Portfolio Project Report 1

Portfolio Project Report

Marsha Patterson

October 6, 2019
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Investment Strategy:

The investment strategy used to generate returns on the investment accounts in this

portfolio is Active Portfolio Management. Active portfolio management focuses on outperforming

the market compared to a specific benchmark. Managers actively chose investments that they

believe will outperform a set benchmark, which is usually a market index such as the S&P500

index or the Russell 1000 index. The downside of active portfolio management is that these active

management funds tend to have higher fees and may not necessarily outperform the market

consistently. (Lioudis, 2019)

The actively managed funds in this portfolio were chosen by combining in-depth research,

market forecasting, and the experience of the portfolio manager. Attention was given to market

trends, changes in the political landscape that may have an effect on any of the companies and

shifts in the economy. The total actual return when using the active portfolio management method

is calculated by adding the risk-free rate to the risk premium and then adding the Alpha.

The stocks selected for this portfolio are detailed below. Each description identifies the

stock, describes why it meets the active portfolio management style analysis grid requirements,

why it was chosen, and how it will appreciate over the next three to five years.

Apple, Inc. (AAPL):

Apple is a technology sector company in the consumer electronics industry. Apple

employs over 100,000 employees. The company designs, manufactures, and markets mobile

communication and media devices, as well as personal computers. Over the past four quarters,

Apple beat earnings estimates 4 times. The company’s innovation outlook is trending down (based

on a current score of 91 out of 99. The company is outperforming the sector average. There has
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been an increase in job growth and the company continues to be an outperformer in terms of

sustainability. (Yahoo Finance, 2019)

Apple’s Environment, Social, and Governance rating (ESG Rating) is very good. The

company has a total ESG score of 72, putting Apple in the 83rd percentile. Its environmental score

is 90 (99th percentile), social score is 60 (56th percentile), and its governance score is 61 (44th

percentile). The most recent return on dividend yield of Apple is 1.4%. Apple depends largely on

its supply chain to assemble and deliver parts for its products. Jabil Inc and Pegatron Corporation

Apple’s top two suppliers. Jabil Inc has an economic value of $7.1 Billion and Pegatron $5.7

Billion. Apple’s exposure to Jabil is 2.16% and Pegatron is 1.51%. Both of these companies are

stable and show no signs for concern for future financial performance. Apple’s top customers

include Foxconn Industrial Internet and Samsung Electronics. Foxconn has an economic value of

$18 Billion and Samsung $17 Billion. Apple’s exposure to Foxconn is 3.17% and Samsung is

7.71%.

Apple’s outlook for the next 3 to 5 years is very positive. An Innovation Index by Trea

shows that the company outperforms its sector competition by 91%. Apple has strategic

positioning of its research and development areas, high potential for the future value of its IP

portfolio, and a positive influence on the impact on its peer industries. The momentum of the

company is lacking somewhat as the intensity of the company’s innovation has lessened.

Some of the latest political events that can potentially affect the company include a

statement released by India IT Minister Prasad on September 24th, where he stated that, “India has

cut tax rates to attract investments, hope Apple hears it”. (Yahoo Finance, 2019) On September

23rd, Apple confirmed that the new Mac Pro will be manufactured in Austin, Texas. This

investment will fulfill a commitment to invest $350 Billion into the U.S. economy by 2023.
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Amazon (AMZN):

Amazon is a retail sale giant of consumer products and subscriptions. The company

operates in North America, internationally, and through Amazon’s web services segments.

Amazon provides compute, storage, database, and other AWS services, including compute,

storage, database offerings, fulfillment, publishing, digital content subscriptions, advertising, and

co-branded credit card agreement services. The company’s ISS Governance Quality Score is 7.

(Yahoo Finance, 2019)

Amazon’s innovation outlook is trending upward. This is based on an overall innovation

score of 98 out of 99. Job growth has decreased over the past year and insider sentiment is

negative. The company is currently underperforming in terms of sustainability. It is most exposed

to its major supplier Lenovo Group Limited. Lenovo has an economic value of $11 billion and

Amazon has a total exposure of 3.17% to the company. Amazon’s other major suppliers include

Comcast Corporation and Nestle S.A. Amazon’s largest customers include Rio Tinto Group,

valued at $14 Billion with an exposure of 3.10% and International Consolidated Airlines valued

at $9.8 Billion with an exposure of 2.21%. Amazon has beat earnings estimates three times over

the past four quarters.

