Analysis of four FTSE 100 stocks Stocks and shares - Free Essay Example

Analysis of four FTSE 100 stocks Introduction This paper looks at the share price performance of four FTSE100 listed companies. The four companies randomly selected for analysis are GlaxoSmithKline (GSK), Prudential (PRU), Tesco and Vodafone Group (Vod) representing pharmaceutical, financial, retailing and telecommunication sectors. Share price series analysis Appendix I shows the average monthly share prices of the above companies for the period July 2001 to December 2003. Table 1 below shows the summary of share price analysis for the four companies. Table 1 à ¢Ã¢â€š ¬Ã¢â‚¬Å" Analysis of Share Price GSK PRUDENTIAL TESCO VODAFONE % change -36.25% -44.36% -0.51% -9.01% Average price, p 1435.09 552.52 224.91 125.80 Highest price, p 2001.09 871.06 258.10 180.75 Lowest price, p 1117.71 327.46 167.89 90.64 Diff 883.38 543.60 90.21 90.11 Diff as % of Avg. 61.56% 98.38% 40.11% 71.63% St.Dev 273.30 164.40 25.71 23.21 St. dev as % of avg. price 19.04% 29.75% 11.43% 18.45% All four companies had negative return over the period meaning that share prices of all four companies declined in the 30 months to December 2003. Prudential had the highest negative return at -44.3% and Tesco had lowest negative return at -0.5%. GSK lost about one-third of its value while Vodafone lost about 9.0% of its market value over the period. The table also shows the highest and lowest values of shares of all the four companies. The difference between highest and lowest values is highest for GSK and lowest for Vodafone. But difference as a percent of average is highest in case of Prudential and lowest for Tesco. Such is the vast difference between percents that Tesco difference percent is only about 40% of that of Prudential. This shows that the percent movement in Prudentialà ¢Ã¢â€š ¬Ã¢â€ž ¢s share price was highest. Standard deviation is a better indicator of movement of a stock. Again standard deviation in absolute numbers was highest in case of GSK and lowest for Vodafone. Even though Vodafoneà ¢Ã¢â€š ¬Ã¢â€ž ¢s average share price is about 56 % of average price of Tesco, the difference in their standard deviation is not much. Further when we compute standard deviation as a percent of average, we see that Tesco has lowest percent at 11.43% while Vodafone has higher percent at 18.45%. Prudential has highest standard deviation to average share price percent at 29.75%. The above data shows that Tescoà ¢Ã¢â€š ¬Ã¢â€ž ¢s share price is least volatile among the four companies. Let us also analyse the companies from return point of view. Annexure II shows the monthly returns of four companies. Table 2 shows the key results of monthly returns. Table 2 à ¢Ã¢â€š ¬Ã¢â‚¬Å" Monthly returns GSK PRUDENTIAL TESCO VODAFONE Average monthly return -1.31% -1.48% -0.07% -0.28% Highest monthly return 9.18% 13.87% 11.55% 18.01% Lowest monthly return -13.60% -21.46% -10.52% -18.26% St. Dev. 5.24% 8.84% 4.58% 8.28% Avg. monthly return / st. dev -0.25 -0.17 -0.01 -0.03 As absolute return over the period is negative for all four companies, so are the four average monthly returns. In line with table 1 results, Tesco had highest average monthly return at -0.07% while Prudential had lowest average monthly return at -1.48%. The highest monthly returns at 18.01% were recorded in Vodafone while lowest monthly returns of -21.46% were recorded for Prudential. Even the absolute highest and lowest monthly returns are almost same for Tesco and Vodafone whereas the absolute negative monthly are higher for Prudential and GSK. We now look at standard deviation of monthly returns. Tesco had lowest standard deviation of monthly returns and Prudential had highest. These are in line with standard deviation of share prices seen in table 1. An interesting observation here is that the standard deviation on monthly returns for Prudential and Vodafone are almost same. This