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Stock Presentation Financial Sector. Roger Chan Chris Curtin Jack Lu. Sector Analysis. Our Recommendation : Maintain weighting (approximately 1.67% above S&P) Class Decision : Reduce weighting to S&P (approximately 2% reduction)

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Stock presentation financial sector l.jpg

Stock Presentation Financial Sector

Roger Chan

Chris Curtin

Jack Lu


Sector analysis l.jpg
Sector Analysis

  • Our Recommendation: Maintain weighting (approximately 1.67% above S&P)

  • Class Decision: Reduce weighting to S&P (approximately 2% reduction)

  • Reasoning: Fear of a sub-prime meltdown, an impending economic downturn, and over-exposure in the SIM portfolio


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Current Sector Weighting

  • Financial Sector as a part of the . . .

    SIM 21.52 %

    S&P 500 19.64 %

    Overweight 1.88 %

    as of 8/3/07


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Current Holdings

  • Berkshire Hathaway (BRK.A) 6.00 %

    • Property and casualty insurance

  • Bank of America (BAC) 5.50 %

    • Money center bank

  • JP Morgan Chase (JPM) 4.73 %

    • Money center bank

  • Goldman Sachs (GS) 3.54 %

    • Investment brokerage

  • Citigroup (C) 1.75 %

    • Money center bank

      21.52 %


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Recommendations

  • Sell all JPM ~ 4.75 %

    • Weakest of the three money center banks

  • Sell some BAC ~ 2.00 %

    • Fairly valued, but more potential sub-prime risk

  • Buy more C ~ 1.75 %

    • Fairly valued, well positioned, strong stock in sector

  • Buy some SFI ~ 2.00 %

    • Not a MCB, undervalued, low sub-prime risk exposure

  • Keep all Brk-A & GS ~ 9.9 %


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General Strategy

  • Reduce Sector Weight by 2 %

    • As determined last presentation

  • Reduce Money Center Bank Exposure

    • Three similar MCB’s, constituting 12 % of the SIM

  • Concentrate on Favorite MCB(s)

    • At least one of the three has to be weaker

  • Diversify within the Sector

    • Too much domestic MCB, little foreign banking, no REIT

  • Avoid Risks from Sub-Prime Crisis

    • Don’t sell just to buy back into the crisis


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Current Holdings

  • Property and casualty insurance 6.00 %

    • Berkshire Hathaway (BRK.A)

  • Money center banks 12.00 %

    • Bank of America (BAC)

    • JP Morgan Chase (JPM)

    • Citigroup (C)

  • Investment brokerage 3.50 %

    • Goldman Sachs (GS)

      21.50 %


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1. Reduce Money Center Bank Exposure

  • Bank of America (BAC) 5.50 %

    • Pros: size (#1 credit cards, #1 on-line banking)

    • Cons: sub-prime, expansion to date via M&A

  • JP Morgan Chase (JPM) 4.73 %

    • Pros: credit cards, broad customer base

    • Cons: sub-prime, inefficiency of M&A

  • Citigroup (C) 1.75 %

    • Pros: size, diversity, foreign exposure

    • Cons: sub-prime, economy (investment banking)









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1. Reduce Money Center Bank Exposure

So . . .

Reduce MCB’s from 12% to 7% . . .

OldActionNew

C 1.75% + 1.75% = 3.5 %

BAC 5.50% - 2.00% = 3.5 %

JPM 4.75% - 4.75% = 0 %

Total 12.0 % 7.0 %


General strategy17 l.jpg
General Strategy

  • Reduce Sector Weight by 2 %

    • As determined last presentation

  • Reduce Money Center Bank Exposure

    • Three similar MCB’s facing, constituting 12 % of the SIM

  • Concentrate on Favorite MCB(s)

    • At least one of the three has to be weaker

  • Diversify within the Sector

    • Too much domestic MCB, little foreign banking, no REIT

  • Avoid Risks from Sub-Prime Crisis

    • Don’t sell just to buy back into the crisis


2 concentrate on favorite mcb s l.jpg
2. Concentrate on Favorite MCB(s)

  • Eliminate more JPM than necessary to reduce 2.0% and allow room to diversify

  • Add to C, as the favored MCB

  • Reduce BAC, to put in line with C


General strategy19 l.jpg
General Strategy

  • Reduce Sector Weight by 2 %

    • As determined last presentation

  • Reduce Money Center Bank Exposure

    • Three similar MCB’s facing, constituting 12 % of the SIM

  • Concentrate on Favorite MCB(s)

    • At least one of the three has to be weaker

  • Diversify within the Sector

    • Too much domestic MCB, little foreign banking, no REIT

  • Avoid Risks from Sub-Prime Crisis

    • Don’t sell just to buy back into the crisis


3 diversify within the sector l.jpg
3. Diversify within the Sector

Add 2.0% = iStar Financial, Inc. (SFI)