Some of the most significant developments that could affect Amazon include a

disagreement between Amazon and Disney over ad revenues from apps on Fire TV. (Dana

Mattioli, 2019) Amazon is also facing another house inquiry in conjunction with Facebook and

Google. (MSN News, 2019) In September, Amazon also announced the launch of its voice

interoperability initiative, a new YouTube TV presence on its Fire TV devices, and new AWS IQ

web services.
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Over the next three to five years, I expect that Amazon will continue to grow. The company

can expect at least an 80% growth based on the current growth it is experiencing.

Johnson & Johnson (JNJ):

Johnson & Johnson is a healthcare sector company and is a major drug manufacturer. The

company employs over 135,000 full time employees. Together with its subsidiaries, Johnson and

Johnson researches, develops, manufactures, and sells various products in the health care field,

globally. The company operates in consumer, pharmaceutical, and medical devices. Johnson &

Johnson markets its products to the general public as well as retail outlets and distributors. It also

distributes directly to wholesalers, hospitals, and health care professionals for prescription use.

(Yahoo Finance, 2019)

Johnson & Johnson scores an overall innovation score of 79 of out 99. The company has

a secure strategic positioning in research and development and the relative future value of its IP

portfolio is strong, these two areas can be further developed. The intensity of innovation in the

industry and its impact of IP on peer industries are strengths of the company.

Potential developments and political forces that can affect the company’s growth include

an FDA breakthrough therapy designation granted for Niraparib by Janssen. Janssen is a

subsidiary of Johnson & Johnson. Johnson & Johnson also reached a settlement agreement with

two Ohio counties before the upcoming opioid trials. (Kalia, 2019) Johnson & Johnson also

continues to release new FDA approved pharmaceuticals that have done well in the consumer

market.

Johnson & Johnson’s top suppliers include Flex Ltd, valued at $2.7 Billion with a total exposure

of 4.11% and Amgen Inc, valued at $745 Million with an exposure of 11.59%. Some of its top
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customers include Merck & Co, valued at 1.3 Billion with an exposure of 26.90% and Mitsubishi

Chemical Holdings, valued at $8.1 Billion with an exposure of 11.72%.

Growth trends for Johnson & Johnson are stable and future growth estimates show that the

company has the potential to continue to gain approximately 6% over the next five years, based

on their sustained growth of 9.25% over the past five years.

Netflix, Inc (NFLX):

Netflix is a consumer cyclical sector company in the diversified media industry. Netflix

employs 7,100 employees and provides internet entertainment services. The company operates in

domestic streaming, international streaming, and domestic DVD. It offers TV series,

documentaries, and feature films across various genres and languages. The company has

approximately 139 million paid members in 190 countries. Netflix’s innovation outlook is neutral

based on a score of 65 out of 99. It outperforms its sector average but job growth over the past

year has decreased. The company is laggard in terms of sustainability, and it is most exposed to

Comcast Corporation as its supplier. Netflix has beat earnings estimates four times over the past

four quarters. The company’s intensity of innovation in the industry is high as well as the relative

future value of its IP portfolio. Strategic positioning of its research and design areas requires

improvement. (Yahoo Finance, 2019)

Netflix has experienced a few significant developments in the month of September. Some

of these include a deal with Kuku Studios, an animated feature film company, under which key

members will exclusively produce animated films and series solely for Netflix. Netflix also has

plans with Tesla to stream live when a Tesla automobile is stopped. Netflix also launched a mobile
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plan for India so that members can access content-uninterrupted and ad free standard definition on

their smartphone or tablet.

Netflix has a strong future presence in the market. The company has the potential to grow

by as much as 61% annually over the next five years. This is based on the per annum growth of

the past five years where the company grew by 47%.

Starbucks Corporation (SBUX):

Starbucks is in the consumer cyclical sector of the restaurants industry. The company

employs 291,000 employees. Starbucks, together with its subsidiaries, operates as a roaster,

marketer, and retailer of specialty coffee. The company operates in four segments including the

Americas, China, Europe, the Middle East, and Africa, as well as channel development. Starbucks

stores offer coffee and tea beverages as well as pastries, breakfast sandwiches and lunch items.

Starbucks also licenses its trademarks through licensed stores. Starbucks currently operates

approximately 30,000 stores. (Yahoo Finance, 2019)

Starbucks scores a 67 out of 99 on the innovation score index. The company’s strategic

positioning of research and development is in need of development. The relative future value of

the IP portfolio can be strengthened as well. The intensity of innovation in this industry creates a

strong momentum for the company.

