1 0.13 0.13 0.03 0.06Net Income (ttm): 3.70B 3.16B 1.37B 254.36M N/AEPS (ttm): 5.88 8.63 1.43 0.13 1.05P/E (ttm): 14.24 10.32 14.2 89.71 15.73PEG (5 yr expected): 1.81 -7.22 6.39 1.71 1.41P/S (ttm): 0.91 0.85 N/A N/A 0.87*Data acquired from Yahoo FinanceDE = Deere & Company

KMTUY = Komatsu Ltd.

VOLVY = AB Volvo

Table 8 DIS & Competitor Financial Ratios DIS TWX FOXA Industry

Market Cap: 172.90B 67.53B 72.39B 712.30M

Employees: 180,000 34,000 27,000 730

Qtrly Rev Growth (yoy): 0.09 0.03 -0.01 0.13

Revenue (ttm): 49.90B 30.77B 32.58B 385.63M

Gross Margin (ttm): 0.46 0.46 0.34 0.4

EBITDA (ttm): 14.40B 8.23B 6.96B 23.79M

Operating Margin (ttm): 0.24 0.24 0.18 0.05

Net Income (ttm): 7.84B 4.29B 9.30B N/A


EPS (ttm): 4.5 4.55 4.21 0.02

P/E (ttm): 22.62 17.71 8.09 25.83

PEG (5 yr expected): 1.32 1.38 1.16 1.16

P/S (ttm): 3.48 2.19 2.19 1.96*Data acquired from Yahoo FinanceTWX = Time Warner Inc.FOXA = Twenty-First Century Fox, Inc.

Table 9 ATVI & Competitor Financial Ratios ATVI EA SNE TTWO Industry

Market Cap: 15.87B 16.83B 28.10B 2.50B 460.51M

Employees: N/A 8,300 N/A 2,530 960

Qtrly Rev Growth (yoy): 0.04 0.39 0.07 -0.72 0.04

Revenue (ttm): 4.41B 4.45B 67.89B 978.06M 208.92M

Gross Margin (ttm): 0.65 0.69 0.25 0.5 0.54

EBITDA (ttm): 1.27B 1.11B 3.42B -20.55M 5.02M

Operating Margin (ttm): 0.27 0.2 0.01 -0.04 0.03

Net Income (ttm): 817.00M 847.00M -1.88B -66.04M N/A

EPS (ttm): 1.13 2.59 -1.78 -0.83 N/A

P/E (ttm): 19.5 20.93 N/A N/A 21.27

PEG (5 yr expected): 2.38 1.5 N/A 0.62 0.68

P/S (ttm): 3.61 3.84 0.43 2.6 2.16*Data acquired from Yahoo FinanceEA = Electronic Arts Inc.

SNE = Sony Corporation

TTWO = Take=Two Interactive Software Inc.

Table 10 SU & Competitor Financial Ratios


SU PVT1 IMO IndustryMarket Cap: 43.92B N/A 33.51B 96.90MEmployees: N/A N/A N/A 42Qtrly Rev Growth (yoy): -0.09 N/A -0.03 0.13Revenue (ttm): 32.05B 21.80B1 28.46B 45.85MGross Margin (ttm): 0.54 N/A 0.14 0.64EBITDA (ttm): 8.63B N/A 4.93B 2.53MOperating Margin (ttm): 0.14 N/A 0.14 0.09Net Income (ttm): 2.17B 1.71B1 3.04B N/AEPS (ttm): 1.48 N/A 3.58 N/AP/E (ttm): 20.56 N/A 11.05 13.84PEG (5 yr expected): 5.73 N/A 2.66 0.26P/S (ttm): 1.42 N/A 1.2 3.1*Data acquired from Yahoo FinancePvt1 = Husky Energy Inc.IMO = Imperial Oil Ltd.

