May 19th, 2010
During the Spring 2010, the students in Economics of Investment played the investing game throughout the 10-week semester. The 42 players were each given $500,000 and had to manage a Buy and Hold account as well as an Active account. Students invested in domestic stocks, foreignstocks, bonds, mutual funds, futures, and options, attempting to finish with the best portfolio in the class by the end of the trading period.
Section 1: Introducing the stock
General Information on the Stock
Stock: Kraft Food (KFT) New York Stock Exchange
Purchase price: $29.05
52 week hi and low: 23.55 - 31.09
Market capitalization: 44.23B
Mean analyst Recommendation: 2.1/5
Annual Dividendand yield: 3.90%
One-year target price: $33.53
Short interest ratio: 2.2
% shares held by institutions: 42.20 %
% shares held by insiders: 8.02%
Beta : 0.59
Kraft Food (KFT) is a company that manufactures and markets snacks, confectionery, and quick meal products worldwide in approximately 160 countries. Together with its subsidiaries Kraft also sells beverages,cheese, convenient meals and various packaged grocery products. Nine of their brands have revenues of more than $1 billion, and 50 brands generating more $100 million. Brands like Kraft cheeses, dinners and dressings; Oscar Mayer meats; Philadelphia cream cheese; Maxwell House coffee; Nabisco cookies and crackers and it's Oreo brand; Jacobs coffees; Milka chocolates; and LU biscuits. They have morethan 103,000 diverse employees around the world, which contributes to the success of their business. The corporation is a mature company that has been in an uptrend since the beginning of the financial recession experienced in 2009 (figure 1). On January 19th 2010, Kraft Food acquired Cadbury (PLC), the world's largest maker of chocolate and sweets after a month-long corporate battle, for $19.5billions. One reason why Kraft bought Cadbury was because of its presence in emergent countries. This represents a great opportunity for Kraft to increase its presence in developing market.
Why Kraft Food?
One of the reasons I picked Kraft Food as my company is because it is a good defensive stock. In times of economic downturn, people are willing to spend more money on affordable goodsinstead of spending money on luxurious goods, such as eating in restaurants. I also chose this particular stock because I knew that mature companies were less risky than growing companies. They generate smaller capital gains but certainly offer a higher annual dividend yield (3.90%). Additionally, Kraft’s beta of 0.59 shows that the company is safer than the market and that a recession will affect itsreturns less than the average stock. The company’s one-year stock price target is expected to increase by 15% of what I originally paid ($29.05 to $33.53). With 87 years of experience, Kraft has build up a market capitalization of $44.23 billion. It is the largest confectionery, food, and beverage corporation headquartered in the United States and the second-largest in the world. With theacquisition of Cadbury, Kraft’s stock was even more attractive to investors. Cadbury was the world’s leader in chocolate and sweets, which is expected to drive up Kraft’s long-term revenue. The fact that my father works for Kraft had some influence on my decision, but after analyzing the stock, I truly thought it would be good to own shares of this company for the 10-week period.
Figure 1: Thehigher highs and higher lows of Kraft Food stock price over a one-year period. Source: www.yahoo.com
Section 2: Fundamental Analysis
Looking at the liquidity measures (figure 2) for Kraft, we can observe that the company has a current ratio greater than 1, which means that their current assets are greater than their current liabilities. Kraft’s current ratio (1.1) is slightly lower...