TO: Jarrad Harford

FROM: Cash Cows (Pavel Ceban, Erica Cheng, Jennifer Cheng, Jiani Lei)
SUBJECT: Stock Case Analysis
DATE: March 14, 2014

Summary
For the majority of winter quarter, Cash Cows portfolio has led Finance 350, with an overall
portfolio return of 29%. This success can largely be attributed to Tesla Motors, Inc., whose stock
price increased by 71% up to March 10. Our stock value in Costco Wholesale Corp. barely changed
from its January 13 value, while Delta Air Lines experienced a 12% growth and Salesforce.com
experience around a 7% growth. These companies together have given us a fairly diversified
portfolio, with representation from a variety of industries. With a portfolio beta of only 0.999, our
risk was a little less than that of the market as a whole. In the end, with some diversification and a
little luck, we managed to choose a very profitable set of stocks.

Market and Firm-Specific Factors
Tesla Motors (TSLA) experienced enormous gains since January, defying the overall movement of
the market, while also being a relatively low-risk investment (with a Beta of only 1.28). This can be
attributed to Teslas high profits and increasing cash flows. The electric car company also recently
completed its revolutionary supercharger networks in Europe and the USA. Even with the escalating
Ukraine crisis on the first week of March, Tesla stock barely took a hit when compared to the -0.06
% VFINX and -0.68% VHGEX returns. Of course, Tesla is still a fairly volatile stock and many
believe its current stock price is overvalued, which may still prove to be the case in the near future.

Additionally, Salesforce.com had a fairly unpredictable run. As an enterprise tech company focusing
on CRM and using acquisitions to fuel its growth, salesforce-specific news can greatly affect its
stock. For example, on January 17
th
, Salesforce reached 1 million customers and immediately saw a
jump in its stock price by about $4. Nonetheless, during March, CFO Graham Smith announced that
he would resign within a year following news of Salesforces negative GAAP earnings report. The
report of this news was quickly followed by a 3.8% (or $2.42) decrease in Salesforce stock.

Delta Air Lines, Inc. (DAL) was another successful stock for Cash Cows. The company provides
scheduled air transportation for passengers and various cargos worldwide. DAL has stayed consistent
in their stock prices and over the past 9 weeks has slowly increased. The airline company did not
have any major news to report, and even market-wide events such as the U.S government shutdown
and Ukraine crisis have not affected Deltas stock. This may be due to the compelling growth in net
income and revenue growth seen in the past few years and the markets future projections of further
success. Deltas position as a stable and economical airline company has helped it as well.

Lastly, Costco has had a fairly stable run, with a few small fluctuations in its stock. As a successful
retail company with a durable business model focused on making profit from subscription fees that
bring in dependable revenue, Costco provides one of the best near-term cash flow visibilities and
allays investor worries. Over these last few months, Costco has seen a 5% rise in comparable store
sales for last quarter, a 7% increase in membership fee sales and released their Q2 fiscal 2014
earnings, reporting a 7.27% earnings jump compared to last year.

Portfolio Performance and Risk
Determined through the weighted average beta of our portfolio, our portfolios beta was only 0.999
in comparison to the market beta of 1. This low beta is mostly due to Costcos beta of 0.46. Although
Salesforces, Deltas and Teslas betas are slightly higher than that of the market, it helped that we
put a greater emphasis on Costco and Tesla stock. Since our four stocks were so diverse relative to
their industries, it made sense that our risk was similar to that of the overall diversified market. Apart
from Tesla, our other three stocks moved similarly to that of the VFINX, QQQ, and VHGEX, with
small increases and decreases throughout the quarter and a small overall increase in value based on
those three stocks alone. Nevertheless, Teslas surprise surge did not necessarily reflect its lower risk
value, nor did it fluctuate according to the market, which was a little surprising.

In terms of our portfolios actual performance compared to the 3 index returns, we were surprised at
how well we did. Our average portfolio return was 3.30% in comparison to the S&Ps 0.46%, QQQs
0.68%, and the Global Equity Funds 0.41%.

Multiples in Relation to Stock Types
Moreover, the multiples of our stocks match our intuition for growth and value stocks. Since growth
stocks are stocks with earnings that are expected to grow at an above average rate compared to the
market, we would expect the P/E ratio and the PEG ratio (which takes into account a companys
earnings growth) to be higher than the industry averages. As relatively new companies, Tesla and
Salesforce would likely be considered as high growth stocks. Their future projected P/E ratios are
significantly higher than the industry averages, and their PEG ratios are 2.38 vs 1.18 for Tesla and
4.20 vs 0.93 for Salesforce. Again, Costcos durable business model allows it to grow above the
average market rate and continue to innovate, which is reflected in its multiples. Its P/E ratio of 24.83
is well above the industry average of 1.07, and its PEG ratio is as well (2.27 vs 0.64).

On the other hand, as a long-established airline company, Delta cannot really be considered a growth
stock, making it more like a value stock. Value stocks are undervalued and have lower multiples
relative to their industry. Our intuition is mostly correct; Deltas P/E ratio of 2.82 is much less than
the industry average of 31.88, and its PEG ratio of 0.97 is only slightly more than the industrys 0.86.

Volatility
It can be difficult to expect how the stock market will perform tomorrow and to find out what is the
dominant factor that determines market trends. Generally speaking, there are usually two factors that
play an important role in this situation. First, investors irrational behavior has a great impact on
where the market will end up. When investors lose confidence in their investing companies or the
economic environment, they can become more aggressive and irrational, which can drive markets
down. On the other hand, overvaluation of stocks can occur when investors are too eager over some
positive news, which can have consequences as well. In addition, the political environment in both
the US and other nations can also affect the stock market. For example, when the nation experiences
high unemployment or a real estate bubble, investors will lose confidence in the government, thus
negatively affecting the market. This is true globally as well, especially in terms of negative reports
regarding European banking systems, which affects both global and US markets greatly.

Conclusion and Lessons Learned
This stock case project was a very intuitive way of learning more about stock portfolios and keeping
up with the market. Before this project, most of us had never looked at the NASDAQ or NYSE to
look at stock values. By choosing stocks that we were interested in and regularly observing them on a
weekly basis, we were able to learn how to read quotes summaries and analyst estimates. It also
allowed us to become more familiar with the whole process of picking and evaluating stocks, which
will be very useful for future investments. More importantly, our positive performance has taught us
just how essential a diversified portfolio really is. Although we had many discussions on the value of
diversification in class, experiencing it firsthand has really brought the lesson home. Furthermore,
Teslas rapid rise was an enormous indication of how uncertain the future can be, and even though it
seems very beneficial to invest in Tesla at the moment, we realize its volatile nature.

Overall, this exercise has inevitably allowed us to experience what we have always wanted to ty for
ourselves. By learning more about the process of choosing and evaluating ones portfolio, we hope to
be better prepared for a future of real investments.