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4/30/2015

Team Project Portfolio Construction FE 445 C1

Yage Meng

Yiming Ye

Jingzhen Zhang

Dr. Hamid

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Table of Content

Introduction……………………………………………………………………………………..2

Investment Profile………………………………………………………………………………2

Policy Statement………………………………………………………………………………...4

Economic Analysis……………………………………………………………………………...4

Asset Allocation Decision……………………………………………………………………....7

Industry Analysis………………………………………………………………………………..7

Company Analysis……………………………………………………………………………... 10

Conclusion……………………………………………………………………………………....13

Appendices .………………..…………………………………………………………………...15

Appendix 1…..……………..……………………………………………………………………15

Appendix 2A: Industry Criteria .………………..………………………………………………22

Appendix 2B: Internet Industry .………………..………………………………………………23

Appendix 2C: Biotechnology Industry.………………..………………………………………..27

Appendix 2D: Automobile Manufacturing Industry.………………..…………………………..31

Appendix 3A: Company Criteria.………………..………………………………………………33

Appendix 3B: Google.………………..………………………………………………………….34

Appendix 3C: Facebook .………………..……………………………………………………....37

Appendix 3D: Gilead.………………..………………………………………………………….40

Appendix 3E: Amgen .……………..……………………………………………………...….....44

Appendix 3F: Tesla .………………..…………………………………………………………....48

Appendix 4: Oil .………………..……………………………………………………………….51

Appendix 5: Mutual Fund………………..……………………………………………………...52

Appendix 6: Bonds………………..……………………………………………………………..55

Appendix 7: Why not invest internationally…..………………………………………………...56

Works Cited ………………..…………………………………………………………………...57

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Introduction

The purpose of this project is to construct an investment portfolio for Mr. Donothing to

fulfill his short term and long term financial needs. It is critical to build up investment strategies

and allocations in order to make short term and long term profit. Investor Philip Fisher once said:

"The stock market is filled with individuals who know the price of everything, but the value of

nothing." In order to make profit from investing in a semi-strong market, it is not enough for

investors to only look at the numbers and follow up the news, but to see the real value behind the

numbers and the trend hidden in the news. We are investing in 4 instruments, they are stocks, 10

year T-bills, Mutual Funds, and oil as a commodity. For Stocks, we plan to invest in 3 industries,

Internet information provider, biotechnology and automobile; we have selected 5 companies’

stocks to invest in from these industries. For mutual funds, we have chosen 2 securities to invest

in, which are both with overall rating of A+. From all the investments, we will achieve an

annual return of 10.57%. In this report, we will talk about investment profile, policies, asset

allocation; we are also going to analyze the economy, as well as several industries and some

companies that we are going to invest in. At the end, we will talk about other instruments we

choose.

Investment Profile

Mr. Donothing is a 50-year-old single man, who inherited 20 million from his family. He

is an ambitious person who lives on a cruise and spends $500 every day. He spends about

$30,000 for secretarial services and incidental expenses every year. Besides that, he need $1190

for health care, $2242 for pensions, personal insurance and social security, $1134 for

entertainment every year. 5 years later, he wants to buy a house in Pompano Beach, Florida and

move into it, get married and have a child. He will have to spend $811,500 to purchase the house

with all cash and spend $10,000 for his simple wedding. He also needs $639,000 to raise his

child to 18 (Childcare, clothing, food, transportation, housing, health care, education). After

moving back on the land, he will need $2,751,275 for the next 25 years with $1,501,275 as

property tax payment and $1,250,000 as living expenditure. (As we assume he lives to 80)

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Table of Expense for Mr. Donothing

Type of Expense Amount Per Year Total Expense

Cabin and Cruise $182,500

Secretarial Service $30,000

Healthcare $1190

Entertainment $1134

House Purchase $811,500

Marriage $10,000

Children $25,300 $639,000

Education $46,000 $184,000

Living Expenditure $50,000

Vehicle Purchase $100,000

Pensions,personal insurance,

social security

$2,242

Based on his needs and preferences, we consider Mr. Dothing as a low to moderate risk

tolerant investor. We believe that he will not be willing to invest in some high risks assets to gain

higher profit as undertaking the risks that he might lose money. We will make sure covering his

daily needs and basic living expenses by investing enough amount of his money into stocks that

have low beta and mutual funds with excellent rating, bonds that pay coupons- like treasury bills,

as well as steady commodities. Covering all his needs, we will suggest that he invests large

portion of his money in stocks, which represent middle to large-scale companies that might

outperform and beat the market. The industries where he might invest in are Internet Information

Providers, Biotechnology and new energy automobile industry.

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Policy Statement

Return Objectives and Risk Tolerance:

Our goal is to minimum the risk while generate high profit for Mr.Donothing. In order to

achieve this goal, we decided to allocate 48.08% in stocks, 35.9% in mutual funds, 5.86% in

commodity and 5% in bonds.

Risk and objective

We are aiming a low to moderate degree of risk to achieve the 10.57% of return he

desires and lower the risk as possible as we could by diversifying his portfolio into stock, bonds,

mutual funds and commodity. To accomplish this goal, we chose two of the top rating mutual

funds that have A+ overall rating and quality stocks that have a combined beta less than 1. The

mutual funds together generate 3.27% annual return. We aim to get an annual return of 6.9%

from our stock selection, 0.1% on bonds and 0.29% on commodity.

Time Horizon:

This portfolio is designed for a multi-stage time horizon. The medium term time horizon

of five year is for achieving his real estate goal. The long-term horizon is suitable for his

retirement, necessity, children’s education approach and extra.

Liquidity Requirements:

In order to accommodate the necessity needs, distribution of the portfolio in the amount

of $215,995 is required every year the first 5 years. In year 5, he needs an additional amount of

$811,500 in year 5 for house purchasing and $10,000 for marriage and $100,000 for purchasing a

vehicle. After year 5, he needs $50,000 for annually regular expenses. (Refer to the table of

expense we calculated above)

Taxes:

Tax structures should minimize any effect of taxes and maximize after tax return.

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Economic Analysis

In order to better construct our portfolio, optimize our returns and control the risk of the

assets we choose to invest, we should understand the macroeconomic situation and information.

The economy’s growth or decline will directly influence our returns thus will direct us when

allocate how much to invest in each classes of assets. There are many factors that we could look

at to determine the trend of economy.

GDP:

First, we will look at the GDP. GDP is a primary indicator when analyzing how healthy

the economy is. According to WSJ, GDP is expected to grow at a moderate rate, from 2.6% to

2.9% although it did not have an optimistic ending the last quarter. In the fourth quarter of 2014,

real GDP dropped to 2.4% from previous quarter. The reason that GDP slowed down is mainly

because that business investment which includes spending on software, research and

development, equipment and structure, is not as much as expected, but still 3.1% higher than

initially reported. But it still tells a good story about the economy growth compare to the growth

rate in fourth quarter in 2013, which is 2.2%. The 2nd quarter of 2014 had a 3.6% GDP. The

downward revisions were to increase the incentives of business investment in R&D and

equipment and government spending.

To understand why GDP is growing at this rate and why we expect it to grow gradually

this year, we have looked in depth of some aspects of the economy: Private consumption, net

export, unemployment rate, retail sales, fiscal policy and interest rate.

Private consumption

Private sector is very strong. Private consumption increased by 4.8% in the last quarter of

2014, highest in 9-year period. Indicates a potential high demand. However, spending slowed

down in the first quarter. Consumer spending went up at only a 0.2% in the first quarter of 2015.

Cold weather is the main reason contributed to this result. Spending on service growth declined

by 1.5% while spending on housing and utilities accounted for more than half of the growth

compared to 26% in previous quarter. With the high job growth rate and low international oil

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price, we are expecting an increase in consumer spending in the future. However, the increase

was not as strong as the Fed predicted in January. It is worth to notice that businesses are not

expecting a drop in consumer spending. Firms started to stock their inventory in December,

averaged at a level of 0.1% of their total inventories. This might takes more than one month for

them to get their inventory out, which is not a good sign for businesses. But we still remain

confident about a strong consumer spending in 2015.

