The Million-Dollar Investment

Corporate Finance Timothy Kerley

Financial Portfolio
While creating my portfolio, I first thought about my personal risk tolerance. I am a 23-year-old single male that was just given $1,000,000 to invest however I wanted. I am going to be taking a lot more risk now than I would be as a 45-year-old man with a family. Secondly I thought about my long-term financial goals, everything I plan on investing in is for the long term. I am not trying to invest in order to get rich quick. I would like to retire by age 50; key word is like. Now if I have invested this $1,000,000 correctly I feel like most of the investment will grow enough over a 27-year and help me reach my goal of retiring at 50. I tried to invest in stocks that show I have a very diverse portfolio. The way I did this was by choosing stocks from many different industries. I ended up investing in a Bank, Natural Gas, Biotechnology, Entertainment, Resorts & Casinos, Internet Information Provider and Semiconductor Equipment and Materials. I also tried to diversify my portfolio by choosing stocks that varied in risk, some high risk, a lot of medium and a few low risks. While trying to decide which stocks would be the most valuable to me I looked a few factors. One of which is the companys dividend and

dividend yield. This way I can see what they pay the investors and I could compare the yield to others in the industry. I also looked at each stocks beta in order for me to tell the risk factor associated with the stock. I then took a look at market capital, PEG Ratio, P/E Ratio and forward P/E Ratio. The P/E ratio will help me determine if the price of the stock is relative to its earnings. Also the forward P/E ratio can give you an estimate as to if the company predicts more earnings for the upcoming year. Another step I took was to look at the stock value over the past 5 years and compare it to the S&P 500 to see how it stacks up against the market average. I also looked at graphs comparing multiple companies in an industry to compare the value and trends. The more risky investments showed a lot of up and downs following no pattern while the safer, less risky, stocks followed an simple pattern of a steady climb up.

Las Vegas Sands Corp (LVS)

Las Vegas Sands Corp. is an American company based in Paradise, Nevada that operates and runs resorts and casinos. The company is one of the leading developers of destination properties in the world. The resorts feature high-end accommodation, gaming and entertainment, convention and exhibition facilities and celebrity chef restaurants and clubs. Some of the most famous Las Vegas Sands resorts are located on the Las Vegas Strip and they are The Venetian and The Palazzo both of which are rated as Five-Diamond. After reviewing Las Vegas Sands Corp I decided to purchase 1,872 shares at 56.49 a share, which cost me $100,000. Sands Corp has a P/E ratio of 28.87, which is extremely high, but I expect the companys earnings to increase significantly over time and that will make the investment well worth it. With that being said the forward P/E ratio is 17.23 so earnings are expected to go up after this year. The company also has a PEG ratio of 1.58, which shows that the stock is a little over priced at the time but that is not always the case. Comparing Las Vegas Sands Corp to the Industry and Competition it shows LVS has a Market Capital of 45.13 billion while Caesars

Entertainment Corp has a Market Capital of 2.06 billion and MGM Resorts has a 6.38 billion-market capital. The industry as a whole has a Market capital of 1.57 billion. This shows that LVS is a large cap corporation, which usually means it will have a lower risk and lower return than those companies that are mid to small cap. However, LVS has a Beta of 1.72, which would mean that there is still quite a significant amount of risk involved while investing in the company. Some information I was able to calculate from the stock summary on Yahoo Finance included the return on equity of 16.76%, which I was able to get from using the Capital Asset Pricing Model. I also calculated that the WACC of the company is 14.02%. Some investors use the WACC to value companys shares in order to help them decide on investing or not investing. A higher WACC is less likely to create value because the company would have a higher borrowing cost. The graph on the next page shows Las Vegas Sands Corp in comparison to S&P 500 or the market average. You can see LVS has been preforming just below the market average for the past couple years but with earnings expected to go up in the future I would hope LVS would jump north of the S&P 500.

Time Warner Inc. (TWX)

Time Warner was founded in 1989 and is an American cable telecommunications company that is based out of Manhattan New York. They operate in 28 states throughout the country and Time Warner is an S&P 500 Component on the NYSE. After reviewing Time Warner I decided to purchase 1,661 shares at $60.19, which costs me $100,000. Time Warner has a P/E ratio of 19.48, which, just like LVS, is a little high but has some potential in the future because the forward P/E ratio is 14.13. This indicates that earnings next year are expected to be higher than the current years earnings. The PEG Ratio of TWX is 1.27. Anything over 1 for a PEG ration means the stock could be overpriced. While comparing Time Warner to the competition and to the industry I found that Time Warners Market Capital is 56.27 billion. This shows

that TWX is a large cap company and should be a pretty safe investment. However, the Industry has a Market Capital of 264.35 million and the leader competitor Disney has a Market Capital of 111.83 billion. In comparison with the other 149 companies in the industry Time Warner is ranked 6th in Market Capital and ranked 4th in annual dividend yield. Time Warner also has a Beta of 1.24 so there is some minor risk involved while investing in the company. While looking over the Time Warner stock summary I was able to gather all of the necessary information needed in order to calculate both the CAPM and the WACC. The return on equity came out to be 12.92% while the WACC came to be 10.64%.

