1. of1 11 Cooper Strout
Cooper Strout
Duff Bergquist
Personal Portfolio
May 10, 2016
Risk profile
Cooper is currently in college and does not have a stable income, and neither
does his family. Although Cooper does not heavily rely on his family for income anymore
except for paying college tuition. Cooper primarily lives off of savings, he anticipates a
$35,000 to $45,000 annual salary after graduating from college, he plans on saving
10% or more annually. His current net worth is between $8,000 and $10,000. He
expects to be married soon after graduation and could potentially move to a different
state. Cooper is 21 years old and will be graduating next summer. He expects to have a
secure job out of college which means he will be able to have a higher risk tolerance.
Currently, his need is to pursue capital appreciation, in order to improve his net worth.
He will begin to gradually switch to an income oriented portfolio when he is 30, which is
when he could expect to be starting a family. The goal of the income stocks is that they
will be an additional cash source for his family and for future retirement. He has $3,000,
he is willing to invest but he wants to take incremental steps in order to gain more
experience in strategic asset allocation.
Objectives
Cooper selects a capital growth objective designed to increase asset value. This
means that he will look at higher risk growth stocks and other speculative investments.
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He anticipates having a beta of 3.00 for the time being. Currently he will have an asset
allocation strategy to meet his desire to increase his net asset value. Therefore he will
employ the flexible weighting approach. This approach involves periodic adjustment of
weights for each asset category on the basis of market analysis. This will give him the
opportunity to react to market trends in order to benefit from them. Cooper wants to
continue researching stocks on his own; this means that for now he will have two stocks
that he has thoroughly researched. The rest of the portfolio will be run by professional
managers.
Economic Outlook
2015 was a rather volatile and sluggish year for markets due to certain key
factors. Some of those factors include a slowing Chinese economy, political and
economic threats in the European Union, and decreasing commodity prices led by the
decline in the price of oil. Europe experienced monetary easing policies with countries
implementing lower or even negative interest rates. U.S. GDP, however, managed to
grow by 2.4% in 2015. The World Bank estimates 2016 world GDP growth will be 2.7%
due to a slight recovery of advanced economies along with the stabilization of
commodity markets. Even though all financial markets experienced a bearish start to
the year, markets quickly recovered and have expanded thus far through 2016.
Although as speculation remains as to whether China can recover from its sharp
decline, the U.S. and global markets have been held back as a result. Looking forward,
we still have a bullish perspective on the global and domestic economic predictions.
Therefore we will continue with our riskier asset allocation strategy.
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LIST OF INVESTMENTS
Play money
The breakdown between asset classes is as follows: 60% will be personally
researched stocks and 40% will be mutual funds. Because he will be using the flexible
weightings approach, he will change it relative to shifts in market conditions and
expectations. The ultimate goal of his weighting approach is to give equal 20%
weightings to US stocks, foreign stocks, cash, and real estate. He wants to employ this
strategy by the time he is 30 years old. That means that for the next nine years he will
invest aggressively in order to build net worth.
The first stock will be Shiloh Industries Incorporated. Shiloh is traded on the
NASDAQ, Its ticker is SHLO. It is a metal fabrication company in Ohio with a market cap
at $115M. The company makes light weight auto components for car manufacturers.
The Industry is going through a major shift towards building product with aluminum
rather than the traditional steel. Many of Shiloh's competitors are remaining with steel,
although the industry macroeconomic trends are pointing towards a new solutions in
light weighting methods. This is because the corporate average fuel efficiency
standards (CAFE), set by the federal government have dramatically increased from 34
MPG to 54.5 MPG in 2025. As car manufacturers try to meet this goal, they have two
options, those being change the energy source or use lighter materials to make the
vehicle. It is estimated that car manufacturers will triple the amount of aluminum in new
cars within the next 5 years. In Shiloh's industry, one major player is in a good position
to benefit from the paradigm shift, that being the $14B market cap company Alcoa.
Shiloh being a small company, is more volatile than its big competitors and has fallen
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under the radar, leading us to further believe that it is undervalued. Shiloh and its
industry have room to grow after being beaten down buy low steel prices after the
Chinese demand for steel had significantly declined while their supply of steel had
dramatically increased. We are assuming that Shiloh will benefit from this influx in
aluminum demand as they are one of the few companies that are increasing their
aluminum production capabilities to meet the future demand. The stock currently trades
at $6.60 and according to our calculations, due to their current positioning and future
cash flows, they are worth $12.03 per share. It is anticipated that the stock will hit this
price by the end of the year. Although there are some risks associated with this stock,
one being their small customer base. Around 65% of their customer base is made up of
four companies, that means if Shiloh were to lose any one of these customers, their
future cash flows would be significantly decreased, resulting in a lower stock price. This
is one of the risky securities that will hopefully yield a high return with the objective to
grow net worth.