Starbucks has had some significant developments over the past month that can potentially

affect the company’s stock. Starbucks announced that it has partnered with Alibaba to launch

voice ordering and delivery in China through Alibaba’s smart speaker. (Garcia, 2019) Starbucks

also filed a debt shelf offering with the SEC on September 13th, 2019. (SEC, 2019)
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Starbucks’ top suppliers include JPMorgan Chase, valued at $1.7 Billion with a total

exposure of 9.35% and Ingenico Group – GCS, valued at $709 Million with a total exposure of

5.22%. Starbucks’ top customers include Nestle S.A., valued at $2.6 Billion with a total exposure

of 27.68%, and PepsiCo, Inc., valued at $469 Million with a total exposure of 17.48%.

Starbucks is in a position to grow in the next five years. Future predictions show that

Starbucks has the potential to grow by at least 13% over the next five years. This is based on a

15% growth over the past five years.

Stitch Fix (SFIX):

Stitch Fix is a company in the consumer cyclical sector of the specialty retail industry. The

company currently hires 8,000 employees. Stitch Fix sells apparel, shoes, and accessories through

its website and mobile app in the United States. The company is formerly known as Rack Habit,

Inc. and changed its name to Stitch Fix in 2011. Stitch Fix scores relatively low on the overall

innovation index, scoring 48 out of 99 points. Its strategic positioning of research and development

is not as developed as it needs to be to sustain future growth. Stitch Fix’s impact of IP on peer

industries is also low. The company does have a strong intensity of innovation within the industry

and the relative future value of its IP portfolio is strong. (Yahoo Finance, 2019)

Stitch Fix has not had many significant developments of late that have had an impact on

the strength of the company’s stock. The latest development is that Park West Asset Management

has purchased a 5% passive stake in the company according to SEC filing. (Market Beat, 2019)

While we do not have five years of past growth estimates to use in order to predict future

gains, based on the company’s current growth rate, I think it is safe to assume that Stitch Fix has
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the potential to grow up to 50% of its current size in the next five years. As the company continues

to learn and grow in its industry, it will be able to mitigate cost and risk as it moves forward.

Alibaba (BABA):

The Alibaba Group Holding Limited is in the consumer cyclical sector of the specialty

retail industry. The company employs 103,699 full time employees. Through its subsidiaries,

Alibaba provides online and mobile commerce business in China and internationally. It operates

in the core commerce, cloud computing, digital media and entertainment, and innovation initiatives

segments. Alibaba scores a 68 out of 99 points on the overall innovation score index. The

company has a high relative future value of its IP portfolio, but it’s strategic positioning of research

and development areas as well as the intensity of its innovation in the industry can improve.

Alibaba’s innovation outlook is trending upward however, and the company beat earnings

estimates four times over the past four quarters. (Yahoo Finance, 2019)

There have been several significant developments for Alibaba in the pat month that have

affected the growth of its stock. On September 26, Alibaba Cloud and Ubitus built a strategic

partnership to launch their global public cloud gaming solution. (Ubitus, 2019) Avnet also

expanded its ecommerce strategy in China with Alibaba, launching the new Avnet super store on

a new B2B ecommerce platform and now offers Alibaba cloud enabled raspberry PI products.

Based on earnings of the past five years, future growth estimates show that Alibaba has the

potential to grow by up to 4% per year over the next five years.

Intel (INTC):

Intel Corporation is in the technology sector of the semiconductor industry. The company

employs 107,400 full time employees. Intel offers computing, networking, data storage, and
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communication solutions worldwide. The company operates through client computing group, data

center group, interest of things group, non-volatile solutions group, programmable solutions group,

and other segments as well. Intel offers microprocessors and system-on-chip and multichip

packaging products. (Yahoo Finance, 2019)

Intel score san 85 of out 99 points on the innovation index, outperforming the sector

average. Job growth over the past year has decreased and insider sentiment is negative. In terms

of sustainability, the company is a leader in its sector. Over the past four quarters, Intel has beat

its earnings estimates four times and it pays higher dividends than its peers.

Intel has made several changes to its company in the past several months which have

affected its growth. In September, Intel hired Karen Walker and SVP and Chief Marketing Officer.

Walker joins Intel from Cisco where she was the Chief Marketing Officer since 2015. (Rooney,

2019) Intel also promoted Gregory Bryant and Michelle Johnston Holthaus to Executive Vice

President status within the company. The company also sold 10,000 of common stock in July at

a price of $52.45 per share, per SEC filling.

Intel’s top suppliers include Micron Technology, Inc, valued at $898 Million with a total

exposure of 14.18% and Applied Materials, Inc., valued at $1.6 Billion with a total exposure of

7.26%. Some of Intel’s major customers include Apple Inc., valued at $1.9 Billion with a total

exposure of 20.89% and Dell Technologies Inc., valued at $11 Billion with a total exposure of

7.74%.

Intel’s growth of the past five years gives us a potential growth rate for the next five years.