Vertex Pharmaceuticals Incorporated (VRTX)

Vertex Pharmaceuticals Incorporated was founded in 1989 and is based in Cambridge Massachusetts. Vertex is one of the leading biopharmaceutical companies around. Their focus is in the business of discovering, developing, manufacturing and commercializing small molecule drugs for the treatment of serious disease. Some of the diseases Vertex focuses on are Hepatitis C (HCV), Cystic Fibroses Rheumatoid arthritis and influenza. After looking over Vertex Pharmaceuticals I decided to buy 1,822 shares at $82.33 a share, which costs me $150,000. Now when reviewing the stock summary of Vertex it does not look like a good investment right away. They have a PEG ratio of -8.39, which should act as a red flag but is not necessarily a bad thing all the time. From what I have read a company will not grow earnings while it is improving its cash flow significantly so this could be the reason for a negative PEG ratio. I was also able to gather all the information to calculate both the CAPM and the WACC for Vertex. The answers I received from my calculation include a return on equity of 5.16 % and

WACC of 5.10%. With Vertex also have a Beta of .27 it is safe to say that is a very non-risky investment. In comparison with the industry on top competitors I was able to see that Vertex has a Market Capital of 17.68 billion while Merck & co has a Market capital of 144.92 billion and the industry has a 313.08 million Market Capital. Since I am not investing for quick cash but more for a solid increase over time. I am basing this investment off of historic data and trends with Vertex rather than basing my investment off of todays numbers alone. Below shows the comparison of Vertex with S&P 500 over the last 5 years. The graph clearly shows a slight increase over five years and is consistently above the market average, especially recently with a huge spike to over 200%.

Google Inc.
Google is an American multinational corporation that specializes in Internet related services and products. Google is by far one of the most recognized names in modern day because it is where we all go to find information on the Internet. Google was founded in 1998 and went public in August of 2004 and is an S&P 500 component as well as NASDAQ. After reviewing Google I have deiced to purchase 312 shares at $800.11 a share, which will cost me $250,000. Googles P/E ratio is 23.94 but their forward P/E shows an estimate of 14.91. This drop in P/E is a good indicator of greater earnings for next year in comparison to this current year. The company also has a PEG ratio of 1.10 while the industrys PEG ratio is at 1.65. This shows that Googles stock is currently at a lesser value than that of the industry. Googles Market Capital is currently at 264.40 billion while some of the top competitors like Yahoo and Facebook are at a Market Capital of 27.43 billion and 62.20 billion. The industry as whole sits at 61.89 billion in Market Capital.

Using the information I found on Google via Yahoo Finance. I was able to calculate the return on equity at 12.20% by using the CAPM formula. I also found that Google has a WACC of 11.98% by using all the information needed for the WACC formula. Below is a graph that compares Google to the S&P 500 over the past 5 years. You can clearly see that Google and the S&P 500 reflect off each other and follow very similar lines. However, Google has had more dramatic ups and downs. This year shows a big increase with Google, as it is more than 20% over the market average.

Goodrich Petroleum Corp. (GDP)

Goodrich Petroleum Corporation is an independent exploration and production company that drills for, acquires, develops and produces natural gas and crude oil. They are based primarily in East Texas and North Louisiana. Right now GDP is not looking good but I will explain what I have found. After reviewing Goodrich Petroleum I have decided to purchase 3,729 shares at $13.41 a share, which would cost me $50,000. Goodrich Petroleum Corp currently has a PEG Ratio of -1.36 and a Market Cap of 522.71 Million. If we compare this to the Industry and other competitors we find that the PEG for the Industry is at 9.08 and has a Market Capital of 129.45 million. Also Abraxas Petroleum Corp, a competitor of GDP, has a PEG of .96 and Market Cap of 202.95 Million. The beta of Goodrich Petroleum is at 2.33 which indication a lot of risk for your investment. I looked at a lot of historical prices and data associated with Goodrich Petroleum and they have been on a steady decline for over a year now. However with one of the top Market Capitals in the industry I feel like GDP will rebound and start creeping back up. With prices this

low there is potential for a great reward. Buy lowsell high Warren Buffet. The graph below is showing the comparisons between Goodrich Petroleum and S&P 500. While the S&P 500 has been on a slow climb upwards, GDP fell for half the year and now is trying to recover. GDP is currently around 20% below the market average. This is by far the most risky investment I am going to make and I am very interested to see what will happen over time.