means that the two companies have high volatility. Correlation Analysis While we saw the individual performance of four companies, it is important from a portfolio point of view to analyse how they would impact a portfolio of stocks. The important thing to analyse is the correlation between stocks. Ideally a portfolio should have totally negatively related stocks to reduce standard deviation of the portfolio. We have done the correlation analysis on monthly % returns rather than on share prices. Table 3 shows the correlation between monthly returns of different companies. Table 3 à ¢Ã¢â€š ¬Ã¢â‚¬Å" Correlation between monthly returns of different companies GSK Prudential Tesco Vodafone Average GSK 1.00 0.52 0.48 0.41 0.47 Prudential 0.52 1.00 0.48 0.47 0.49 Tesco 0.48 0.48 1.00 0.04 0.33 Vodafone 0.41 0.47 0.04 1.00 0.31 The highest correlation is observed between GSK and Prudential but it is 0.52 only. The movement in GSK monthly return is only matched 52% by the movement in Prudentialà ¢Ã¢â€š ¬Ã¢â€ž ¢s share monthly returns. Each % movement in GSK monthly return will be matched by 0.52% movement in monthly returns of Prudential. When we classify the four companies as either growth or value stocks, GSK and Prudential are probably the most closely related. GSK is a pharmaceutical company with decent growth. Prudential is a financial services firm. They are neither value stock nor growth stock in true sense. Tesco is in retailing of consumer goods whereas Vodafone is on the edge of telecommunication and technology. The lowest covariance of 0.04 was observed between Tesco and Vodafone. This low correlation means that there is almost no similarity between the returns of Tesco and Vodafone. This could be explained on the basis of their different business segments. Tesco can be seen as a value stock whereas Vodafone was then seen as a growth stock. During boom periods, growth stocks show higher returns and during lower growth or recession investors shift their focus to value stocks. That is the reason for almost unrelated movement in the share prices of Tesco and Vodafone. We now look at the average correlation of all four companies. Prudential has the highest average correlation of 0.49. Vodafone on the other hand has the lowest average correlation of 0.31. This means that Prudentialà ¢Ã¢â€š ¬Ã¢â€ž ¢s share price movement was most in line with other three shares whereas Vodafoneà ¢Ã¢â€š ¬Ã¢â€ž ¢s share price was least in line with three other shares. One interesting thing to note from table 3 is that all correlations are positive. This means that irrespective of low magnitudes, all companies share prices moved in the same direction. This is important from the point of portfolio formation. Portfolio manages would like as diverse stocks as possible to benefit from different movements in markets. Unrelated or negatively related stocks lower the variance of the portfolio and hence offer high return to variance ratio. The fact that all correlations are positive may be because of the size of companies. All four companies selected for this study are large companies. Normally movements in share price of large companies are in the same direction. Also the fact that we are calculating only monthly returns would result in more alignment of returns. Individual stocks GlaxoSmithKline GSK had the second highest negative returns over the period of this study. Its overall share price return was -36%. This is a substantial drop in market value. On this factor alone, GSK is not worth buying. But when we look at return to standard deviation ratio, GSK has highest absolute monthly return to standard deviation ratio. It means GSK offers highest returns for each % movement in variation. Investors look not only for highest return stock but for stock with highest return to standard deviation ratio. This makes GSK a contender for hold. Prudential Prudential had highest negative returns