Investment Team Update

Who are we?
The Risk Investment Team (RIT) consists out of 25 students of the University of Groningen who all have an interest in the stock exchange and investing. Once a month we meet to discuss macro-economic trends, our current positions and new investment ideas. Afterwards we have a social with some drinks. In this article we would like to set out some positions the Risk Investment Team currently holds.

IBM
The American company IBM is one of the largest players in the market of hardware, software, IT-technology and IT-services. The company is listed at the New York Stock Exchange and has a yearly revenue of around 80 billion dollars. We purchased the stock at the end of October 2016 with the expectation that after years of decreasing revenue, IBM will grow again. The IBM stock has performed relatively poorly compared to their main competitors in the past. We expect IBM to grow again since their focus has shifted from classical hardware products to high-end cloud computing services, where a larger profit margin can be obtained.

Below you can see a chart of IBM its performance from the moment we bought it. Besides IBM (blue line) we added some competitors in the chart, namely Google (red), Oracle (yellow) and Microsoft (green). We can see that IBM is outperforming her competitors with a yield of 10%. We expect that IBM will continue to outperform their competitors in the following months. Therefore we are still positive about this stock and we will keep it in our portfolio.

Covered short straddle Royal KPN
At December 13th we bought a covered short straddle KPN. KPN is known for its television, telephone and internet services, mainly in the Netherlands. Over the last couple of years the company performed relatively poorly. However KPN has a strong cash flow and an attractive dividend policy. Due to its low share price it may also be an attractive takeover candidate. Therefore we expect that there is upward potential for KPN. We would like to take advantage of this upward potential by using a covered short straddle.

A straddle is an option strategy where a call and a put with the same maturity and strike price is bought and makes a profit when a large movement in the underlying stock occurs. We however have a short straddle, which means that we wrote the options and received a premium. We also bought the share itself to account for the unlimited risk of this option strategy. This makes it a covered strategy.

We purchased the KPN stock, holding into account that one option contract holds 100 shares, for €2.68 per share. We wrote call and put options with a maturity of June 2017 with a strike price of €3.18. This means that the call is out-of-the-money and the put is in-the-money. Therefore we received a large premium for the put and a small premium for the call. Since the moment of purchase, the KPN share has increased by almost 7%, this also makes the put less valuable and the call more valuable. In total this strategy has yielded a profit of almost 16%. We hold on to the options and shares until the expiration of the options. The best case scenario for this option strategy is when the share price is close to the option strike price of €3.18. This is where our profit is maximized.

Royal BAM
Our most recent purchase (January 10^th 2017) is Royal BAM. BAM is a Dutch company active in infrastructure and the construction industry. This sector had to face tough marked conditions after the global financial crisis. However, currently there is an upward trend in construction. This means firms are getting more orders. BAM its competitors already took advantage of this trend by increasing their share prices. BAM its share price lacked behind on her competitors while the firm shows comparative results. An explanation could be the insecurity in the United Kingdom and the Brexit, since a significant share of revenue from BAM comes from the United Kingdom.

Our expectation is that BAM will catch up with their competitors and that its share price will rebounce to the level where their competitors are. We would like to hold the shares for one year maximum but we will track new developments closely. During meetings of the Investment Team we always can choose to take our profit or cut our losses on this stock.

Are you interested in the Risk Investment Team after reading this article? Are you motivated and do you have affinity with the stock market? More information can be found on our website www.riskinvestmentteam.nl. If you have any questions or if you are interested, please contact us via our email: rit@verenigingrisk.nl