Bank of America Corporation

Bank of America Corporation is an American multination banking and financial services corporation. They are based out of Charlotte North Carolina and are the second largest bank holding company in The United States by assets; Forbes Magazine also lists Bank of American as the third biggest company in the world. They are traded as an S&P Component along with the Dow Jones Industrial Average. After reviewing Bank of America I have decided to purchase 8,532 shares at $11.72 a share, which will cost me $100,000. Using Yahoo Finance I was able to determine some key factors in investing in Bank of America. They have a beta of 1.78, which shows there is a pretty good amount of risk involved with this investment. They have PEG ratio of .53, which indicates the price for the stock is under valued and is a good purchase. Also, Bank of America has a P/E ratio of 27.77 and a forward P/E of 9.02. I may be wrong but this is huge estimate for next years earnings. The drastic drop in P/E indicates that earnings next year are expected to be a lot more than the current year. That combined with the undervalued stock price already proves this is a good buy.

With the information given on Bank of America, under key statistics, I was able to calculate the return on equity and WACC. What I found was a return of equity of 17.24% and a WACC of 9.63%. The graph below shows a big increase over the passed year for Bank of American when being compared to the market average of S&P 500. The last half of the year is almost triple what the market average is which is a very good sign and great information to know when investing into the company.

Cree, Inc. (CREE)

Cree Inc is a multinational, manufacturer of semiconductor materials and devices. They are based out of Durham, North Carolina and are widely known for their improvements in light-emitting diode (LED) technologies. They were founded in 1987 by researches from North Carolina State University and is traded as NASDAQ. After reviewing Cree Inc I have decided to purchase 2,701 shares at $55.54 a share, which will cost me $150,000. While looking over the summary of the Cree stock, we can see that they have a Market Capital of 6.44 billion along with a P/E ratio of 115.71, a forward P/E ratio of 31.20 and a PEG ratio of 2.46. This tells us that currently I am paying a little too much for the stock but if the estimated for the forward P/E are correct, earnings for next year will jump up and gain me more value. A market capital of 6.44 billion lets us know that there is some risk involved with the company because it is a mid-cap company. We also know there is potential risk because Cree has a beta of 1.47 and anything over 1 is considered to be more risky. Some other information I was able to gather off of the stock summary is that Cree has a return on equity of 14.76% and a WACC of

around the same, 14.75%. While being compared to the Industry as a whole Cree Inc seems to be a good purchase. The Industry has a market capital of 235.65 million and PEG ratio of 7.19, which is really high. Below is a graph comparing Cree Inc. to the market average using the S&P 500. You can clearly see that towards the second half of the year Cree Inc. jumped up a lot and is more than 50% above what the market average is at the time.

Conclusion
After looking over all of my investment I am pretty proud of the ones I was able to find and invest in. I attempted finding companies out of the norm but also ones that would give me the return I want. Spreading out the 1,000,000 over 7 different stocks in 7 different industries should work out in the long run. I also calculated that the my portfolio beta is currently at 1.43 which lets you know that I am taking a lot of risk with the stocks I decided to purchase but I also believe some of the stocks are still a pretty safe bet. I am basing this off of the 5-year graph, which shows a steady increase over time. As time goes on the stocks will eventually go up. On the following page there are two graphs that explain my portfolio a little bit more.

Stock Price

Value

Historic Beta Last No. of Total 1yr Dividend Shares Investment Return 3.43 11.69 8.69 61.48 -4.41 6.05 11.94 1.72 1.24 0.27 1.15 2.33 1.78 1.47 1.40 1.15 N/A N/A N/A .04 N/A 1,872 1,661 1,822 312 3,729 8,532 2,701 $100,000 $100,000 $150,000 $250,000 $50,000 $100,000 $150,000

LVS TWX VRTX GOOG GDP BAC CREE

$56.49 $60.19 $82.33 $811.16 $13.41 $12.51 $55.54

$140.41 $100.77 $6.79 1469.45 $0 $3.84 $29.18

Listed above is a graph of my entire portfolio. The betas highlighted in red indicate above average risk and as you can see I am taking a lot of risk with my investments. The beta highlighted in blue indicates it is a very safe investment with little risk involves. The graph on the final page shows how I diversified my portfolio into seven different industries. I did this in order to spread out by investments in hope of gaining higher values. It would not be smart to invest in two companies that are competing in the same industry. I know how you like colorful graphs so I did my best to make them pretty.

Portfolio Overview
Independent Oil & Gas 15% 5% Internet Information Provider 25% Semiconductor Equipment & Materials Banks 10% 10% 15% Entertainment Resorts & Casinos

10%