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Risk-Return Analysis of Five Assets Portfolio

Introduction

The given analysis will primarily focus on the risk-return analysis of five key assets represented by companies, such as Cabot Oil & Gas Corporation (COG), Cooper Companies Inc. (COO), ConocoPhillips (COP), Coty Inc. (COTY), and Texas Instruments Incorporated (TXN). It is important to note that all of these companies were hit by ramifications of the COVID-19 pandemic and its effects on the economy to a varying degree. Although the United States government aided both the citizens and businesses through stimulus checks, which helped them to stay afloat, the outbreak’s impact was and still is unavoidable.

Description

In order to properly and thoroughly understand the U.S. economy during the COVID-19 pandemic, it is important to utilize the framework of business cycles. Every business cycle is comprised of four major phases, which are expansion, peak, contraction, and trough (Amadeo, 2020). By observing the financial performance of the selected companies and the US economy in general within the timeframe of interest, it is evident that the most prominent phases are contraction and trough with small indications of expansion at the end. The pre-COVID-19 period can be considered as a peak point for these companies and the economy, where the performance gradually, and in some cases, sharply, declines, manifesting itself in the contraction phase. All companies hit their trough point in the midst of the pandemic, where some of the companies even begin to lose money by quarter 2. However, the following quarters are indicative of a gradual and slow recovery process, which is reflective of the expansion business cycle phase. For example, Cabot Oil & Gas Corporation or COG experienced its lowest gross profit values during quarter 3, whereas Cooper Companies Inc. or COO, have the lowest gross profit values during quarter 2. Both these quarters take place during June and September of 2020, which are periods between two major stimulus checks signed by the Trump administration, which took place during March and December of 2020.

In the case of ConocoPhillips or COP, which is one of the largest companies on the list alongside Texas Instruments Incorporated or TXN in terms of market capitalization, it experienced negative gross profit or losses during quarter 2 since its total revenue fell below its total costs. Although the company gradually recovered throughout the following month, it still did not reach its state during March 2020. In a similar fashion, Coty Inc. or COTY also experienced major losses during quarter 2, where it had negative revenue, negative costs, and negative gross profits. It recovered slowly but was unable to reach its state during the initial months of the pandemic. The last selected company TXN is an outlier and exception of these observed trends because it was able to maintain and even slowly grow its profits during the pandemic. Throughout the first two quarters, TXN did not experience any change in its financial performance, but during quarters 3 and 4, the company’s revenue and profits grew significantly.

From these observations, one can understand how different industries are performing. For example, the oil and gas industry was hit severely by the lockdowns and the pandemic since both ConocoPhillips and Cabot Oil & Gas Corporation experienced contractions and troughs during quarters 2 and 3. In the case of the industry of medical instruments and supplies, COO experienced contraction and trough during quarter 2 but reached its peak during quarters 3 and 4, which partly can be explained by the increased demand in the healthcare sector for medical equipment due to surges in infections. The industry of household and personal products, represented by COTY, experienced a severe decline in quarter 2 but remained stable throughout all other quarters. It can be explained by the fact that many consumers began hoarding these products at the beginning of the pandemic, after which, in quarter 2, the demand fell drastically.

There was a total of three stimulus aids throughout the pandemic, where the Trump Administration provided the first two checks, and the third one was provided under the Biden Administration. The CARES Act was the very first COVID-19 relief bill, which was signed during quarter 1 on March 2020 (AS English, 2021). It provided $1200 to people who complied with a set of certain criteria and conditions. The second stimulus aid was provided on December 2020 as a “part of the Coronavirus Response and Relief Supplemental Appropriations Act of 2021” (AS English, 2021, para. 5). It included $600 per individual, and it was a $900 billion package. It is stated that “the third, most recent round of Covid-19 stimulus came as part of the $1.9tn American Rescue Plan Act which was passed by the House of Representatives on 26 February,” and was provided on March 2021 (AS English, 2021, para. 7). Therefore, the three fiscal stimulus packages adopted by Trump and Biden Administrations were the CARES Act, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, and the American Rescue Plan Act.