The next stock will be Ryder Systems which will have a 20% upside. It is
currently trading at $68 and it has a market cap of $3.34B. Ryder provides
transportation outsourcing, supply chain management, packaging and warehousing
services. 85% of its revenue comes from the United States, and as we foresee the US
GDP increasing around two percent in the next year we anticipate the stock reaching its
target price of $79. The growth catalyst of Ryder is that businesses we'll switch to
outsourcing because it is more cost efficient. Currently only 10% of transportation and
logistics businesses are outsourcing and with and an over $200 billion market of
outsourcing shows growth opportunities for Ryder. Ryder has three business segments,
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Fleet Management Solutions, Dedicated Transportation Solutions, and Supply Chain
Solutions. There are four reasons why companies should outsource, The first being the
increased vehicle cost and complexity, the increased government regulation, and capital
access and focus. As the transportation system gets more complicated companies will
need to hire an external company to do the transportation for them so that they can
focus on their core business. 63% of their revenue comes from long term (7 year)
contracts, while the rest come from various short term sources. Ryder is separated by
their dedication to technological investments, such as the customer web portal which
gives the customers 24/7 access to operating and maintenance information about their
fleet. Also the RydeSmart® Telematics which is a cloud based software GPS
integration. This decreases field consumption by 10-15% and has helped lead to 99.1%
on time deliveries. The company’s growth strategy is to utilize total cost of ownership to
emphasize the positives of outsourcing. Also to provide more flexibility to customers
while retaining the security of a dedicated plan. Ryder has 3 plans FMS, DTS, and SCS.
FMS is a full rental service, DTS provides vehicles and drivers, and SCS is a
comprehensive supply chain solution where Ryder does all the supply chain work. 63%
of their work is in FMS but they want to increase the amount of DTS contracts in the
next five years. DTS utilizes the cost of ownership to emphasize the perks of
outsourcing. It also provides more flexibility to customers while retaining the security of
a dedicated plan. Ryder wants to shift its largest FMS customers to DTS plans because
the margin is bigger, also it would increase their revenue 4-5x and it would increase
return on capital and have a higher customer retention rate. Ryder’s size aligns with the
industry average, but the most alarming is that its EPS growth has far outpaced its
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competitors, this is due to their recent acquisitions. They have room to improve on their
ROA and ROE but with their new strategy of higher margins those numbers should rise.
In conclusion, Ryder is poised to benefit from the market trends of long term logistics
outsourcing along with their internal improvements and their expanding fleet. The target
price is $79.29 a 20% upside. This stock also has the potential to significantly help
Cooper achieve his financial goal by increasing his net asset value
Aggressive Growth Mutual Funds
Knowing that Cooper wants capital appreciation, he needs to grow his current net
asset value of $3000. In order to to this he will invest the rest his cash in aggressive
growth mutual funds.
The first fund will be Primecap Odyssey Aggressive Growth mutual fund. The
objective of this fund is long term capital appreciation. The fund has historically invested
most of its assets in mid to small cap companies in the U.S.. Its YTD return is 6.5%
which is beating the broader markets. Also its 1 and 3 year returns are 17% and 26.3%.
The expense ratio is 0.62% which is low considering the industry average is 1.31%. Its
top holdings are Ellie Mae Inc at 3.88%, 3.72% Abided Inc, 3.01% Sony Corp, 2.98%
United Continental holdings, and 2.82% BlackBerry. In total this accounts for 16.41% of
its entire portfolio value, which is $6.1B. In terms of sector weightings the top 5 are:
32.6% technology, 27.2% healthcare, 15.4% consumer discretionary, 14.7% industrials,
and 2.9% financials. This fund searches for companies that are undergoing changes in
either: new products, markets, management, restructuring, structural shift in demand/
supply, or changes in industry dynamics. Typically the stocks have low or no current
income which gives significant opportunity for growth. It has a 10 year beta of 1.11.
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We believe that this is a fitting buy because of the uncertain market conditions
occurring today. There are many small-mid cap companies that are poised for immense
growth, in these sectors of the U.S. economy. We are most confident in the U.S.
economy because the it is more secure than the global markets due to consumer
drivenness.
The next growth fund will be Vantagepoint Aggressive Opportunities Investor
mutual fund. The objective of the fund is to attain capital growth. It holds small to mid
cap domestic and foreign stocks which the managers believe have high growth
potential. Its YTD return is 5.4% which has also beaten its benchmark. The 1 and 3 year
returns are 8% and 15.4%. It also has an expense ratio of .83% which is smaller
considering the category average of 1.31%. The fund has 91.87% of its value in
domestic stocks, 5.31% in foreign stocks, and 3.72% in cash. It’s top five holdings are
as follows: 4.3% Fidelity Institutional Money Market, 1.59% Level 3 Communications
Inc, 1.32% SBA Communications Corp, 1.31% ServiceMaster Global Holdings Inc, and
1.15% Wynn Resorts Ltd. By sector it has 25% in industrials, 20.5% Consumer Cyclical,
14.8% technology, 10.8% healthcare, and 5.7% financial services. The fund has a
turnover rate of 56.08% of the average value of the portfolio. The management of this
fund is a multi management strategy, although the people who have been working the
fund have been in the business for a minimum of 10 years. They choose stocks that are
in the Russell Midcap® Growth Index, in this they expect capital growth appreciation. It
has a beta of 1.02 and has a net asset value of $985M.
