FE 445 C1 Final Team Project

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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 1C
GDP
Appendix 1D
Inflation

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Appendix 1E
Unemployment Rate

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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
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.
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
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.

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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.
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.

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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.
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 $106.1 bn in 2014 and a
compound annual growth rate of 5.7% from 2010 to 2014. This strong growth also shows its
high capability and ability for recovering from an economic recession.
Past Performance
performance than others. Over the past five years, the annual revenue for the biotech industry has
grown at 5.5% to 98.5 billion in 2014. The three-year CAGR for sales is surprisingly high,
around 23% from 2011 to 2014. The industry also has a unbelievable high gross margin.
According to S$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

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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.
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

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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
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
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.
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.
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
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
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.
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.

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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
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
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.
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 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.
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.

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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.
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

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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.
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.

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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.
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

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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.
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

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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.

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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.
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.

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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Industry and company Analysis
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Internet Industry:
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broadcasting-and-search-engines/

58
Automobile Manufacturing Industry
http://www.ibisworld.com/industry/default.aspx?indid=816
http://selectusa.commerce.gov/industry-snapshots/automotive-industry-united-states
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growth-opportunity-for-corning/
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Tesla Motors. Inc.
http://ir.teslamotors.com/secfiling.cfm?filingid=1193125-13-96241&cik=
http://financials.morningstar.com/ratios/r.html?t=TSLA
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%22scale%22%3A%22linear%22%7D
Google
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Facebook
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http://ayeshamascarenhas.tumblr.com/post/30917292852/core-competencies

59
Medicare Industry & Companies
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Mutual Fund & Commodity
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