Financial Analysis Exercise #$2(100$ Points$)$

Background

The S&P $500$ is a market index that also defines firms into sectors$,$ industries that contain specific

firms. A link is provided below with the standard sector$/$industry breakdown used by the S&P$.$

The S&P $500$ identifies ten different sectors and industries within each sector:

Consumer Discretionary $(12$ Industries$)$

Consumer Staples $(6$ Industries$)$

Energy $(2$ Industries$)$

Financials $(8$ Industries$)$

Health Care $(6$ Industries$)$

Industrials $(14$ Industries$)$

Information Technology $(8$ Industries$)$

Materials $(5$ Industries$)$

Telecommunication Service $(2$ Industries$)$

Utilities $(5$ Industries$)$

If you go to the link above, it will allow you to see each industry within the sectors$.$ Sector analysis

is fundamental to managing an investment portfolio that provides returns that are superior to

market returns. This requires an understanding of the current economic conditions, forecasts

about the future, and consensus forecasts about future earnings prospects within

sectors$/$industries and specific firms.

$7$

Requirements

Exercise #$2$ is due by the end of Module $4.$ In this exercise, you will need to select $1$ to $3$ sectors

and then $1$ industry within each sector to that you think will outperform the S&P $500$ over the next

year.

In order to meet all the requirements for the financial analysis exercise #$2,$ you are required to

complete the following tasks:

$1.$ Identify sectors and industry:

The exercise #$2$ requires you to identify $1$ to $3$ sectors and $1$ industry within each sector

that will be used complete this exercise. The sectors selected should be on the basis of

their past behavior that was pro cyclical, counter cyclical or a neutral sector

sector$/$industry$.$ The best place to start would be to scan the firms in each industry and

look for familiar names from your own consumer experience or other sources. Then, roll

back up to the industry and sector.

$2.$ Perform fully analysis:

The first part of the analysis is to perform a SWOT analysis on each sector$/$industry

selected. Identifying its strengths, weakness, opportunities and threats. Look at the sector,

such as utilities, they are neutral. People always need to electricity, water and gas. They

are all highly regulated industries. A SWOT analysis might indicate that their strength is

stability and neutrality but it would also be a threat to future growth and earnings

potential. Opportunities could be to expand their base or acquire other firms, which

could also be threat. Keep it simple but be thoughtful and provide perspective and

insight.

$3.$ Analyze past performance:

This will require you to research on past performances during recessions and periods of

growth, which will help you determine whether they are pro, counter, or neutral sector

cyclically. This type of information should be readily available from numerous reliable

internet sources, which includes: S&P$,$ investment firms, but no Wikipedia or other nonacademically acceptable sources. Graphs should be readily available from these

sources but any graphs should be sighted as to the source.

$4.$ Present research on future economic scenarios:

Another source of information would be consensus forecasts of the sector and industry

performance. Many investment firms publish their predictions of earnings by firm, industry

and sector. Do not rely on a single source but bring together the broad view of as many

sources as possible.

$5.$ Demonstrate why these particular sector$($s$)/$industries will outperform the overall market:

The last part of this particular project is to demonstrate why these particular

sector$($s$)/$industries will outperform the overall market. This requires understanding some of

the key drivers in the industry such as consumer spending, consumer spending on

durable products. This further requires using a combination of the historic data and

interpolation about those relationships and how they will impact the industry in the future.

For example, for this section if Consumer Discretionary sector were chosen and the

industry Hotels, Restaurants and Leisure, there are likely parts of that industry that are

counter cyclical such as McDonalds in the restaurant industry. They typically perform

better in low growth or recessionary times while Chili$$s and other sit down restaurants

generally see a slowdown.