during the period. It also had the highest standard variation among the four companies. In light of the above two, it is better to sell Prudential. There is no point in holding or buying lowest return stock with highest variability. Also Prudential has the highest correlation with other three shares. Forming a portfolio with Prudential will least chance of decreasing the standard deviation of the portfolio as compared to forming a portfolio with any other three stocks. So it is better to sell Prudential. Tesco Tesco had the lowest negative returns among four stocks. This makes it a strong contender to buy. It also had the least standard deviation among four companies. Though its return to standard deviation is not high, its highest performance in terms of returns results in a buy decision. Vodafone Vodafone had second lowest negative returns. But it has a very high standard deviation. On its own, it is better to sell it because of high volatility. But if used in a portfolio, its lowest correlation can reduce the standard deviation of the portfolio most. In light of two diverging views, it is better to hold it à ¢Ã¢â€š ¬Ã¢â‚¬Å" neither buy nor sell. Appendix I à ¢Ã¢â€š ¬Ã¢â‚¬Å" Monthly Share Price of Four FTSE 100 Companies In pence Date GSK PRUDENTIAL TESCO VODAFONE GROUP 15/06/2001 1977.76 824.57 260.55 164.76 15/07/2001 2001.09 833.59 248.83 150.10 15/08/2001 1902.43 871.06 256.06 138.48 15/09/2001 1779.15 705.80 249.89 138.56 15/10/2001 1895.22 727.74 247.55 159.87 15/11/2001 1855.68 772.00 242.84 179.05 15/12/2001 1736.52 783.07 239.64 180.75 15/01/2002 1715.00 784.37 238.80 166.72 15/02/2002 1728.35 699.07 247.84 136.27 15/03/2002 1681.09 700.79 242.39 136.90 15/04/2002 1638.77 733.18 256.72 118.60 15/05/2002 1589.26 683.00 258.10 105.66 15/06/2002 1373.10 591.07 247.96 94.07 15/07/2002 1226.17 501.04 221.87 91.29 15/08/2002 1300.86 520.64 217.67 100.16 15/09/2002 1205.62 408.90 208.29 90.64 15/10/2002 1291.35 418.24 201.24 96.33 15/11/2002 1240.43 476.24 200.90 113.68 15/12/2002 1164.50 461.11 193.45 115.08 15/01/2003 1170.09 406.16 183.65 117.36 15/02/2003 1129.45 385.25 167.89 114.27 15/03/2003 1117.71 327.46 173.37 113.27 15/04/2003 1220.27 360.00 193.40 122.39 15/05/2003 1277.73 381.59 202.08 122.94 15/06/2003 1250.00 376.45 212.92 124.46 15/07/2003 1199.96 408.86 216.04 117.95 15/08/2003 1209.76 423.51 216.83 118.42 15/09/2003 1271.09 455.33 232.39 121.61 15/10/2003 1276.83 448.37 238.42 123.48 15/11/2003 1329.50 467.97 242.77 129.07 15/12/2003 1275.74 463.84 247.55 136.57 (Source: Data provided by the client) Appendix II à ¢Ã¢â€š ¬Ã¢â‚¬Å" Monthly Returns Date GSK PRUDENTIAL TESCO VODAFONE GROUP 15/07/2001 1.18% 1.09% -8.90% -4.50% 15/08/2001 -4.93% 4.50% -7.74% 2.91% 15/09/2001 -6.48% -18.97% 0.06% -2.41% 15/10/2001 6.52% 3.11% 15.38% -0.94% 15/11/2001 -2.09% 6.08% 12.00% -1.90% 15/12/2001 -6.42% 1.43% 0.95% -1.32% 15/01/2002 -1.24% 0.17% -7.76% -0.35% 15/02/2002 0.78% -10.87% -18.26% 3.79% 15/03/2002 -2.73% 0.25% 0.46% -2.20% 15/04/2002 -2.52% 4.62% -13.37% 5.91% 15/05/2002 -3.02% -6.84% -10.91% 0.54% 15/06/2002 -13.60% -13.46% -10.97% -3.93% 15/07/2002 -10.70% -15.23% -2.96% -10.52% 15/08/2002 6.09% 3.91% 9.72% -1.89% 15/09/2002 -7.32% -21.46% -9.50% -4.31% 15/10/2002 7.11% 2.28% 6.28% -3.38% 15/11/2002 -3.94% 13.87% 18.01% -0.17% 15/12/2002 -6.12% -3.18% 1.23% -3.71% 15/01/2003 0.48% -11.92% 1.98% -5.07% 15/02/2003 -3.47% -5.15% -2.63% -8.58% 15/03/2003 -1.04% -15.00% -0.88% 3.26% 15/04/2003 9.18% 9.94% 8.05% 11.55% 15/05/2003 4.71% 6.00% 0.45% 4.49% 15/06/2003 -2.17% -1.35% 1.24% 5.36% 15/07/2003 -4.00% 8.61% -5.23% 1.47% 15/08/2003 0.82% 3.58% 0.40% 0.37% 15/09/2003 5.07% 7.51% 2.69% 7.18% 15/10/2003 0.45% -1.53% 1.54% 2.59% 15/11/2003 4.13% 4.37% 4.53% 1.82% 15/12/2003 -4.04% -0.88% 5.81% 1.97% BIBLIOGRAPHY AND REFERENCES Brealey, R.A. Myers, S.C., à ¢Ã¢â€š ¬Ã‹Å"Principles of Corporate Financeà ¢Ã¢â€š ¬Ã¢â€ž ¢, Sixth edition, McGraw-Hill Companies.