We believe that this is a fitting buy because it is another growth stock. It has
more exposure to the industrials, technology, and healthcare that have previously been
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mentioned in the last mutual fund. An attractive aspect about this fund are the low fees,
the fund also has a high turn over rate but no turnover fees. Since Cooper does not
have much money to spend on fees right now, the objectives, and ratings of this fund
seem to be a good fit for Cooper and his current needs. We are also believers in the
potential in the industrials sector, therefore we are comfortable taking the risk of adding
more exposure to industrials.
The third mutual fund is ClearBridge Aggressive Growth A. This fund invests in
companies whose growth or earnings exceed the average rate of earnings growth of
companies that are part of the S&P 500. Contrary to the other funds, this one invests in
large cap companies which the managers believe will grow over the long term. The
objective of this fund is to find undervalued large cap companies in order to achieve
capital growth. The fund has a YTD return of 3.1%, 1 and 3 year returns of 10.1% and
20.7%. The fund carries a 1.15% expense ratio compare to industry average of 1.20%.
It has a beta of 1.02 and an annual holdings turnover of 3%. In regards to industry
weightings it has 34.47% healthcare, 23.4% technology, 11.83% energy, 10.86%
telecommunications, and 10.45% consumer cyclical. Its top 5 holdings are 8.7%
UnitedHealth Group Inc, 6.8% Biogen Inc, 5.84% Allergen PLC, 5.81% Comcast Corp
Class A, and 5.78% Amgen Inc. The entire fund is worth $12.4B. This fund is managed
by two men who have a combined investing experience of 70 years.
We are choosing this mutual fund for Cooper because of the management
experience of the team. This fund is to provide support for the rest of the portfolio. It has
a lower beta but still has the same objectives as Cooper, therefore we have chosen this
fund. Even though there is more exposure to the healthcare, technology, and industrial
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sectors, it still seems a sound investment because of the management professionals
working on it.
Cooper’s portfolio is weighted as 40% in Shiloh Industries with a beta of 2, 20%
in Ryder Systems with a beta of 1.52, 20% in the Primecap mutual fund with a beta of
1.11, 10% in Vantagepoint with a beta of 1.02, and 10% in ClearBridge with a beta of
1.02. This means that the weighted portfolio beta is 1.53.
Cooper has a significant amount of exposure to the healthcare, industrials, and
technology sectors. In order to hedge against this risk Cooper can buy put options
against these sectors. If he does this then if the sectors were to go down, he would
have a hedged bet against them so that he will not lose as much money had he not of
had put options.
Cooper also has the opportunity to increase his yield and increase his beta
portfolio. He can buy call options on either Shiloh, Ryder Systems or the Primecap
mutual fund. He has decided that these would be the stocks/fund to buy call options on
because they are the ones he feels the most confident about. This is a way to maximize
his return through leverage, which could be a beneficial aspect but it could also add
unnecessary risk to his portfolio.
Based on Cooper’s research he expects to see an 86% upside on Shiloh
Industries, which is his main bet to meet his goal in the short term. Ryder is expected to
make a 20% upside. If these go according to plan, it will significantly help meet his short
term goals, these are 5 year target prices. With the other mutual funds, it depends on
how the economy turns out after the current turbulence. If the global environment
increases demand for goods, we expect to see returns between 8-17% for all of them.
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But individually we expect Primecap to earn 17%, Vantagepoint to earn 8%, and
Clearbridge to earn 10.7% over the course of 5 years. Assuming that all goes to plan
and if he were to invest $3,000 into this portfolio plan, in three years he would increase
his investment 144% which would be a $7,310 profit. This would mean that Cooper
would be meeting his first step towards meeting the goal of capital appreciation within
his first 5 years out of college.
Theoretically if he gained a $5,000 increase in his salary every two years, and
invested 20% and received a minimum 10% interest, he would be well on his way to
making his way towards the $10,000,000 goal. It would be in his best interest to stay out
of higher tax brackets, therefore he should get a Roth 401(k) or a Roth IRA to bypass
higher tax brackets. Accordingly, if all goes to plan, Cooper will have a healthy
retirement bundle at 65 as when he decides to retire so that he can have a stable
source of income generating stocks. But we want Cooper to have a buffer in getting
there, so he is pursuing riskier investments at this time.