Trade deficit

U.S. was experiencing a trade deficit last year and the beginning of this year. The imports

are three times more than export according to the fourth quarter report of 2014. In the first

quarter of this year, the exports fell at a faster annual rate than before, from 4.5% to 7.2%.

Imports keep strong as we entered 2015. There are several reasons that contributes to this result.

The major reason is that the global economy is not as strong as it used to be. Euro has dropped to

its lowest point in 9 years, 1.175 against the US dollar in January, 2014. Euro is expecting to

keep at this low rate. This will definitely favor the import demand and hinder export. Demands

for US goods are declining. However, as we discussed that the US private consumption demand

was very strong last year and it is assumed to stay strong in the following year, thus demand for

importing from other countries goes up. Also, the value of US dollar keeps strong last year also

results in higher imports than exports.

Business investment

We could see from first quarter’s report in 2015, business spending slowed down in early

2015. The main reason is probably what we discussed above, the strong US dollar and weak

global economy. Oil price keeps going down, which is a major contribution of declining in

business investment, which includes software, research and development, equipment and

structure. Business investment dropped to 3.4% compare to 4.7% in previous quarter.

Unemployment rate

Unemployment rates is expected to decline to 4.8% by 2017.According to the US Labor

Department, the job growth reached the highest point in 15 years in December, 2014, which is

50,000 more jobs in the end of last year than expected. The strong US economy further added

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126,000 jobs in March, 2015. Labor department states that they expect the employment rate is

expecting to grow in later 2014. In contrast, there is no clear evidence of comparable wage

growth. The tepid wage growth hinders the consumers’ incentives to spend money, It is

reasonable to say that the central bank officials might need more time before they raise their

benchmark interest rate.

Interest Rate:

In January, Janet Yellen, the chair of the Federal Reserve announced that the central bank

will change the interest ray on “a meeting-by-meeting basis”, implies that the Fed will take

actions on the interest rate if necessary. She also implied that the Fed will not raise interest rates

until the inflation is moving towards its 2% target. In recent Federal April’s Statement, we could

expect that although the Fed keeps door open for interest rate to increase in July, it is more likely

the interest rate will stay the same so far since the economy slowed down in winter months as we

discussed. The private consuming slowed its pace, the business investment softened and dollars

remained strong. The prices fell 2% in the first quarter of 2015 and the Fed expects inflation

returns to 2% goal gradually. The treasury yield will remain around 2%. Thus we are more

inclined to say that the Fed will not increase interest rate until September. If the interest rate is

low, stock market would be more attractive to the investors. Since we have a large portion of

portfolio in stock market, this will be beneficial for us in short term.

Fiscal policy:

Obama proposed $4.1 trillion federal budget for 2016. This proposal will add $6 trillion

to the national debt, and the deficit would increase from $468 billion to $687 billion by 2025

according to The New York Times. The budget proposal includes tax reform that redistributes

funds largely from wealthy and overseas operations and some from middle class’s pocket, $478

billion on highway and transportation improvement. 1.15 trillion On total discretion spending,

27.3% on health and human services, and $ 60 billion on free community collage programs over

the next 10 years. Budget in medical and healthcare will increase, as well as transportation,

which will benefit our investment in industries we have chosen.

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Asset Allocation Decision

Based on the current economy situation and future policies, we could conclude that we

are optimistic that the U.S. economy is already recovering from this crisis and will remain its

strong leading position in the world and keeps fast pace in the next few years. This strong

economy growth will favor the growth of the stock market, mutual funds market and the

commodity market. Treasury yield will remain low around 2 percent in the future. The low yield

rate encourages us to invest more in stock market than in bonds market. We have decided that

except some cash in hand ($1,034,235), rest of all the portfolio will be allocated among four

major instruments: Stocks (48.08%), Bonds (5%), Mutual Funds (35.9%), and Commodities

(5.86%).

Industry Analysis

Since the financial crisis in 2008, most industries are recovering from the crisis and have

shown very strong performance. Looking at the three most important indicators in the US- Dow

Jones, S&P 500 and Nasdaq, they are all experiencing consistent growth since the crisis. Nasdaq

index recently went over 5000, which stays at highest level since the bubble in 2000. Moreover,

the index generated return of 24% in the year of 2014. On the other hand, during 2008 financial

crisis, the government raised 10 Year Treasury bill yield to almost 4.5%, which attracted

investors seeking for high returns and safety for their investments. Entering 2014, when the

global oil price went down, investors became panic; as a result, the yield went up again.

However, after last year, the yield rate had shown a down curve, and is expected to keep going

down in 2015. According to this trend, it is a good time to invest in stock market to get high

returns. US personal income grew at a rate of 2% in 2013 and 3.9% in 2014, which is a strong

indicator of high investment returns. It is predicted that US personal income will increase from

$13,200 to $13,731 in 2015, and $18,154 in 2020. This shows a strong confidence and

performance from the market and proper investment in stock market will gain promising returns.

Internet content has become one of the fastest growing industries in recent years in the

U.S. The industry is highly competitive, with rapid technological change. Many companies have

good amount of cash in hand, which can be used for capital expenditures to make acquisitions,

and to repurchase shares. The industry is correlated to the performance of the economy; it

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experienced a decline during the 2008 financial crisis but immediately climbed back up after the

economy recovered. Overall, long term prospects for the industry are very encouraging.

Biotechnology consists the uses of biological processes in developing, manufacturing,

and marketing products based on advanced biotechnology research. Some major segment of the

industry are: agriculture, industry, health care and research, where medical/healthcare is the

largest segment of the U.S. biotechnology industry, account for nearly 60% of the industry’s

total value. The U.S. health expenditure is a major income of the country’s GDP. We believe that

the companies in this industry will continue to become more profitable for the future with the aid

of Obama’s healthcare reform. The leaders of the industry are Gilead, Amgen, and Baxter

international.

Automobile industry is one of the most stable industry you can find in the market,

because it follows the economy very closely, and always recover even there is a financial crisis.

For example, after 2008, the economy suffered a downturn, so does the automobile industry.

However, after the market started to recover from the damage, the industry also started to rise.

The expected return of the industry will remain very strong in the next 5 years with 5 to 6

percent. One thing worth to mention is that the recent technology trend of electric cars started to

become major player in the automobile industry. The company we chose, Tesla model is the

leading electric car manufacture in the world. As of right now, they have the most popular

electric car model to date- Tesla model S. the successful launch of the product helped the

company’s stock price raise from $30 to $270 in two years.

One of the criteria we have chosen is cyclical fluctuation. The three industries we choose-

Internet content, biotechnology and automobile manufacturing are all cyclical industries. Given

strong performance of the market and the trend of up curving, we believe that in recent years

investing in such industries will generate high returns in the future. According to Morgan

Stanley, S&P 500, the sector represents Internet, technology and biotech will probably rally to

3000, a 50% increase until the year of 2020. Therefore, future growth prospect is also a factor

that help us determine the industry’s potential return if we decided to invest.

Another criteria we pick is past performance. We are looking for something steady

growth rate, and better performance than others. Historical data will help us determine those

factors. As two of the most popular and innovative industries today, internet and biotech have

shown their huge potential and significant growth in the past years, and are believed to continue

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grow for a long time. Automobile manufacturing industry, the traditional US industry struggled

during the financial crisis, performed a very strong rally since 2009. The Dow Jones U.S.

Automobiles & Parts Index went from $47 in 2008 to $255 in 2011, and around $335 in 2015.

