Relative Performance Analysis Paper
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Using the stock market to invest in securities can be risky but with a little research and a carefully thought out investment strategy the road to financial security can be successful. In this paper, Team A will 1) determine the five-year average return for Walt Disney, Wal-Mart, Time Warner, Dell, Motorola, and US Treasury Bonds, 2) identify the industries of each of these six securities, 3) determine the average five-year average return for each industry, 4) identify three additional stocks in each industry and determine the five-year average return for each security, 5) compare the selected securities’ performance to those in the same industry and to the industry average, and lastly, Team A will determine whether or not changes will need to be made to our investment portfolio.
Walt DisneyWalt Disney (DIS) belongs to the Media Conglomerates industry. Disney has had its highs and lows but has remained well above its peers in the industry with a five-year average return of 18.62%. The industry average five-year return is 12.32%.
Three industry peers of Walt Disney are Time Warner (TWX), CKX, Inc. (CKXE), and Viacom, Inc. (VIA). Time Warner has experienced a five-year average return of 7.74% which is only slightly higher than CKX, Inc. average five-year return of 7.38%. Viacom, Inc. has not proved as successful in the industry with an average five-year return of 1.94%.
Wal-MartWal-Mart (WMT) is part of the Discount, Variety Stores industry. Wal-Mart’s returns have fluctuated greatly over the past five years with an average return of .18%. Wal-Mart still remains above the industry average of -1.98%.
Three industry peers of Wal-Mart include: Target (TGT), Costco (COST), and Family Dollar Stores (FDO). The average five-year return for Target is 12.96% which is much less than Costco with an average five-year return of 21.60%. Family Dollar Stores lags behind in the industry with only an average five-year return of -5.70%.
Time WarnerTime Warner, Inc. (TWX) is a member of the Media Conglomerates industry. Over the last five years Time Warner has held its own within the industry for returns. Time Warner’s five year average return from 2003-2007 is 7.74%, which is slightly above the industry average of 6.28%.
Three industry peers of Time Warner in the media conglomerates industry are Yahoo, Inc. (YHOO), CBS Corporation (CBS) and News Corporation, Ltd. (NWS). Yahoo, Inc. has experienced a five-year average return of 40.62%, CBS has yielded 1.1% and News Corporation, Ltd. has shown 13.06%. In looking at these widely varying averages it is apparent that the five-year average return for the industry may not be where many of the stocks hover, but simply the mean of a wide spectrum of returns.
DellDell, Inc. is one of many companies included in the Computer Equipment industry. Based on the five-year historical returns and the current five-year average, Dell appears to be struggling simply to stay on the positive side of returns at 0.74%. The Computer Equipment industry as a whole has done very well at 19.94% for a five-year average, doubling from 2006 to 2007 at 15.2% and 32.9% respectively.
Three industry peers of Dell, Inc. in the Computer Equipment industry are International Business Machines, Corp. (IBM), Apple, Inc. (APPL) and Hewlet-Packard Company (HPQ). IBM was on a downswing from 2003-2005 but has come back strong with returns of 44% in 2007 for a five-year average of 8.9%. Apple, Inc. is well above its industry peers, consistently outperforming them with a five-year average of 105.06% returns. Hewlett-Packard had a down year in 2004 but has also consistently outperformed Dell and is 7% above the industry average at 26.82% for its five-year average return.
MotorolaMotorola is a global leader in technology solutions and services. Motorola offers a product line that includes wireless devices, handsets, accessories, voice and data communication systems and digital entertainment devices. Motorola currently operates in the communications/wireless equipment industry.
As of January 1, 2008 Motorola had 79,907 stockholders of record (Motorola Annual Report, 2008). Motorola’s common stock par value at the end of 2007 was $3 per share. Motorola’s current stock is trading at $10.33 a share (as of August 15, 2008). Motorola’s stock has had highs and lows over the past 5 years, but for the most part has performed well and increased over that time. The last year has been an exception to that five-year growth, as Motorola stock has declined 42% compared to the same time last year.
Motorola’s five year average stock price is $17.49 (Yahoo Finance, 2008). Up until February of 2008, Motorola’s stock performed very similar to the communications equipment industry, as well as to the S&P 500 for the past five years. Motorola has, in fact, performed better over the past five years than the NASDAQ Composite Index. The five-year average return on Motorola stock is 11.9%. Compare that to the industry average of -2.8% during the same period and Motorola stands out in its industry.
Although Motorola compares favorably to its industry’s five-year average return, that is not the case with its three largest competitors. Nokia has averaged a 16.7% return for the past five years. Qualcomm has averaged a 24.7% return and Ericsson has averaged a 37% return during the same five-year period (Morningstar, 2008).
US Treasury BondUnited States Treasury Bonds, or T-Bonds, are marketable, U.S. debt securities that have a fixed interest rate and very little risk. T-Bonds are issued in various terms (5, 10, 30 years) and pay interest every 6 months until mature. Once a Treasury bond matures, the face value of the bond is paid. T-Bonds are issued through auctions and the purchase amount ranges in price from $1000 to $5 million. The current yield for a 5 year Treasury bond is 3.26 (Yahoo Finance, 2008). The five-year average return on the five-year U.S. Treasury Bond is 3.8% (Federal Reserve, 2008).
ConclusionTo summarize, Team A has calculated the five-year average return for Walt Disney, Wal-Mart, Time Warner, Dell, Motorola, and US Treasury Bonds, identified the industries and industry five-year average return for each of the above securities. In addition, the average five-year return for three additional stocks in each industry has been provided. Based on our findings, Team A has decided it would be beneficial to make some adjustments to our investment portfolio.
Disney stock has performed will over the past five years and remains a strong return on investment, therefore will be kept in the portfolio. Yahoo has provided higher returns of the last five years, but is a fairly new entrant to the Media Conglomerates industry. Time-Warner has remained profitable and will be kept in the portfolio. Wal-Mart has not performed well in relation to some of its rivals. Costco has provided significantly higher returns over the past five years and will be added to the portfolio as Wal-Mart stock is sold.
Dell stock has not provided returns as high as some of its competitors and will be sold. The resurgent Apple stock will be purchased and added to the portfolio in replace of Dell. Motorola, although an industry giant in the communications equipment sector, has provided returns significantly lower than its three closest rivals. Ericsson stock will be added to the portfolio as Motorola stock is sold. Finally, the 5-year U.S. Treasury bond will be kept in the portfolio as it is a low risk investment that will provide consistent, although small, returns.
Federal Reserve. (2008). Federal Reserve Statistical Release – Historical Data. RetrievedAugust 17, 2008 from: http://www.federalreserve.gov/releases/h15/data.htmMorningstar. (2008). Industry Peers. Retrieved August 17, 2008 from:http://quicktake.morningstar.com/StockNet/IndustryPeers.aspx?Country=USA&Symbol=QCOMYahoo Finance. (2008). Bonds Center. Retrieved August 11, 2008 from:http://finance.yahoo.com/bondsYahoo Finance. (2008). Motorola, Inc. Historical Prices. Retrieved August 17, 2008 from:http://finance.yahoo.com/q/hp?s=MOT&a=07&b=18&c=2003&d=07&e=18&f=2008&g=d