The company can be expected to grow by at least 7% annually over the next five years.

JPMorgan Chase (JPM):

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JPMorgan Chase & Co. is in the financial services sector of the Banks – Global industry.

JPMorgan currently hires 254,983 full time employees. JPMorgan operates as a financial services

company worldwide. It operates in the Consumer & Community Banking, Corporate &

Investment Bank, Commercial Banking, and Asset & Wealth Management sectors. JPMorgan

offers deposit and investment products and services to consumers in its CCB segment. The CIB

segments provides investment banking products and services, corporate strategy and structure

advisory, and equity and debt markets capital-raising services. JPMorgan was founded in 1799

and is headquartered in New York. (Yahoo Finance, 2019)

JPMorgan scores a 72 out of 99 possible points on the Innovation Index. It outperforms its sector

average. Job growth over the past year has remained the same and insider sentiment is negative.

JPMorgan is also an outperformer in terms of sustainability. The company beat earnings estimates

three times over the past four quarters. The company pays dividends lower than its peers.

JPMorgan has had several significant developments over the past several months which

have affected the value of its stock. In September JPMorgan was chosen by Saudi Aramco to lead

its IPO-AFP. (Farheed, 2019) The company has also expanded its advisors in Asia to help

Japanese businesses. It expanded its corporate Japan desk by roughly 20%. This includes staff

specialists based in India as well. (Reuters, 2019) JPMorgan also announced a five-year deal with

Persado for AI powered marketing capabilities.

Based on growth trends over the past five years, we can estimate that JPMorgan will

continue to grow at a rate of roughly 5% annually over the next five years.
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Microsoft Corporation (MSFT):

Microsoft Corporation is in the technology sector of the Software – Infrastructure industry.

Microsoft employs 144,000 employees. Microsoft develops, licenses, and supports software,

services, devices, and solutions worldwide. The company’s productivity and business processes

segment offers Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and

Compliance, and Skype for Business. The company’s more personal computing segment offers

Windows OEM licensing and other non-volume licensing of the windows operating system.

(Yahoo Finance, 2019)

Microsoft’s innovation outlook is trending up based on a score of 91 points out of 99 on

the innovation index. The company outperforms its sector average. Job growth has decreased

over the past year and insider sentiment is negative, but Microsoft is an outperformer in terms of

sustainability. Over the past four quarters Microsoft has beat its earnings estimates four times. IT

does pay a lower dividend than its peers.

Microsoft has had significant developments over the past month that can affect the price of

its stock. In October, Microsoft revealed a new holiday lineup of products, introducing new dual-

screen devices built for mobile productivity including the surface neo and surface duo. (Williams,

2019) Microsoft also announced a technical partnership with T-Mobile with Project Xcloud that

has the potential for further growth as well.

Microsoft’s major suppliers include Lenovo Group Limited, valued at $3.2 Billion with a

total exposure of 4.99% and Credit Suisse Group AG, valued at $2.7 Billion with a total exposure

of 3.94%. Some of Microsoft’s major customers include Walmart Inc., valued at $7.5 Billion with

a total exposure of 5.75% and Lenovo Group, valued at $3.1 Billion with a total exposure of 2.46%.
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Based on growth seen in the past five years, the trend shows that Microsoft has the potential

to grow by as much as 15% per year over the next five years.

References
Dana Mattioli, S. P. (2019, 10 3). Amazon Clashes With Disney Over Terms for Offering Apps in Fire TV.
Retrieved from The Wall Street Journal: https://www.wsj.com/articles/amazon-disney-fight-
over-ad-revenue-from-apps-on-fire-tv-11570117659?mod=breakingnews

Farheed, Q. (2019, 09 11). JPMorgan Chase is picked to lead Saudi Aramco IPO: Sources. Retrieved from
Business League: https://www.businessleague.in/2019/09/11/jpmorgan-chase-is-picked-to-
lead-saudi-aramco-ipo-sources/

Garcia, T. (2019, 09 18). Starbucks launches voice ordering in China with Alibaba smart speaker.
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ordering-in-china-with-alibaba-smart-speaker-2019-09-18

Kalia, S. (2019, 10 1). Johnson & Johnson settles Ohio lawsuits to avoid federal trial. Retrieved from
Reuters: https://www.reuters.com/article/us-johnson-johnson-opioid-ohio/jj-settles-with-ohio-
counties-ahead-of-opioid-trial-idUSKBN1WH00F

Lioudis, N. K. (2019, 04 24). Active Portfolio Management: An Overview. Retrieved from Investopedia:
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active-portfolio-management.asp

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https://www.hostreview.com/news/190927-alibaba-cloud-and-ubitus-build-strategic-
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