This means that the rally will not stop in the near future, making the industry an attractive land to

invest. Moreover, the innovative new energy cars like Tesla, and many other brands represent a

trend of going green to reduce the impact of global warming and scarcity of resource. Stocks that

are related to this sector must have a bright future and is worth to invest. While looking at past

performance, we also look at the industries’ volatility. As we know, a stock with high volatile

can be risky but may also generate high returns. From research, we found out that all these three

industries we have selected, Internet and biotech industries are less volatile than automobile

manufacturing industry. They all experienced a decline in 2008 and 2014, due to the financial

crisis and oil price drop; but in general, all of them are expecting a steady growth in long term.

We also consider supply and demand as a criteria when deciding whether to invest in an

industry. When economy is healthy, people will be more confident on spending, thus there will

be stable and growing demand for automobile as a necessity. For the other two industry, as long

as the companies spend money on their research and development, keep innovating new products

and service, and expand their market globally and increase their target market, there will be

always growing demands. There is never insufficient supply in automobile manufacturing

industry, as it’s the main force of manufacture and the vehicle as a necessity in the US. Not to

mention the Internet and biotechnology, the two technology sectors that are experiencing fastest

growing in the economy. There can be only more supply in the future.

The leading companies in our industries such as Google, Facebook both expand their

business all over the world. They generate revenue from international companies for

advertisements and services. International exposure is another perspective we take into

consideration while making investment decisions. More international means more diversified,

that when economy is bad in the US the companies will be able to use earnings from other

countries to cover their loss. Nevertheless, we also have to take in government regulations into

measurement. How strictly the government regulate the industry, and on what level is the

government aims to help the industry are important for the growth and future expectations. The

three industries we have chosen are all important as to the government. However, we have to

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consider foreign governments’ regulation on Internet industry, especially their companies’ social

platforms and searching engines.

Company Analysis

When determining companies to allocate our portfolio, we consider the position of the

company as a key factor. Leading companies will be more flexible and resilient undergoing

market volatility and financial crisis; besides they normally have business in different regions

and sectors, which help them diversify risks and reduce loss from single operation error. A

market leading company normally dominant its competitors in the market. Another criteria we

take into consideration is international exposure. A company’s number of branches overseas,

relations with local governments, amount of investments in foreign branches would be

measurement of its success in international market.

Past performance is also very critical when evaluating a company. We look at the

company’s historical revenue, net income, and stock price, cash flow, P/E ratio to evaluate its

performance, and use the past data to predict its future. We will also focus on whether the

company is competitive in its market by looking at its core competencies. Whether the company

has innovative strategies and technologies, or unique way of management, or secret recipes that

help it success among other companies. Excellence management is key to a company’s success.

A good leading board would normally have very well planned 5 year or even 10 year strategies.

The companies we have chosen all keep investing a large amount of their revenues into research

and development, innovative products and services. Most of them do not pay dividend, so they

can invest more money into expanding their business, and make a promising success in the

future. Also, we would prefer the companies that try to challenge the industry and are willing to

take a high risk project in return of high profit.

After doing extensive research, we decided to allocate about half of our portfolio to

invest in stocks of 5 companies: Google, Facebook, Gilead, Amgen and Tesla. A very crucial

reason that we select these companies is because of their beta. Google has a beta of 1.04,

Facebook has a beta of 0.74, Gilead has a beta of 0.84, Amgen has a beta of 0.57, and Tesla has a

beta of 0.65. Beta represents the risk of one stock. Google is the only stock that has beta slightly

over 1, which means its stock is highly correlated to the market volatility; but considering the

market performance and expectations, we believe that investing in Google will be a safety

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choice. Not to mention that the other four stocks all have beta below 1, which means that they

are hardly affected by fluctuations in the market. We have chosen these stocks with ideal beta,

aiming help Mr. Donothing to generate returns and meanwhile ensure that he does not have to

worry too much about market risks.

Google, founded in 1995 was the first popular search engine in the world, and is currently

the market leader in the Internet information providers industry, accounts for over 60% of the

market share worldwide. Google has announced an income of 66,000 millions in 2014, a 12%

increase in year over year revenue, and 14,000 million of net income, a 4% increase in year over

year base.

Facebook, established in 2004 is the largest social platform in the world. The social

networking gives people access to connect to their family, friends, and discover the world, to

share and express their matters. The company has market cap of $212 billion. The website has

more than 1.25 billion registered active users, and among them 1 billion also use mobile device

to log into their accounts. The company also has Instagram, WhatsApp and messenger and other

apps under. The company experienced a revenue of $7,872 million, with a growth of 55% in

2013 and $12,466 million, with a growth 58% in 2014. The company recorded $2,940 million in

net income in 2014, almost doubled from last year.

Gilead (GILD) has a leading market position in the biotechnology industry. It is a biotech

company that focuses on the research, development and commercialization of anti-infective

medications. GILD’s primary focus is on HIV, HBV and HCV infection. It has operations in

North America, Europe and Asia.

Amgen is a pioneers company that focusing on discovering, developing, manufacturing

and marketing innovative human therapeutics. It is one of the world’s largest biotech companies.

The company put a lot of efforts on novel therapeutics for the treatment of grievous illness in the

area of oncology, inflammation, bone, metabolic disorders and neuroscience. Their products

mainly focus on cancer, nephrology and inflammation. The company has a lot of candidate

products in various stages covering various areas.

Tesla Motors, Inc. focus on design, develop, and sell electric vehicles, electric vehicle

powertrain components, and stationary energy storage systems in the United States, as well as

internationally. Tesla is known to be the top electric cars developer in the world. The technology

it holds help the company successfully launch one of the first popular electric car model, Tesla

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model S. Its strong market presence, and innovative product help the company’s stock price rise

from $30 range to as high as $270 in the last two and half years.

Base on the CAPM model of each company we have selected and the expected returns on

stock price from Bloomberg, we have calculated the expected return on our stocks. The detailed

stock return for each company we chose can be found in Exhibit 1. We have been conservative

on calculating all the returns, in order to minimize Mr. Donothing’s risks and meanwhile making

sure he can earn profit from the investments. Facebook is expected to generate annual return of

12%, and google will generate 15.02%. As of the automobile manufacturing industry, Tesla is

expected to do well in the near future and main a dominant position in electric cars sector; the

return will be 18.9%. Gilead and Amgen, the market leaders in biotech industry, are also

expected to generate sizeable returns. We are confidant that Gilead will have expect return of

11.8% and Amgen will have 7.5%. Portfolio return from investing in stock price alone is 6.9%

every year. (This number excludes dividend)

To be more specific, we advise Mr. Donothing to purchase 30,000 shares of Facebook

stock with price of $80.46 per share (April 29, 2015), with total spending of $2,413,800. For

Google, we would purchase 2,500 shares with price of $561.39, a total of $1,403,475. For Tesla,

which we plan to invest most in the stock market, we recommend Mr. Donothing to purchase

15,000 shares at $232.45, which will cost $3,486,750. As for the two companies in biotech

industry, we suggest to purchase 10,000 in Gilead and 8,000 in Amgen, with relative share price

of $102.32 and $160.98. Total investments on these two are $1,023,200, $1,287,840. Together,

we expect Mr. Donothing to use 48.08% of all his cash to invest in the stock, which is

$9,615,065.

Conclusion

To minimize the risk while still make promising profit for Mr. Doingnothing, we

carefully analyzed the macroeconomic condition, conducted tailored research on different classes

of assets, various industries and companies. Based on our research, we have constructed a

portfolio with five quality stocks from three different industries, two mutual funds, oil and 10-

year treasury bonds that will potentially fulfills Mr.Doingonthing’s investment goal. We believe

that with our portfolio, we are able to bare the minimum risk while gain annual returns of

10.57%. With the oil price experiencing the lowest level in past 9 years, we see this

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extraordinary opportunity and decide to invest 5% in oil to optimize our profit. With an expected

fast growing GDP, 2.9%, in the next several years, stocks shows significant potential in high

investment returns. That reflects our decision in investing a substantial amount of money in

stocks (48.08%). With his risk level at low to moderately tolerant and mid to long term timeline,

we believe investing in mutual funds and 10-year Treasury bonds will fulfill his goal for

marriage, settlement and obligations. By understanding our client’s investment goal and

American economy, our portfolio will provide him optimistic profits while baring relative low

risk.

