Long or Short? Think Qualitatively

1. Long or Short? Think Qualitatively Danny Hassan Managing Partner Boulder Capital, LLC For Discussion Purposes Only NOT Investment Advice

2. About Me • Managing Partner of Boulder Capital, LLC since 1/1/09. • Long/Short equity with a US/Europe focus on the financial space • 10 years in the business • Strong focus on fundamental research • Strong focus on meeting management teams For Discussion Purposes Only NOT Investment Advice

3. Common Hedge Fund-isms • “Look how cheap/expensive it is! This valuation is unsustainable” • “stock has had a great run and is due for a break” • “It’s trading below book! Below tangible book!” • “they’re buying back stock” • “The CEO just sold shares” • “They have tough/easy comps in the 2nd half of the year” For Discussion Purposes Only NOT Investment Advice

4. What Makes A Great Long/Short? Government Intervention is a 6th Force For Discussion Purposes Only NOT Investment Advice Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1980

5. Power of Suppliers • How much pressure can suppliers put on the business? • Highly concentrated suppliers? • No substitutes? • Can’t do without the input • Examples • Gas stations, Starbucks, Microsoft, Tiffany’s For Discussion Purposes Only NOT Investment Advice

6. Power of Buyers • How much pressure can customers put on the business? • Small number of buyers • Purchases of large volumes • Switching is easy • Very price sensitive customers • Examples • Defense Department, Auto Manufacturers v Tire Manufacturers, Wall Street Traders For Discussion Purposes Only NOT Investment Advice

7. Availability of Substitutes • Can someone easily switch to a competitive product or service? • How similar are substitutes? Coffee versus tea? • Examples • Drinking containers, TV transmission (sat, coax, etc), Internet transmission (DSL, cable, etc), building a deck (wood, concrete, etc), Laptops/iPad For Discussion Purposes Only NOT Investment Advice

8. Competitive Rivalry • How intense is the industry competition? • Many players of similar size • Little differentiation between the products and services • Mature industry with low growth. Growth achieved by stealing • Examples • Banks, insurance, computer production For Discussion Purposes Only NOT Investment Advice

9. Threat of New Entrants • How high are the barriers to entry? • Existing loyalty to major brands • High fixed costs • Buying incentives • High switching costs • Examples • McDonald’s, GE, Colorado Ski Pass, Facebook?, Apple? For Discussion Purposes Only NOT Investment Advice

10. Government Intervention • How susceptible is the company to government regulation/intervention? • Industries with too much market power • Industries that have caused systemic pain • Examples • AT&T, Microsoft in Europe, Mortgage business, Banking For Discussion Purposes Only NOT Investment Advice

11. Long Example: Stock ABC • ABC is a global credit card network • Threat of new entrants? Rating = 8 - Some threat of a bank entering or a new form of payment emerging • Bargaining power of suppliers? Rating = 8 - Merchants and merchant acquirers have very little power currently • Bargaining power of customers? Rating = 6 - Customers have some power. Banks are concentrated. However, largest profits come from smallest players. • Substitutes? Rating = 8 - MA, V, AXP, DFS, PayPal, etc. Worldwide it’s V and China UnionPay • Competitive Rivalry? Rating = 8 - Oligopoly • Regulatory? Rating = 2 - Very pronounced, though waning a bit. Business is “too good”? Ratings are my opinion with 10 being best For Discussion Purposes Only NOT Investment Advice

12. Who follows this nonsense?! For Discussion Purposes Only NOT Investment Advice

13. The Envelope Please? For Discussion Purposes Only NOT Investment Advice

14. Short Example: BAM! Entertainment (NASDAQ: BFUN) • Threat of New Entrants? Rating = 3 - Fixed costs are high: talent, machines, manufacturing. However, if you have a pile of cash you can enter. BAM entered in October 2009 and conducted a well-received IPO just 2 years later. • Bargaining power of suppliers? Rating = 2 - Suppliers are their employees or developers. Talent extremely tough to find and on average costs ~$95k per direct employee. A franchise game can cost $50m to $100m to develop and take years (WoW cost ~$100m for example) • Bargaining power of customers? Rating = 3 - You need a “franchise” game in order to command market power. Sellers/Distrubution is highly concentrated • Substitutes? Rating = 2 - Over a $12B industry in 2001 (according do BAM’s own filings). Once you have a franchise game, life becomes a bit easier • Competitive Rivalry? Rating = 2 - As of this week, Amazon.com lists 2,142 different video game titles on the PS3 • Regulatory? Rating = 10 - No one in government cares about video games Ratings are my opinion with 10 being best For Discussion Purposes Only NOT Investment Advice

15. Tough Industry. Are We Missing Something? Nope. • “The bulk of Bam's sales last year, 66 percent, came from its three "Powerpuff Girls" titles, which are aimed at 10-year-old and younger girls.” Oops • “Bam! Entertainment makes games such as "Hot Potato" and "Fire Pro Wrestling" for Sony Playstation and Nintendo customers.” Hot! • Shares priced at $8 in late 2001. FY2001 revenues were $17m and net income was $-500k. • But! But! But! “While Bam has been losing money, the losses "are not as bad as others might think," Menlow said. "There is a very strong revenue curve for a company that has not been around all that long." • This was a ~$100m market cap company throwing a Hail Mary pass. For Discussion Purposes Only NOT Investment Advice

16. The Envelope Please? For Discussion Purposes Only NOT Investment Advice

17. Conclusions • Qualitative skills > Quantitative? • Don’t always trust valuation • Don’t buy what other analysts are selling. Especially if they’re on the cover • Be highly skeptical of “flavor of the month” themes • Read, Read, Read. I found BAM on C14 of the WSJ For Discussion Purposes Only NOT Investment Advice

18. Danny Hassandannyhassan@gmail.com For Discussion Purposes Only NOT Investment Advice