  • Primary business is lending and corporate tenant leasing

  • Web-site: http://www.istarfinancial.com/home.html

  • Part REIT and part financial services

  • Business is high-end commercial real estate financing

  • But, it pays dividends like a REIT (i.e., taxed like a REIT)

  • Market Cap: $4.45 B (mid-cap; $1 - $10 B)

  • Shares outstanding: 128.2 M

  • Average volume: 1.2 M/day

  • Beaten down by the sub-prime crisis, even though its not a sub-prime player and has little sub-prime exposure









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SFI’s Story

Market Psychology:

  • Price has been falling in concert with sub-prime residential lenders, due to the overall sub-prime risk.

  • Fell further when REIT sector was downgraded in June, on fears of a slowing economy, increasing interest rates, lack of investor confidence, and prospect of decreasing dividend yields.






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SFI’s Story

Market Psychology:

  • Price has been falling in concert with sub-prime residential lenders, due to the overall sub-prime risk.

  • Fell further when REIT sector was downgraded in June, on fears of

    1. a slowing economy,

    2. increasing interest rates,

    3. lack of investor confidence, and

    4. prospect of decreasing dividend yields.




Sfi s story36 l.jpg
SFI’s Story

  • “iStar Financial is one of those guilt-by-association companies.”

  • “[T]he company has very different risk exposures from those of subprime residential lenders such as Countrywide and American Home Mortgage.”

    -- Emil Lee, TheMotleyFool.com

    (July 31, 2007)


Sfi s story37 l.jpg
SFI’s Story

  • More conservative lender, and uses less leverage

    D/E

    • iStar (SFI) 2.93

    • Countywide (CFC) 5.40

    • American Home Mort. (AHM) 8.96

    • Annaly Capital Management (NLY) 11.24

    • Redwood Trust Inc. (RWT) 12.91

  • Has not increased reserve for potential loan losses this year (still anticipating 6%)


Sfi s story38 l.jpg
SFI’s Story

  • May 22, 2007 Acquired Fremont General’s commercial real estate division for $1.9 B (immediately changed compensation structure from volume-based to profitability-based)

  • July 2, 2007 Announced an increased dividend = 5% increase on dividend 5 years in a row

  • July 31, 2007 increased 2007 earnings expectations from $2.74 to $2.90 per share

  • August 1, 2007 Reactivated stock repurchase program, up to 2.7 M shares (open market)

  • Current Price $18.31 (35%) off 52-week high


General strategy39 l.jpg
General Strategy

  • Reduce Sector Weight by 2 %

    • As determined last presentation

  • Reduce Money Center Bank Exposure

    • Three similar MCB’s facing, constituting 12 % of the SIM

  • Concentrate on Favorite MCB(s)

    • At least one of the three has to be weaker

  • Diversify within the Sector

    • Too much domestic MCB, little foreign banking, no REIT

  • Avoid Risks from Sub-Prime Crisis

    • Don’t sell just to buy back into the crisis


Recommendations40 l.jpg
Recommendations

  • Sell all JPM ~ 4.75 %

    • Weakest of the three money center banks

  • Sell some BAC ~ 2.00 %

    • Fairly valued, but more potential sub-prime risk

  • Buy more C ~ 1.75 %

    • Fairly valued, well positioned, strong stock in sector

  • Buy some SFI ~ 2.00 %

    • Not a MCB, undervalued, low sub-prime risk exposure


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Proposed Holdings

OldNew

  • Berkshire Hathaway (BRK.A) 6.00% 6.00%

    • Property and casualty insurance

  • Bank of America (BAC) 5.50% 3.50%

    • Money center bank

  • JP Morgan Chase (JPM) 4.75 % 0%

    • Money center bank

  • Goldman Sachs (GS) 3.50 % 3.50%

    • Investment brokerage

  • Citigroup (C) 1.75 % 3.50%

    • Money center bank

  • iStar Financial, Inc. (SFI) 0 %2.00%

    • Credit services

      21.50 % 19.50%







Berkshire hathaway brk a l.jpg
Berkshire Hathaway (BRK-A)

Hold: Upside potential – 4.08% ($114,382/share)

Insurance Outlook in 2007

  • Slower premium growth

  • Weak pricing

  • Underwriting becomes less profitable

  • No exposure to subprime mortgage

    Berkshire’s Source of growth

  • Non-insurance business

  • Investment income


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Goldman Sachs (GS)

Hold: Realize a significant loss (21%) if sell GS now

Stock is undervalued

  • DCF

  • Comparables

  • Analyst Report

    Positive Economic outlook in 2008

    GS will recover from recent stock slump

  • Well diversified business











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