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Appendix 1A

Asset Allocation

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Appendix 1B

Index

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Appendix 1C

GDP

Appendix 1D

Inflation

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Appendix 1E

Unemployment Rate

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Appendix 1F

Fiscal Policy

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Appendix 2A

Industry Criteria

Cyclical vs. Noncyclical

As we know, cyclical industries is likely to perform better after the recession. In the long

run, cyclical industry is a safer choice than non-cyclical industry. The key indicator we are trying

to identify here is how well and how long the industry recovers from any kind of economic

recession based on the historical data.

Past Performance

For past performance, we are looking for something steady growth rate, and better

performance than others. Historical data will help us determine those factors.

Future Growth Prospects

Future growth will help to determine the industry’s potential return if we decided to

invest. We will analysis industry’s financial date, such as the average earnings, industry growth

rate, future sales etc. The goal here is to find the most profitable industry in the following years.

Stability

Stability is one of the most important factors when considering invests in an industry.

The key here is using industry characteristics, past performance, and financial data to determine

whether if it’s safe to invest.

Supply and Demand

A good supply and demand relationship is key to a profitable business model. An

industry needs a good balance between supply and demand. Without that, it won’t be able to

sustain a good growth rate.

International Exposure

For an industry to achieve outstanding sales, a domestic market is definitely not enough.

It needs a strong international presence, a worldwide market.

Government Regulation

Government Regulation is also important here for an industry to grow. High regulation is

very likely to build a barrier for new entries. Thus limit the competition between players. It

might also decrease the profitability of an industry.

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Appendix 2B

Internet information Provider Industry

Summary

Since the 21 Century, trend of getting information started to move from offline to online.

Along with the successful development of companies like Yahoo and Google, Internet content

has become one of the fastest growing industry in recent years in the U.S. The industry is highly

competitive, with rapid technological change. Overall, long term prospects for the industry are

fairly encouraging. Many companies have healthy cash flow, which can be used for capital

expenditures, to make acquisitions, and to repurchase shares. The industry is correlated to the

performance of the economy; it experienced a decline during the 2008 financial crisis and made

a strong came back after the economy recovered.

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Cyclical vs. Non-Cyclical

In the long run, cyclical industry is a safer choice than non-cyclical industry. The key

indicator we are trying to identify here is how well and how long the industry recovers from any

kind of economic recession based on the historical data.

The Internet information providers industry is not as much cyclical compared to other

industries with the impact of economy performance. Its performance depends on number of users

on the internet and how fast internet is developed in that region. Since most of the biggest

internet content companies are listed in S&P 500, we can also see the trend in S&P 500

performance. The industry experienced a steady growth since 10 years ago, until the 2008

financial crisis. It struggled during the year and performance went down to negative. After 2009,

the economy started to recover, the performance became better, and has been growing all the

way until today. The reasoning is that when the economy is healthy, the companies would have

more capital to develop and provide more and better service to customers. There will be more

users start to access and use the search engines etc.

Past Performance

For past performance, we are looking for something steady growth rate, and better

performance than others. Historical data will help us determine those factors. This industry takes

the largest place in S&P 500, weighing about 20%. During the past year, we experienced an 11%

growth in performance. It also reached a 43% growth in industry revenue. Although the index

went down to 6% in January 2015, it came back up to 12% in April, which shows a strong

performance.

Future Growth Prospects

Future growth will help to determine the industry’s potential return if we decided to

invest. Long-term prospects for the industry are fairly encouraging. Trends such as increasing

worldwide Internet usage, overseas expansion, and the continued popularity of online advertising

ought to further benefit companies in this industry. The industry still have a large space of

growth especially due to development of mobile technology, where people can use mobile device

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to access and search information more conveniently. Therefore, there is still a high growth

potential.

Stability

The Internet information providers industry has higher risk than average industry due to

its low barriers to entry, high competition, low switch cost, and high risk of obsolescence.

However, this industry is relatively concentrated. Top 50 companies account for about 80% of

the total revenue. Therefore, for those leading companies that develop multi functions and

frequently update their information and service, it is difficult to stop their revenue growth. On

the other hand, for smaller size companies that only have single and simple function, there are

threats of competition and rivalry entrance for them.

Supply and Demand

A good supply and demand relationship is key to a profitable business model. An

industry needs a good balance between supply and demand. Without that, it won’t be able to

sustain a good growth rate. Demand in the industry come from internet users who want to search

for information, interact with the information and with other users online. Therefore, there is

tremendous number of demand in the market. Since services are generally free, which makes

switching easy. Users tend to have their one to several favorite sites, and rely on add ons, which

strengthen user loyalty. Since worldwide internet adoption rate is only 40%, there is a huge

potential of growth for the industry. Another demand come from buyers of advertisements. They

normally do not have much bargaining power on sites with high market share. Supply in the

industry come from the companies such as Google, Yahoo! and Facebook who provide platform,

search engines for people to access information. The information they provide is free to users,

the companies make money by selling ads and benefit from economies of scale. Smaller

companies depend on operation in niche market. Portals have little power over suppliers because

they do not own much of the information. There are a lot of suppliers, they rely on telecoms to

provide bandwidth. Due to the competition, the prices keep decreasing.

26

International Exposure

For an industry to achieve outstanding sales, a domestic market is definitely not enough.

It needs a strong international presence, a worldwide market. International exposure in this

industry is extremely high. Google, Facebook, and Yahoo have become the most famous and

well-known companies around the world. Google- a US based company accounts for 60% of the

worldwide market share in search engine, while Baidu, a China based company accounts for

10%-20% of the worldwide market share.

Government Regulation

Government Regulation is also important here for an industry to grow. High regulation is

very likely to build a barrier for new entries. Thus limit the competition between players. It

might also decrease the profitability of an industry. Being a relatively young industry, as it grows

more laws are necessary to protect uses. Tracking mechanisms built by internet sites have lead

to privacy right disputes. There are increasing lawsuits against internet sites for sharing

unwanted information and virus to users. Different country regulations affect the industry

competitiveness, especially for those companies that develop their business overseas. Moreover,

some governments restrict what people in their countries can access on the internet, especially

political and religious content.

Rivalry

The Internet information providers industry is highly competitive. Most companies in this

industry have to adapt to fast growing technologies and rapid change in environment. Many of

them do not have enough power to distinguish from other competitors, therefore allowing a low

barrier of entry and easiness of switching. Also, the big players such as Google, Yahoo and

Facebook have taken more than half of the market share, which makes the small business hard to

survive and all squeeze in that niche market. In addition, emergence of Chinese companies such

as Tencent and Baidu are taking away these traditional American giants’ market shares in the

international market.

27

Appendix 2C

Biotechnology Industry

Summary of Outlook

Biotechnology consists the uses of biological processes in developing, manufacturing,

and marketing products based on advanced biotechnology research. Some major segment of the

industry are: agriculture, industry, health care and research, where medical/healthcare is the

largest segment of the U.S. biotechnology industry, account for nearly 60% of the industry’s

total value. The U.S. health expenditure is a major income of the country’s GDP. We believe that

the companies in this industry will continue to become more profitable for the future with the aid

of Obama’s healthcare reform. The leaders of the industry are Gilead, Amgen, and Baxter

international.

Cyclical vs. Noncyclical

According to the historical stock prices of NASDAQ biotechnology, we can conclude

that the industry is a cyclical industry because even though the price only declined by 27%

during the period of recession in 2008, it went back up as soon as the recession is over. The

industry index had a rapid growth from 2010 to 2014, almost quadrated the lowest point during

recession. The US biotechnology industry had total revenue of $106.1 bn in 2014 and a

compound annual growth rate of 5.7% from 2010 to 2014. This strong growth also shows its

high capability and ability for recovering from an economic recession.

