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A common thread through these fifteen stocks is that they not only represent diversification as a group, but most of the companies chosen also have a range diversification within the company's operations. The companies are spread around the world, and include a number of sectors. For example, within technology the portfolio has access to the health care sector through Cerner; within ADRs there is exposure to the Internet, chemicals and pharmaceuticals. This level of diversification will only help the portfolio to achieve its objectives in the long run. Each of these stocks will have between 5-7% of the portfolio, totaling 90%. The remaining 10% will be held in a U.S. government Treasuries. The use of treasuries is to allow for some degree of safety in the portfolio, as Treasuries do little more than cover expected inflation. The current rate on 10-year federal government paper is 3.40% (Yahoo! Finance, 2011). The coming pages will outline the specific financial information for each of these companies in detail. This will be following by a total portfolio analysis at the end of the report.
Newmont Mining (NYSE: NEM) is a gold and silver producer and has seen its earnings per share (EPS) improve steadily in recent quarters. The most recent quarterly EPS was $1.16. In 2010, Newmont earned $4.63 per share. The book value per share was $27.08, giving a price to book of 1.86. Net income was $2.305 billion. The current dividend is $0.60, or 1.1%. The 52-week high is $65.50 and the 52-week low is $48.20. Stockholder equity is valued at $13.345 billion and the firm's market cap is $29.92 billion. The beta for Newmont is 0.36, which indicates that the firm has considerably lower risk than the general market.
The prospects for Newmont going forward are good. Gold and silver are important commodities that represent a safe haven. While the value of these commodities is often volatile, it often moves against the broad market -- investors fleeing falling stocks move their money into precious metals. There is considerable uncertainty in the global economic environment, and the failure of leading economies to address their financial crisis with economically sound ideas is contributing to the prolonged high value of precious metals. Newmont is a sound company within the gold and silver space because it has taken steps to control its costs over the past few years and thereby increased its margins. This will position the company to outperform similar stocks should the precious metals market begin to fall.
The second mining stock is Sterlite, a copper producer from India. Sterlite market cap is $12.62 billion and its beta is 2.38. The company reports in rupees, but these will be converted to dollars using the current exchange rate from Oanda, which is 45.3552 rupees to the dollar. Sterlite's net income in fiscal 2010 was $865 million, or $0.265 per share. The P/E ratio is 53.8 times, and the price to book ratio is 5.85 times. The company is not currently paying a dividend. The 52-week high is $19.92 and the 52-week low is $12.58. The total equity book value is $842 million. Sterlite's business is strong because the company is focused on the copper market. The price for copper is on a general long-term increase, from just over $3.60 per kilogram in June 2010 to a current price around $3.75. Demand for copper is increasing strongly, especially in emerging markets. Sterlite's main business is in India, a rapidly growing international market with a high demand for metals like copper.
Sterlite is the largest copper producer in India, which gives it significant upside as the Indian economy continues to improve. Its presence in the portfolio therefore provides exposure to the Indian economy in general and to the increasingly lucrative copper market. Although this stock is volatile, its volatility is in part counteracted by the use of the very stable Newmont as the other component of the precious metals stock. The two combined have a weighted average beta of 1.37, which is somewhat risky, but not unduly so.
Caterpillar is a heavy equipment maker in the industrials category. The company makes construction and mining equipment and therefore is a way to gain exposure to both of those industries. The company is also expanding rapidly into a number of developing regions such as Brazil. Caterpillar's net income is $2.07, with an EPS of $4.15. The company's P/E ratio is 26.11. The market cap is $69.23 billion. The price to book ratio is 6.40 times. Caterpillar pays a dividend of $1.76, giving a dividend yield of 1.6%. The beta is 1.88. The 52-week high is $108.90 and the 52-week low is $54.89. The book value of the company's equity is $10.864 billion.
Caterpillar is a diversified company with a strong global presence. Its exposure to multiple industries makes it more stable than many other industrial manufacturers. While the company suffered in 2009 with respect to revenues and profits, it rebounded in 2010, indicating that for Caterpillar at least the recession is over. Its industry is highly competitive, but Cat has earned top spot in many segments and many countries, so it is well-positioned to continue growing steadily in the future, especially when the construction sector begins to recover in developed nations.
The other investment in the industrial sector is blue chip Dow 30 company Boeing. Boeing's business is split almost evenly between the aerospace and defense sectors. This gives the portfolio exposure to both sectors. Aerospace has been a growing sector as competition in the airline industry has intensified. Given that the industry is a virtual duopoly, Boeing stands to gain from general industry growth. Its defense business looks steady going forward as the U.S. Department of Defense typically spreads contracts around its key contractors, and there is steady demand from other nations.
Boeing's most recent net income is $3.3 billion, for an earnings per share of $4.48. The company has a book value per share of 3.76 times. The P/E ratio is 16.33 times. Boeing currently pays a dividend of $1.68, for a yield of 2.3%. The beta is 1.31. Boeing's 52-week high is $76.00 and its 52-week low is $59.48. The book value of the firm's equity is $2.766 billion and the market cap is $53.57 billion.
Boeing's growth prospects relate not only to its strong market position but to two major trends in the global environment. Increased globalization and wealth ahs improved the outlook for air travel, especially as new firms have entered the industry with profitable business models. The increase in flights in Asia and the Middle East in particular has boosted the prospects for airplane manufacturers. Ongoing political instability is going to prove a boost to Boeing's defense contract business, both in the U.S. And around the world. Nations are reluctant to cut defense spending significantly as there are always threats to geopolitical stability.
Valero is an oil and gas refining and marketing company, operating gas stations and refineries. Their operations are largely in the United States. Valero's prospects tend to be tied highly to the price of petroleum. Because of globally limited supply and rapidly increasing demand in the developing world, the price of oil is on an upward trend that looks to continue unabated for a few more decades at least. Valero is well-positioned to take advantage of this, operating in the U.S. market where consumers have very low price elasticity of demand for gasoline. As the U.S. economy improves -- of which there are signs it is doing slowly -- the demand from consumers for gasoline should begin to increase.
Valero earned $922 million last year, for an EPS of $2.77. The current price/earnings ratio is 8.09 and the price/book ratio is 1.04 times. Valero is primarily a growth stock, paying a dividend of $0.20, which equates to 0.80% yield. The company's 52-week high is $30.42 and its 52-week low is $15.49. The beta of Valero is 1.16. Valero's purpose in the portfolio is as a source of long-run growth, given the prospects of the petroleum industry in general. There is significant upside for all players in the industry, and Valero gives the portfolio exposure to the U.S. market specifically, where demand is expected to continue to increase. Prices will rise, but in general consumers will not change their habits much, meaning that demand will not fall significantly even as prices (and profits) rise in the industry
Encana is one of the world's largest producers of natural gas. The company's main fields are in northern Canada, with some others in the U.S. And other parts of North America. Encana markets its gas primarily in Canada and the United States, so this company is a way to increase the portfolio's exposure to the American energy market. The natural gas focus makes…[continue]
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