The Federal Reserve System or FED also contributed to the U.S. economy through a wide range of approaches. Firstly, the FED began supporting the economy by introducing near-zero interest rates by lowering the federal funds rate to 0-0.25% in March 2020 and providing forward guidance measures, which are based on the tools utilized during the Great Recession of 2008 (Cheng et al., 2021). It also began supporting financial market functionality through repo operations, backstopping mutual funds, lending to securities firms, and conducting security purchases (Cheng et al., 2021). In addition, the FED promoted and encouraged banks to lend money to the population by relaxing the regulatory requirements for both community and large banks, and it provided direct lending to banks through simplified systems and lower interest rates (Cheng et al., 2021). The FED also provided support to small and medium-sized companies through loans and lending to large corporate employers (Cheng et al., 2021). Lastly, the FED helped consumers and households, municipal governments, and states through lending. All these actions were aimed to minimize the economic damage of the pandemic and stimulate economic growth through the availability of resources.

In order to understand and properly evaluate the stock inclusion in the portfolio, it is important to assess the projected performance of the selected companies. In the case of COG, the stock can be categorized as a growth stock since it has relatively low market capitalization and small beta, which is indicative of low volatility. In other words, the company is projected to grow because there is room for growth, and it is not subject to market changes. In addition, both ROI and ROE are within acceptable and positive ranges, which also make the company an appealing option for investment with an emphasis on its future growth potential.

The second stock, COO, can be categorized as both defensive and income stock because it can perform both of these functions. It is a defensive stock because the industry of medical instruments and supplies is an essential market. For example, through all four quarters, the company remained relatively stable with periods of small growth. In other words, being a part of the healthcare industry, the stock is defensive. It can also be categorized as an income stock because it has a high EPS ratio of 45.38, which means that one can maximize his or her income by purchasing COO stock.

Moreover, the COP stock can be put in a category of cyclical stock since the company is experiencing small declines in ROI, ROE, and EPS. It is a fairly large company, which means that it will likely struggle within the national economy’s pattern. The company will most likely survive the current recession and can potentially grow after the pandemic is over, which means that stock can be purchased with an expectation that it will recover alongside the economy.

The COTY stock can be categorized as speculative and cyclical, and the former element can be justified by the possibility that the company is undergoing through its deepest trough, and it might recover and grow by a significant degree, which means that potential returns can be highly profitable. The fifth option, TXN, is a solid income stock with some elements of defensiveness. It is primarily an income stock since it is a large company with high market capitalization values, and it also has high EPS, which is ideal for maximizing profits.

Conclusion

In conclusion, in order to diversify the risk and maximize returns, the portfolio should include COG, COO, COP, and TXN. COTY should be excluded because it is highly volatile and speculative, and its size is too small to ensure that it will survive the recession. COG should be included because it has a high potential for growth, which will be the main driver of returns with relatively low risk due to 0.17 beta. Both TXN and COO should be included as defensive stocks because the former exhibited a strong form of resilience during the crisis, and the latter operates in an essential industry. Both of them will be necessary to minimize the risks since they are unlikely to experience a downturn.

References

Amadeo, K. (2020). What is the business cycle? The Balance.

AS English. (2021). How many stimulus checks have been there until now and when were they paid? AS. 

Cheng, J., Powell, T., Skidmore, D., & Wessel, D. (2021). What’s the Fed doing in response to the COVID-19 crisis? What more could it do? Brookings.

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Essay4Business. (2023, January 16). Risk-Return Analysis of Five Assets Portfolio. Retrieved from https://essay4business.com/risk-return-analysis-of-five-assets-portfolio/

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Essay4Business. (2023, January 16). Risk-Return Analysis of Five Assets Portfolio. https://essay4business.com/risk-return-analysis-of-five-assets-portfolio/

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"Risk-Return Analysis of Five Assets Portfolio." Essay4Business, 16 Jan. 2023, essay4business.com/risk-return-analysis-of-five-assets-portfolio/.

1. Essay4Business. "Risk-Return Analysis of Five Assets Portfolio." January 16, 2023. https://essay4business.com/risk-return-analysis-of-five-assets-portfolio/.


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Essay4Business. "Risk-Return Analysis of Five Assets Portfolio." January 16, 2023. https://essay4business.com/risk-return-analysis-of-five-assets-portfolio/.

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Essay4Business. 2023. "Risk-Return Analysis of Five Assets Portfolio." January 16, 2023. https://essay4business.com/risk-return-analysis-of-five-assets-portfolio/.

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Essay4Business. (2023) 'Risk-Return Analysis of Five Assets Portfolio'. 16 January.

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