Risk and Return
Peachtree Securities, Inc.
Peachtree Securities is a regional brokerage house based in Atlanta.
Although the firm is
only 20 years old, it has prospered by following a simple goal – providing quality
personal brokerage services to small investors.
Jake Taylor, the firm’s founder and
president, is well-satisfied with Peachtree’s progress.
However, he is apprehensive about
the future, as more and more of the firm’s customers are buying mutual funds rather than
individual stocks and bonds.
Thus, even though the number of customers per office has
been increasing because of population growth, the number of transactions per customer
has been decreasing, and hence sales growth has slackened.
Taylor believes this trend will continue, so he has been actively expanding his product
line in an effort to increase sales volume.
As a first step, Peachtree began offering trust
and portfolio management services five years ago.
Many of the trust clients are retirees
who are interested primarily in current income rather than capital gains.
Thus, an average
portfolio consists mostly of bonds and high yield stocks.
The stock component is heavily
weighted with electric utilities, an industry that has traditionally paid high dividends.
example, the average electric company’s dividend yield was about 6.3 percent in 1992,
versus an average stock’s yield of 3.1 percent.
Until 1993, Peachtree had no in-house security analysts –all stock and bond selections
were based on research provided by subscription services.
However, these services had
become very costly, and the volume of portfolio management had reached the point
where hiring an in-house analyst was now cost-effective.
Because most of its portfolios
were heavily weighted with electric utilities, Peachtree created its first analyst position to
track this industry.
Taylor hired Laura Donahue, a recent graduate of the University of
Georgia, to fill the job.
Donahue reported to work in early January, 1993, jubilant at having the opportunity to
use the skills she had worked so hard to learn.
Taylor then informed her that her first task
would be to conduct a seminar for a group of Peachtree customers on stock investments,
including the effects of different securities on portfolio performance.
Donahue was asked
to pick an electric utility, assess its riskiness, develop an estimate of its required rate of
return on equity, and then present her findings to a group of Peachtree’s customers.
Donahue’s first step –choosing the company- was simple.
She had been born and raised
in Tampa, Florida, so she picked TECO Energy, Inc., the holding company for Tampa
Next, she searched for information on the company.
using the Value Line Investment Survey during her student days, so she turned to this