Past Performance

For past performance, we are looking for something steady growth rate, and better

performance than others. Over the past five years, the annual revenue for the biotech industry has

grown at 5.5% to 98.5 billion in 2014. The three-year CAGR for sales is surprisingly high,

around 23% from 2011 to 2014. The industry also has a unbelievable high gross margin.

According to S$P 500, the average gross margin for seven major biotech firms is 88.1% and an

average of 33.2% net income margin. The cash balance has doubled for those seven firms since

2010, from $24.9 billion to $50.8 billion. The average ROE was 22.6% for the past 4 years with

28

2014 being the highest aided by the excellent performance of Gilead Science. In general, the

biotech industry showed a stellar growth during the past 4 years after the financial crisis.

Rivalry

The industry is composed of a large number of small biotech companies along with a

small number of large companies within the industry that increases the rivalry. But the product

differentiation can be high because companies can target themselves in a particular niche.

However, the R&D costs and the time length required discovering a new field in pharmaceutical

is extremely high, making small start-ups much less competitive than larger companies and

making the rivalry more intense. Luckily, the industry is growing rapidly where companies can

still increase their revenue without competing with each other. Thus, we can conclude, overall,

the rivalry in this industry is moderate.

Future Growth Prospects

Future growth will help to determine the industry’s potential return if we decided to

invest. The biotechnology industry is still developing its full range of capabilities and offerings.

The IBIS World expects the industry to grow at an average annual rate of 9.1% to 152.4 billion

29

over the next five years. The need and trend for merge and acquisition with each major players

and favorable legislation will favor the growth of the industry. Environmental problems and

aging population will also encourage the growth of the biotech industry. The CAGR of the

industry from 2014-2019 is expected to be 5.3%. Although it is slightly lower than the past few

years, it will still be growing aggressively and outpaces the other industries. Pharmaceuticals will

remain its prominent role in the industry in the next five years due to expanding market for

drugs. Up to 2019, the IVA is expected to outpace U.S. GDP. IBISWorld expects the IVA for

biotech industry to grow at 7.6% annually compare to the U.S. GDP at 2.5% during the same

period.

Stability

Stability is one of the most important factors when considering invests in an industry.

The key here is using industry characteristics, past performance, and financial data to determine

whether if it’s safe to invest.

According to the past performance of the biotech industry, we could see that the industry

is relatively stable. The rivalry and threat of entry is both relative low for the industry, shows the

stability of the industry. However, as industry grows, the access to capital is limited to some

major players thus increases the investor’s uncertainty, posing some threat to the industry. The

industry is growing at a rapid pace and will continue follow this trend in the next four years.

Supply and Demand

A good supply and demand relationship is key to a profitable business model. An

industry needs a good balance between supply and demand.

A greater life expectancy for the U.S. population means that age related disease is

increasing, indicating a higher demand for medical treatments. The demand for vaccine

development has been rising for last decades. Specialty drug spending costs, which include

biologic drugs, are growing at a remarkable rate. According to the research by Express Scripts

Holding Co., the specialty drugs accounted for more than 25% of the whole plan costs. WHO

announced that cancer was the second largest world’s leading killer, while biotechnology is the

most demanding and effective solutions for cancer. The number of people who got infected with

HIV was 35 million. There were 170 million people get infected by Hepatitis C worldwide in

30

2011. In 2011, the FDA approved the two new drugs for the treatment of Hepatitis C and the two

drugs became the fastest selling drugs. Other disease, such as diabetes and Alzheimer’s all

require the biotech solutions. The industry is putting their efforts on researching regarding to the

treatment of those diseases.

International Exposure

For an industry to achieve outstanding sales, a domestic market is definitely not enough.

It needs a strong international presence, a worldwide market.

The United States accounts for 32.8% of the global biotechnology industry, Europe

accounts for 29% and Asia- Pacific accounts for 24%. IBISWolrd estimates that around 7.8% of

Biotech revenue is from exports, 7.7 billion. The average annual growth rate of exports for last 5

years was 13.1%. Exports mainly goes to the Netherlands, Belgui, and the United Kingdom,

accounting for more than 50% of the industry export. The demand for imports is high because of

the presence of highly developed biotech companies in Europe and Japan. Last year, the

imported biotech products accounted for 6.5% of demand in 2014.

Government Regulation

Government Regulation is also important here for an industry to grow. High regulation is

very likely to build a barrier for new entries. Thus limit the competition between players. It

might also decrease the profitability of an industry.

In 2006, the US Pandemic and All-Hazards Preparedness Act has Implemented, which

authorized funding for advanced medical R&D. In 2010, the government gave out $1.0 billion in

tax credits to around 3000 small biotech companies to encourage them in R&D. Those funding

policies and act all boost the incentives for small companies to discover new technologies.

However, federal regulatory supervision creates many obstacles for getting approved for a new

therapy or crop, which slows down the pace of getting new biotechnology products into markets.

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Appendix 2D

Automobile Manufacturing Industry

Cyclical vs. Noncyclical

As we know, cyclical industries is likely to perform better after the recession. In the long

run, cyclical industry is a safer choice than noncyclical industry. The key indicator we are trying

to identify here is how well and how long the industry recovers from any kind of economic

recession based on the historical data.

Here we select the Automobile Manufacturing Industry because it is closely followed the

economy in the long run, and we believe it is cyclical rather than noncyclical. The industry

suffered a down turn since 2008’s financial crisis. However, it start to recover in 2015 due to the

rise of the demand, and the low interest rate. We think it is a good time to invest in Automobile

Manufacturing industry, and are confident that in the long run, it will offer great, as well as

steady return.

Past Performance

For past performance, we are looking for something steady growth rate, and better

performance than others. Historical data will help us determine those factors. The automobile

industry has a historical return of 3.6% in past three decades. It is still a strong and growing in

industry as the past performance suggests.

Future Growth Prospects

Future growth will help to determine the industry’s potential return if we decided to

invest. We will analysis industry’s financial date, such as the average earnings, industry growth

rate, future sales etc. The goal here is to find the most profitable industry in the following years.

The expected annual growth rate for Automobile industry is 5.4% according to Ibis

industry report, and as the major manufactures focus on developing gas-electric hybrid vehicles,

the growth prospects is very promising.

32

Stability

Stability is one of the most important factor when considering invest in an industry. The

key here is using industry characteristics, past performance, and financial data to determine

whether if it’s safe to invest.

Automobile industry is safe to invest because it follows the economy very closely. The

demand of cars is always there. It might suffer short term decrease during when the economy is

not doing well. However, in the long run, it always recovers as the market start to grow.

Supply and Demand

A good supply and demand relationship is key to a profitable business model. An

industry needs a good balance between supply and demand. Without that, it won’t be able to

sustain a good growth rate.

Automobile industry have a very mature supply and demand environment. We believe as

of right now, the relationship would not change significantly.

International Exposure

For an industry to achieve an outstanding sales, a domestic market is definitely not

enough. It needs a strong international presence, a worldwide market.

Automobile industry have a great international exposure because almost all major

companies in the industry targeted the global market.

Government Regulation

Government Regulation is also important here for an industry to grow. High regulation is

very likely to build a barrier for new entries. Thus limit the competition between players. It

might also decrease the profitability of an industry.

Government Regulation in the industry is high. However, it is expected to improve as all

major companies are now start to develop more fuel efficient, hybrid, and electric car models.

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Appendix 3A

Company Criteria

Market Leadership

Whether a company is a market leader in its industry is a crucial indicator for any kind of

investments. A market leading company is likely to do well than its competitors in terms of sales,

and profits.

International Exposure

If a company established a strong global presence, it is likely to thrive and achieve great

sales. When investing a company in the industry, it is important to know how many countries,

how many customers this company can reach.

Past Performance

We will use historical data to determine the past performance for a company. A company

have a good past performance not necessary means it will do well in the future, however, it is a

good indicator shows that this company have some competitive advantage over its peers.

