Figure 2: BP vs. competitors (in British Pounds)
In comparison with its major competitors, Exxon Mobile and Total S.A (see figure 2), BP shows a good performance. BP has the second largest market capitalization, a similar P/E ratio than its competitors, a better dividend yield and a moderate EPS growth rate.
Figure 3: Price history BP Sept05-Sept06 (in British pence)
According to the concept of support and resistance, “levels of a share that were important in the past will be important again”. The chart of BP (Figure 3) shows a supported level of 620p. Actually the price of the share is 587p, thus the share can be perceived as cheap.
Monitoring of the investment for a six-week period
Figure 4: Price history BP Sept06-Nov06 (in British pence)
In the six- week period the share gained 13p and closed with 601p on the 9th of November, despite the fact that the share price had its lowest point at 568p on the 4th of October. The movements of the price were partly influenced by the announcements BP made. On the 4th of October 2006 BP announced their “3.Quarter 2006 Trading Update” and disappointed the shareholders, thus the share price dropped.
Future prospects of the investment
The future prospects for BP are good, as long as they have oil and gas reserves. In order to be prepared, they carry out research and development in renewable and alternative energies. Therefore the share price of BP will rise constantly in the following years.
2.2 Royal Bank of Scotland Group plc
Justification for the choice with a historical review
Figure 4: RBS vs. competitors (prices in British pence)
To diversify the portfolio, a company of the financial sector from the FTSE100 was chosen. The Royal Bank of Scotland Group PLC is a banking and insurance based in . Due to the fact, that the Royal Bank of Scotland Group is the second largest banking group in the UK and Europe, and the fifth largest in the world by , the risk of this share can be evaluated as moderate. In comparison with his main competitors (see figure 5), the share of the Royal Bank of Scotland shows a lower P/E ratio. This indicates that the share is cheap relative to its industry peers. Furthermore it has the best dividend yield; hence the share returns a better income to his shareholders than his competitors. But at the same time, the Citigroup outperforms with a larger market capitalization and a higher EPS growth.
Figure 5: RBS vs. competitors (in British Pounds)
Monitoring of the investment for a six-week period
In this six-week period the share had its lowest point on the 28th September with 1812p and its highest point on the 13th October with 1912p.The average share price of this six-month-period (1873p) and the actual share price (1877p on the 9th November) are higher than the purchase price of the share (1812p).
Figure5: Price history RBS Sept06-Nov06 (in British pence)
Future prospects of the investment
Royal Bank of Scotland invests into emerging markets such as China. They started a credit card joint venture with the Bank of China and they are planning to enter China's market for car and household insurance in 2007. These investments will pay off well in the long term and show that RBS is looking to the future. As a result, the shares of RBS will grow in the future.
2.3 Siemens AG
Justification for the choice with a historical review
Siemens was chosen to take part in the portfolio, because it is one of the world's largest electrical engineering and electronics companies. The German company is active in the areas of Information and Communications, Automation and Control, Power, Transportation, Medical, and Lighting. The risk of the share is moderate, because Siemens belongs to the DAX 30 and the EuroStoxx50; furthermore the company has a large market capitalization (44,6 billions £).
Figure6: Siemens vs. industry (currency: British Pounds)
In comparison with its industry (Electronics) Siemens shows a lower P/E ratio, a better EPS growth and a better sales growth. Nevertheless, the dividend yield of Siemens should be considered as low.
Figure7: Price history Siemens Sept03-Sept06 (in British pence)
A basic principle of charting methods says that “you should invest in the direction of the main trend of the market or share”. The price history of Siemens` share shows an up-going-trend, thus now is a good time to purchase this share.
Monitoring of the investment for a six-weeks period
The determined up-going-trend of the Siemens share continued in the monitored period. In these six weeks the share gained 306 pence. This development was accompanied by positive headlines for Siemens. The restructuring of Siemens, which included the sale of its mobile handset business to BenQ, apparently had an effect. In the fiscal year 2005/06 Siemens was able to increase its profits by 38% to 3.1 billion euros (2,08 billion British pounds).
Future prospects of the investment
The restructuring of Siemens is almost completed; therefore in 2007 a good performance can be expected. In particular, the medical technology division of Siemens seems to promise high growth rates in the future.
2.4 UK- Government Gilt
Justification for the choice with a historical review
To ensure a balanced portfolio, a government gilt is chosen to minimize the risk. Gilts are one of the safest forms of investment, as the government is unlikely to default on interests or principal repayments. A conventional gilt with a duration of six years with a coupon of 9% is chosen. This is a long-term investment, thus Mr. Flippinlaldi receives fixed cash payments twice a year and at the end he obtains his principal back.
Monitoring of the investment for a six-weeks period
The fluctuations in gilt prices are not so important, because at maturity Mr. Flippinladi gets his principal back. Only if he needs his money before 2012 and he wants to sell the gilt, would it be important to monitor the prices. Nevertheless the prices of gilts do not change a lot.
Future prospects of the investment
As this form of investment is nearly 100% safe, there is no doubt that Mr. Flippinladi gets his money back. The UK government has a AAA credit rating from and Aaa from Moody's.
3. Conclusion and summary
In conclusion, a diversified portfolio was created for Mr. Flippinlaldi with a moderate risk. Three shares from large companies within different industries, and a government gilt were chosen and presented in this paper. In the monitored six-week-period the portfolio performed well and produced a 3% yield. The future prospects for the portfolio were estimated as good, but share prices depend on many factors; therefore accurate projections are difficult to make.
References
Teach-in (2004a) Profit by learning the lessons of the past. Teach-In. Vol.12, August 2004, pp.24-25.
Teach-in (2004b) Follow your friend the trend unto the very end. Teach-In. Vol.?, August 2004 pp.20-21.
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http://moneycentral.msn.com
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http://ukinvestmentadvice.co.uk/gilts.htm