Industry = Independent Oil & Gas

Table 11 PEP & Competitor Financial Ratios

PEP KO DPS Industry

Market Cap: 144.77B 186.02B 15.18B 931.77M

Employees: 274,000 130,600 19,000 2.04KQtrly Rev Growth (yoy): 0.02 0 0.03 0.14Revenue (ttm): 66.85B 46.17B 6.08B 1.34BGross Margin (ttm): 0.54 0.61 0.6 0.46EBITDA (ttm): 12.79B 13.13B 1.46B 124.89MOperating Margin (ttm): 0.15 0.24 0.2 0.07

Net Income (ttm): 6.94B 8.04B 709.00M N/A

EPS (ttm): 4.52 1.8 3.56 0.27P/E (ttm): 21.4 23.61 21.91 23.04PEG (5 yr expected): 2.96 5.6 2.53 2.24P/S (ttm): 2.15 3.91 2.49 1.5*Data acquired from Yahoo FinanceKO = The Coca-Cola CompanyDPS = Dr Pepper Snapple Group, Inc.


MDLZ = Mondelez International, Inc.

Table 12 HOLX & Competitor Financial Ratios

HOLX ALR IndustryMarket Cap: 8.42B 3.56B 107.44MEmployees: 5351 17,600 154.0Qtrly Rev Growth (yoy): 0.07 -0.02 0.17Revenue (ttm): 2.55B 2.96B 63.32BGross Margin (ttm): 0.63 0.48 0.57EBITDA (ttm): 914.4M 546.55B 1.80MOperating Margin (ttm): 0.16 0.05 -0.02Net Income (ttm): 51.80B -177.61M N/AEPS (ttm): 0.18 -2.02 N/AP/E (ttm): 167.06 N/A 32.66PEG (5 yr expected): 2.44 1.95 1.75P/S (ttm): 3.29 1.14 3.51


ALR = Alere Inc.

Table 13 OTEX & Competitor Financial Ratios

OTEX EMC IBM ORCL IndustryMarket Cap: 7.18B 54.07B 157.13 193.18B 246.25MEmployees: 8,000 N/A N/A 122,000 474.00Qtrly Rev Growth (yoy): 0.29 0.06 -0.13 0.04 0.23Revenue (ttm): 1.86B 24.44B 92.79B 38.82B 145.77MGross Margin (ttm): 0.72 0.62 0.50 0.61 0.67EBITDA (ttm): 557.03M 6.31B 23.03B 16.94B 4.98MOperating Margin (ttm): 0.22 0.18 0.20 0.39 -0.04Net Income (ttm): 272.91M 2.71B 15.75B 10.90M N/AEPS (ttm): 2.23 1.32 11.90 2.40 N/AP/E (ttm): 26.52 20.64 13.33 18.30 30.35PEG (5 yr expected): 1.71 1.42 2.16 1.72 1.05P/S (ttm): 3.83 2.22 1.66 4.91 3.55

*Data acquired from Yahoo FinanceEMC = EMC CorporationIBM = International Business Machines Corporation


ORCL = Oracle Corporation

Figure 1: Portfolio vs S&P 500 (Jan 1, 2015 – April 6, 2015)

-40.00000% -30.00000% -20.00000% -10.00000% 0.00000% 10.00000% 20.00000%

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-1.00%

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2.00%

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Portfolio vs S&P 500 (Jan 1, 2015 - April 6, 2015)

*Data Acquired from Yahoo Finance


Figure 2: 2015 Portfolio vs. S&P

-4.00%

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0.00%

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2.00%

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2015 Portfolio vs. S&P

Portfolio ReturnsS&P



References

Skypala, Pauline. "Throw out Oil Stocks to Avoid Sector Risks." Financial Times. N.p., n.d. Web. 16 Apr. 2015. <http://www.ft.com/intl/cms/s/0/54e388a2-e134-11e4-9b30-00144feab7de.html#axzz3XO4ivle2>.

Stoffel, Brian, Tamara Walsh, and Demitrios Kalogeropoulos. "Three Stocks We're Buying Again." USA Today. The Motley Food, 16 Feb. 2015. Web. 16 Apr. 2015. <http://www.usatoday.com/story/money/2015/02/16/three-stocks-were-buying-again/23508337/>.


gateway capital resubmitted final report

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