Core Competence

If a company have a strong core competence, it means this company have a sustainable

competitive advantage, and it is very likely to do better than its competitors.

Risk

Risk can be determined based on a company’s structure and business model. We will

look into its financial data, and historical performance to identify the risk factors.

Management

A company needs to have a good management team to continue to be successful. A good

corporate culture is key to company’s growth. A company operating in a higher efficiency is

more likely to achieve a higher profit margin.

34

Appendix 3B

Google.Inc

Market Leadership

Google, founded in 1995 was the first popular search engine in the world, and is currently

the market leader in the Internet information providers industry, accounts for over 60% of the

market share worldwide. Google has announced an income of 66,000 millions in 2014, a 12%

increase in year over year revenue, and 14,000 million of net income, a 4% increase in year over

year base.

International Exposure

Google has established a very strong global presence. It is the most widely used search

engine around the world. The following table exhibits Google’s domestic and international

revenues as a percentage of revenues:

2012 2013 2014

United States 46% 45% 43%

United Kingdom 11% 10% 10%

Rest of the World 43% 45% 47%

Past Performance

Year 2014 2013 2012

Sales $66,001 M $59,825 M $50,175 M

Operating Margin 25% 23.3% 25.4%

ROE 15.6% 16.25% 16.54%

EPS $21.02 $19.08 $16.17

EBITDA $16,496 M $13,966 M $12,760 M

35

From 2012 to 2014, Google’s revenue grew steadily from 50,000 million dollars to

66,000 million dollars, a 32% growth. Its operating margin keeps in the same level, which shows

a more earning in profit. EBITDA grew from 12,760 million dollars to 16,496 million dollars,

reached a 30% growth. Overall, Google has maintained a high profitability. When Google first

launched its IPO in August 2004, its stock price was $ 54.21. Since then, Google’s stock price

experiences a constant growing stage. On October 31, 2007, the stock price opened at $284 and

closed at $353.5, increased by 70 dollars in one day. The stock price was hit by financial crisis in

the end of year 2008, went down to $140. After the recovery of the economy, its performance

increased steadily, reached an all-time high at $610 in February 2014. Google’s stock price is

currently floating at around $560.

Core Competence

Google’s core competency is to solving complex and big data problems. The core

solution created by Google is its searching engine, including its image, academic and news

searching, and other functions such as google analytics, google drive, Gmail and Google+.

Google owns few core products and they are PageRank indexing technology, Google Ads and

Google Mapping platform and based on the core products the company has developed wide

variety of end-products. As one of the biggest tech company in the industry, Google never stop

its pace on revolution. The company's culture of innovation also can be highlighted as a core

competence. Every year, it spends a lot on research and development. Google’s research and

development expenses were $6.1 billion, $7.1 billion, and $9.8 billion in 2012, 2013, and 2014,

respectively, which included stock-based compensation expense of $1.3 billion, $1.6 billion, and

$2.2 billion, respectively. The company expects to continue investing in hiring talented

employees and building systems to develop new services and improve existing ones. Google's

core competencies have created competitive advantage and they have made the company

profitable in short and long terms. The company’s development in Self-driving car, google glass

and alternative energy has shown its big potential.

Risk and Competition

Despite all its investments into new areas, online advertising still accounts for 90 percent

of Google’s revenue. The company faces several risks. Although Google has been invested a lot

36

on Google Plus and Gmail, to expand its social networking platform, people will still prefer

Facebook as the first place to go for sharing information. Google also has no advantage on

professional networking as compared to LinkedIn.

Google also faces problem in vertical research. Although it is the most common page for

PC web searching, it is not very likely to be used for mobile search. People who are looking for

deeper and more specific information such as hotel, flights and travel, they tend to go to other

websites or apps such as expedia.com, airbnb. Google also has to take more effort into e-

commerce business. The giants like amazon and eBay collects millions of users’ profile and

preference through their e-commerce platform, and Google needs to do more to get more data in

order to know what customers are thinking today.

Another risk for Google is that, it does not pay dividend. Therefore the investors have to

trust Google on allocating their investments efficiently and generate more revenues. However,

Google’s revenue growth started to slow down since 2013 at 21%, compared to nearly 100% in

2005. Overall, Google's growth rate is still mighty impressive relative to its peers of that size.

Google continues to act like a growth company. Besides, Google also faces anti-trust issues that

governments and regulators have been investigating on whether Google has given preferential

treatment to reviews of restaurants, travel information and other business on its own service.

Management

According to 2004 founder’s IPO letter, Google will not shy away from high risk, high

reward projects because it believe they are key to their long term success. Google is planning to

reach out to more customers, as only a fraction of the population in the world has access to

internet. The company is investing in new projects, like Project Loon, trying to spread Internet to

the rest of the world. By getting more users online, Google will be able to expand its business

and generate more revenue. Google has been revolutionary, and making brave movements as it

acquired YouTube, Android and created Chrome. Google has been invested in renewable and

alternative energy in recent years. Although the company’s previous investment might not be

very successful, but it sticks to the trend that renewable energy will become very popular in the

near future.

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Appendix 3C

Facebook.Inc

Market Leadership

Facebook, established in 2004 is the largest social platform in the world. The social

networking gives people access to connect to their family, friends, and discover the world, to

share and express their matters. The company has market cap of $212 billion. The website has

more than 1.25 billion registered active users, and among them 1 billion also use mobile device

to log into their accounts. The company also has Instagram, WhatsApp and messenger and other

apps under. The company experienced revenue of $7,872 million, with a growth of 55% in 2013

and $12,466 million, with a growth 58% in 2014. The company recorded $2,940 million in net

income in 2014, almost doubled from last year.

International Exposure

Like Google, Facebook also has a very strong presence in Global market. It has over 230

million users in Europe. Over 51% of revenue were generated from outside the United States in

2013. The majority of our revenue outside of the United States came from customers located in

Western Europe, Canada, Australia and Brazil.

Below is Facebook’s domestic and international revenue in percentage of revenues (in millions):

2012 2013 2014

US & Canada 47% 46% 48%

Europe 28% 28% 27%

Asia-Pacific 13% 14% 15%

Rest of the World 12% 13% 11%

Past Performance

Facebook.Inc launched its IPO in May 2012, with stock price at $38. It then experienced

several minor declines in 2012 and 2013, but then performed strong, and made a rapid growth

since mid-year of 2013. The all-time high stock price happened in March 2015, at $87 per share,

and it seems like the stock in still in a trend of skyrocket. The company experienced a revenue of

38

$7,872 million, with a growth of 55% in 2013 and $12,466 million, with a growth 58% in 2014.

The company recorded $2,940 million in net income in 2014, almost doubled from last year.

From the past performance, we can assure that Facebook will not stop its pace in the near future

and will be expected to gain high return from its investments; which means it will be a good

choice for investors to spend their money.

Year 2014 2013 2012

Sales $12,466 M $7,872 M $5,089 M

Operating Margin 40.1% 35.6% 10.6%

ROE 11.34% 10.95% 0.4%

EPS $1.1 $0.6 $0.01

EBITDA $4,994 M $2,804 M $538 M

Core Competence

Facebook’s core competency is that it understands why and how people are connected, by

creating suitable social graphs and networks. Their strategy makes people keep connecting to

others and pulling friends and families into the network. One of their key functions on attracting

users is to “people you may know”. This function often surprise people that they could find

someone who they lost contact many years ago. Another competence of Facebook is its

innovation. Like Google, Facebook never stop innovate and develop. It had made acquisitions to

Instagram, WhatsApp, and Messenger- several most popular social platforms among young

people. The company made significant investments in technology to improve existing products

and develop new ones. Its research and development expenses were $2.67 billion, $1.42 billion,

and $1.40 billion in 2014, 2013, and 2012.

