Strategy
The strategy for stock investing is a function of the underlying stocks that are to be contained in the portfolio. Although the strategy should be representative of the mathematical expectation of a reasonable risk to return ratio that provides a risk frontier to properly gauge the investment, we sometimes make investments based on stocks we like regardless of its current price. If a person thinks the stock is a good company, they may purchase shares with the belief that in five years the shares will be worth x percent above its current value. Others may invest without caring about the future value of the stock price, or without a specific stock price target. These are generally income investors seeking dividend growth from their holdings. The payment of the dividend, which is not directly correlated to stock price movement, may increase during periods of stock price decline.
The sector fund strategy is a relatively strong strategy that will ensure a relative growth value based on the strongest performing stock in the portfolio. The point of a sector fund is to buy and sell holdings within the sector based on the relative change in value of the stock over the course of a year or every two years, etc. For example, if MSFT is not performing well or is considered to be overbought, selling the shares of MSFT and capturing the growth relative to return for MSFT is the requisite strategy. The portfolio can then add more shares of a stock it is holding until MSFT falls to a price worth purchasing. Additionally, new stocks may be introduced into the portfolio based on valuation metrics relative to the market. The investor does not have to introduce new stocks as this is optional.
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A sector fund portfolio may be enabled by momentum stocks within an inherent growth strategy. At one time PCLN was a $1.00 stock with tremendous growth potential. Today, the stock trades above $1,000.00 share. Therefore, the prevailing strategy may be enabled by underlying fundamentals that favor the market structure relative to momentum swings. Without the underlying momentum, the rate of return is not as robust, which brings into question, which prevailing or primary strategies are most relevant to capturing underlying or secondary strategy? The likelihood of a primary strategy being chosen based on the secondary strategy is more relevant today than in years past. More exogenous market shocks causes investors to either be more risk averse or risk taking relative to their underlying portfolio.
Diversification
The stocks chosen for the portfolio are PCLN, AMCX, THOR, MSFT, NFLX, and CIG. Four of the stocks are in the tech/internet sector and the other two are in television and mining. Primarily, these stocks are in growth stocks in the technology sector which have been rising on momentum in recent months. The prevailing diversification strategy is a function of the underlying investment strategy which can either enable or disenable the prevailing sector fund strategy. Growth stocks, for example that are privy to momentum swings may have exacerbating swings based on underlying revenue and sales growth. The earnings may still be negative but the growth in the core business will cause the stock price to swing upward on its beta coefficient when the broader market rises. Owning the television and mining stocks are diversification of the portfolio by investing in companies with stock prices that have more stability than other stocks.
The first stock, PCLN, was picked because the stock appreciated from $700sh to over a thousand dollars a share this year and is an internet stock that receives heavy consumer traffic due to its popularity as a hub for travel and hotel booking. The strategy for the stock is part of the sector fund portfolio that is part of the growth stock selection of the industry. The momentum of the market during market rises will propel a faster rate of appreciation for PCLN stock. The sector strategy works well with PCLN because Priceline.com is a sector leader in the internet stock sector and is the most widely owned stock among its most competitive peers. The strategy was derived because the stock was selected under the fundamental premise that PCLN is the best stock to own in the Internet sector and can spearhead the portfolio relative to other stock choices.
AMCX was selected into the portfolio because the stock is not correlated with the other stocks in the technology and internet sector. The television stock is a diversification play among the more beta sensitive stocks in the portfolio. AMCX is among the more progressive television stocks given its television lineup including Mad Men which is among the most popular television shows on cable. THOR was selected because it is a medical device company that is among the potentially strongest medical device companies in the medical technology sector. The stock is also not an internet stock and is a derivative of the technology stocks.
MSFT was selected into the portfolio because it’s a technology stock that has been stable over the course of its pricing history. MSFT is not likely to decline in value too much but is likely to generate positive capital appreciation and still pay a dividend. The stock pick stabilizes the risk of the sector strategy. NFLX was selected into the portfolio because it is a technology/internet stock that has growth opportunities in the space that it operates. The stock also fits well into the sector fund strategy which seeks the best internet and technology stocks. CIG was selected because it is a diversification plan on the sector fund strategy. As a mining stock, CIG is likely to do well in times of inflation and during times when commodities are in demand.
The selected stocks are based on a sector fund approach that has targeted the technology and the internet stocks as primary to the growth strategy. Some may include Priceline as a technology stock however the company is still an internet stock which is a subset of the technology stocks. The strategy is based on the expectation of the technology sector outpacing the other sectors of the economy in terms of stock price growth. This expectation is not necessarily based on the earnings of the company, but instead of the expected future earnings of the company relative to its peers and the potential earnings of that particular industry relative to the sector operations.
Question 5
Based on the portfolio strategy, the US market is in the recovery mode within the business cycle. The recovery cycle will help the growth of the fund since the stocks are exposed to the recovery cycle in the economy as people build more cash they will spend on technology and internet sources which will propel the growth of the underlying stocks. The portfolio is essentially invested to safely maximize the business cycle growth within the recovery cycle. Likely would not have changed the portfolio given the parameters of the question. Pressing international impacts on the portfolio include possible sovereign financial issues that could push the prices of commodities higher and create excess demand for precious metals which could drive mining stocks.
- Bodie, Kane, Marcus. Macro and industry analysis of stocks. 2013. Chapter 12