Risks and Competitions

Facebook faces government laws and regulations that might affect its business, which

involves user privacy, rights of publicity, data protection and intellectual property. Another risk

39

would be failure to introduce new products, which make Facebook outdated, and users would

switch to newer platforms. Failure to deliver proper service and good experience to users might

also reduce the website’s attractiveness to people. Another risk is the way Facebook makes

revenue. For 2014, 2013, and 2012, advertising accounted for 92% , 89% and 84% , respectively,

of our revenue. Most of advertisements are short term, and the company has to show high returns

and high volume of online traffics to those ad companies in order to obtain investments.

Facebook’s largest competitor is Google, which is aggressively developing its business in

networking platforms. Facebook would have to fight with Google for market share in the future.

Management

Facebook CEO Mark Zuckerberg plans to make a series of aggressive talent and ad-tech

investments in next coming years, and expects a successful future. However, it means

Facebook’s expense would increase to 70% of its total revenue. The company plans to expand its

users on its apps, such as Instagram, WhatsApp, which grew up with the new generation.

Besides, the company plans to build the next major computing platform with its newly acquired

company Oculus. Like Google.Inc, Facebook has never pay dividend to its stockholders, holding

any future earnings to finance the operation and expansion of its business. The company’s

aggressive investment plan represents confidence from the board, expecting to generate high

profit with these new investments. Therefore, it would be a good choice to invest in Facebook for

mid to long term investment.

40

Appendix 3D

Gilead Sciences Inc.

Market Leadership

Gilead (GILD) has a leading market position in the biotechnology industry. It is a biotech

company that focuses on the research, development and commercialization of anti-infective

medications. GILD’s primary focus is on HIV, HBV and HCV infection. It has operations in

North America, Europe and Asia.

International Exposure

Gilead has operations in more than 30 countries worldwide, including North America,

Europe and Asia. In 2003, Gilead established the Gilead Access Program to expand its market in

developing world. Last year, it partnered with seven major companies in India for selling Sovaldi

at a lower price to more than 90 countries that benefits more than 100 million patients.

Past Performance

Year 2014 2013 2012

Sales $24,890 M $11,202M $9,703 M

ROE 90.1% 29.74% 32.3%

EPS $2.18 $0.44 $0.44

EBITDA $16,687 M $4,869M $4,314 M

41

Discussion on Past Performance:

According to the data above, we could see that GILD had a remarkable growth in 2014.

The revenue has increased by 122% compare to 2013. 3-year compound annual growth rate is

37%. The return on equity went up by almost 60%. It also had an outstanding stock performance.

We could see from the graph that it outpaced the industry average and S&P 500 TR USD since

2013. The growth is mainly due to the approval of GILD’s Sovaldi plus Ledispasvir (Harvoni)

pill to treat 1 hepatitis C (HCV) patients by FDA and European Commission in 2014. Harvoni is

the first pill approved to treat genotype 1 HCV patient, with a 94%-99% cure rates. The sale of

Sovaldi and Harvoni accounted for 50% of the revenue in 2014. Another reason for the

unbelievable growth of the company is their deal with 7 Indian generic drug firms on selling

Sovaldi at a much lower cost. This big deal favors more than 90 developing countries with more

than 100 million people with hepatitis C infection. New technology and treatment is the key to

success in the biotech industry and Gilead is continuing focusing in R&D of HIV, HBV and

HCV treatment in the future.

42

Core Competence

If a company have a strong core competence, it means this company have a sustainable

competitive advantage, and it is very likely to do better than its competitors.

GILD has leading positions in three areas, anti-virus, cardiovascular and respiratory treatments.

In the early years, Gilead focused on developing complete regimens for HIV. It became the

leading producer of HIV drugs in the world. It is the only company that produces complete

regimen for the deadly viral infection, Atripla, Complera and Stribild. It also developed the first

HIV prevention product for adults who have high risk for getting infected by HIV. Being the first

mover, Gilead established its brand and expanded its market quickly.

Gilead did not only focus on the antivirus allay, it entered the cardiovascular and respiratory

space in 2006 by the acquisition of Corus and Myogen, which lowered its risk and expanded its

horizontal scope.

Beginning from 2010, Gilead acquired several companies that develop interesting

oncology products to further expand its business scope. The oncology and inflammatory disease

market is huge and growing, Gilead is definitely going to profit and become the leader in this

area.

Risk

Risk can be determined based on a company’s structure and business model. We will

look into its financial data, and historical performance to identify the risk factors.

Since the revenue is mainly derived from sales of products to treat HCV and HIV, keeping the

growth of those product sales is crucial for Gilead’s performance and growth. Because these two

drugs are newly launched drugs, the performance in 2014 could not be an effective indicator for

the future and the uncertainty for new similar products entrants increases the risk of revenue loss

for Gilead. It is also hard to accurately predict the demand for Gilead’s products, fluctuations

might occur thus may adversely affect the stock price and financial ratios. The company will be

affected if the Fed changes legislator and regulations regarding to government prescription drug

procurement. In 2010, the U.S. adopted healthcare reform legislation, required healthcare

companies to further rebate or discount products paid by various public payers. The impacts of

this reform on Gilead are: the rebate rate and discount rate both increased by 8%; 50% discount

applied to products sold to patients who are under the Meficaid Part D; and paid 3.0 billion new

43

industry fees. This is an example of how regulation and policy can adversely impact the

company.

Gilead has a Beta of 0.8, which means that it has had a lower volatility than the S&P 500

index, shows a low relative low systematic risk.

Management

According to Gilead’s 10 K, its focus in 2015 is to continuing integrating horizontally on

their product pipeline and commercial products. The company will continue funding moneys on

R&D to support their existing products and candidate products. They are planning to launch their

new single tablet regimen containing TAF in the U.S. and continue to advertise the use of

Sovaldi and Hoarvoni in the U.S. and Europe. They will also promote these two new drugs to

Asia. SG&A fee increased 76% compared to 2013 because the headcount increased for ongoing

expansion in the international market and the BPD fee.

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Appendix 3E

Amgen, Inc.

Market Leadership

Amgen is a pioneers company that focusing on discovering, developing, manufacturing

and marketing innovative human therapeutics. It is one of the world’s largest biotech companies.

The company put a lot of efforts on novel therapeutics for the treatment of grievous illness in the

area of oncology, inflammation, bone, metabolic disorders and neuroscience. Their products

mainly focus on cancer, nephrology and inflammation. The company has a lot of candidate

products in various stages covering various areas.

International Exposure

Amgen has operations in more than 75 countries worldwide and makes its treatment

available for millions of people who suffer from cancer, kidney disease, rheumatoid arthritis,

bone disease and other serious illness. Amgen has major R&D centers in both U.S. and the UK

and small centers all over the world. There international market increased by double digit in

2014.

Past Performance

Year 2014 2013 2012

Sales $20,063 M $18,6762M $17,265 M

ROE 21.55% 24.69% 22.82%

EPS $6.7 $6.64 $5.52

EBITDA $6,191 M $5,867M $5,577M

45

Discussion on Past Performance:

According to the data above, we could see that Amgen has a steady growth for the past

three years. The revenue has increased by 7.4% compare to 2013. 3-year compound annual

growth rate is 8.7%. The 3-year compound annual growth for EPS is 18.27%. It also had an

above average stock performance. We could see from the graph that it outpaced S&P 500 TR

USD since 201 but it’s slightly behind the biotech industry. During last five years, Amgen had

several major acquisitions and partnerships that contribute to its growth. In 2013, Amgen

acquired Onyx Pharmaceuticals, which launched multiple FDA approved myeloma drug

Kyprolis. Amgen acquired rights to Nexavar the same year, which is approved for thyroid cancer

later in 2013. In 2011, Amgen partnered with Actavis to develop oncology antibody biosimilar

medicines. In 2013, they together announced that they will launch biosimilar for cancer drugs in

2017. There are also several drugs got approved by the FDA, such as Epogen, Neulasta, Aranesp

and etc. Those newly launched drugs significantly increased the revenue earned.

46

Core Competence

Amgen’s core competencies are their expanded global presence and new bio-

manufacturing technologies. The company has very high free cash flow margin, 39.1% and high

FCF yield 6.18% compares to its peers within the same industry. One of Amgen’s main focus is

on high quality scientific research. Rather than starting with a specific disease and work

backward, the company uses its science to find unique uses for it. Besides, the company’s

development of innovative medicines on addressing serious illness, biosimilar and high quality

biologics. It is a good strategy to keep high cash in hands to ensure Amgen can finance its

research and development, to maintain its leading position in the industry. Another core

competency of the company is that it has developed a new system that could help reduce 23% of

facilities footprint and cut 20% of staffs by the end of 2015. By doing this, the company will

generate an extensive amount of savings from costs.

Risk

Regulation is a key challenge for Amgen. Products could not be sold or marketed without

the approval by FDA and foreign regulatory authorities if sold outside the U.S. Failure to obtain

and maintain regulatory approval will have huge adverse impact on the company. Another major

challenge the company faces is the ability to develop commercial products. Amgen has heavily

invested in R&D to develop biosimilar. However, it is highly uncertain if the product can be

developed successfully. Even the development is successful, only few projects can produce a

commercial product due to number of reasons, such as cost ineffective, harmful side effect, not

economical enough, and etc. The safety and effectiveness using in human being is essential

before any products can be marketed. All the launch of products needs to go through clinical

trials in humans before it goes to the market. The clinical trial requires a large sample size and

broad geographic location and it is also very time consuming. Amgen also faces increasing

completion from biosimilar, especially in Europe.

47

Management

Amgen initiated a restructuring plan during 2014, aimed to reduce its staff and its

facilities footprint by the end of 2015. Amgen’s goal is to increase their operating margins to

52% to 54% in 2018. Last year, by reducing its workforce and optimized its sale force, Amgen

saved near $300 million and improved its operating margin from 37.3% to 42.2% in 2014.

Amgen is planning to increase their savings on their workforce and sale force to $800 million.

By improving its cost structure, Amgen is able to invest in continuing innovation and launching

for new products, reaching operation efficiency and improve operating performance. According

to Amgen’s 10 K, the cost saving initiate also improved their T&D efficiency, contracting and

sourcing。

48

Appendix 3F

Tesla Motors, Inc.

Company Overview

Market Cap (intraday)5: 28.99B

Enterprise Value (Apr 29, 2015)3: 28.13B

Forward P/E (fye Dec 31, 2016)1: 59.25

PEG Ratio (5 yr expected)1: 4.31

Price/Sales (ttm): 9.10

Price/Book (mrq): 31.92

Enterprise Value/Revenue (ttm)3: 8.79

Enterprise Value/EBITDA (ttm)6: 621.69

Market Leadership

Tesla Motors, Inc. focus on design, develop, and sell electric vehicles, electric vehicle

powertrain components, and stationary energy storage systems in the United States, as well as

internationally. Tesla is known to be the top electric cars developer in the world. The technology

it holds help the company successfully launch one of the first popular electric car model, Tesla

model S. Its strong market presence, and innovative product help the company’s stock price rise

from $30 range to as high as $270 in the last two and half years.

International Exposure

Tesla Motors, Inc. has a very strong international presence since it facing the global

market. As of right now, Tesla is expanding to multiple countries, particularly in East Asia. We

strongly believe the company is going to keep its international strategy and provide their product

to more markets as the company grows.

49

Past Performance (Financial Overview)

Year 2014 2013 2012

Sales $3,198.4 M $2,013.5 M $413.3 M

ROE -37.25% -18.69% -227.22%

EPS -$2.36 -$0.62 -$3.69

EBITDA $284 M $206 M -$315 M

From 2012 to 2015, Tesla’s net sales jumped from $413.3 million to $3,198.4 million.

Which helped the stock price rise from $40 to $270. The main reason for the company’s success

is due to the popularity of its most profitable cars on the market, Tesla Model S. Although the

company still have negative ROE, especially in 2014, because of the decrease of the oil price, the

profitability of the company went down tremendously. However, we believe in the long run.

Electric cars still will be a huge component to the automobile market, and we are confident that

Tesla will do well in the future.

Core Competence

As suggested in their 10k report, Tesla’s core competencies of our company are

powertrain and vehicle engineering. Their electric powertrain IP consists battery pack, power

electronics, motor, gearbox and the control software which enables the components to operate as

a system. By using the technology they have, they were able to design popular models such as

Tesla Model S, and made the car capable of running more than 250 miles without fuel.

In addition to the design, development and production of the powertrain, Tesla have

created significant in-house capabilities in the design and engineering of electric vehicles and

electric vehicle components and systems. Their team has core competencies in computer aided

design and crash test simulations which we expect to reduce the product development time of

new models.

50

Risk

The risk in investing in Tesla is fairly small as we predict that the firm will dominate the

electric car market now and in the near future. However, as the other major automobile

manufacturers start to develop the electric, hybrid cars, it is possible that Tesla might lose some

of the market shares, and will face intense competition from companies such as GM, Toyota, or

even high-end brand like Mercedes, BMW. For now, we still believe that Tesla should have the

first-mover advantage, after all, it still holds better technology than its competitors. Therefore,

we think the potential return in investing in Tesla outweighs the risk.

Management

Tesla had a fairly new management team. The company started to expand its business

few years ago, and hired a lot of new blood. As suggested in their year book, their business could

be seriously harmed if integration of their management team into the company is not successful.

We expect that it will take time for the new management team to integrate into the company and

it is too early to predict whether this integration will be successful. The senior management team

in Tesla has only limited experience working together as a group. Specifically, three of the six

members of their senior management team have joined Tesla within the last few years. This lack

of long-term experience working together may impact the team’s ability to collectively quickly

and efficiently respond to problems and effectively manage our business. It is a young company,

so we believe that the management might become some issue for the firm in the future.

51

Appendix 4

Oil

We are confident that Oil price is at historical low point and it is the best time to enter the

oil market, because we feel it is going to bounce back at the end of 2015. Our valuation to actual

price for oil is $80 to $110. Based on that expectation, we believe that in 10 years oil price

should have an annual growth of 5%, therefore it will be safe option to invest.

52

Appendix 5

Mutual Funds

53

54

55

Appendix 6

Bonds

56

Appendix 7

Why not invest internationally?

The investment portfolio we designed for Mr. Donothing consists of stocks, mutual

funds, commodity and bonds. We believe that the portfolio is capable enough to generate profit

to cover Mr. Donothing’s expense every year and will have surplus for his luxury expense. The

reason why we chose not to invest internationally is because the instruments we chose, for

example: google, Facebook and tesla all have global market. International exposure is one of the

most important criteria we have on choosing companies. Therefore we believe that investing in

these companies is already a strategy in investing internationally. Moreover, we do not think it

will be necessary for Mr. Donothing to invest in foreign exchange market, because he does not

have the economics of scale. If he invest in foreign companies, he will have to closely watch the

foreign exchange market on a regular basis.

In addition, our entire portfolio is designed for one purpose- to minimize the risk while

making enough profit for Mr. Donothing. We do not think he should bear this kind of risk while

making investment decision. Furthermore, the US market is the most developed and matured

market in the world, we have enough information to make good assumption to generate

significant return. On the other hand, if we invest in foreign country, we might not have

complete or accurate information for the market. Therefore, we believe not to invest

internationally is better for Mr. Donothing.

57

Works Cited

Investment Profile

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58

Automobile Manufacturing Industry

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Tesla Motors. Inc.

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%22scale%22%3A%22linear%22%7D

Google

http://www.academia.edu/5356952/A_Case_Study_of_Google_Inc

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Facebook

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59

Medicare Industry & Companies

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US

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Mutual Fund & Commodity

http://www.thestreet.com/topic/21421/top-rated-mutual-funds.html

http://www.thestreet.com/quote/VHCIX.html

http://www.thestreet.com/quote/AMFAX.html

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http://www.marketoracle.co.uk/Article48969.html