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2 nd edition 2010. Kick-off. This version: September 27th. 2 nd edition 2010. Agenda. Introduction Stock picking methodology Timing Template Material Scoring/Reward. 2 nd edition 2010. Introduction. Introduction.

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kick off

2nd edition

2010

Kick-off

This version: September 27th

slide2

2nd edition

2010

Agenda

  • Introduction
  • Stock picking methodology
  • Timing
  • Template
  • Material
  • Scoring/Reward
slide3

2nd edition

2010

Introduction

Introduction

  • This game will challenge MA1/ECO1 students to invest in a virtual portfolio of 4 assets on the long run (1 year)
  • This is a chance for students to put into practice their theoretical skills learned during their 3 last years (Macroeconomics, Corporate Finance, Accounting, Control, Marketing..)
  • Student will have to select 4 stocks
    • 1 peer trade (Same sub-sector)
    • 1 naked long
    • 1 naked short
slide4

2nd edition

2010

Introduction

Introduction

  • Among those 4 stocks, one pair has to be selected(2 companies in the same Industry) in 2 different directions (long and short)
  • Stocks' selection is limited to the European markets.
  • Selection is based on fundamental analysis

VS.

VS.

VS.

slide5

2nd edition

2010

Introduction

GLG case study: Valeo

Exposure

Price

slide6

2nd edition

2010

Introduction

GLG case study: Valeo

1) Idea generation

Valeo is a global leader in automobile components. The company manufactures clutches, engine cooling, parts, lighting, security systems. 40% of the sales are sold in Europe, with the remainder in North America and growingly Asia.

Following disastrous 2008 automotive market, stock had suffered from operating and financial leverage putting its viability at risk. In the sector turmoil, most analysts downplayed arrival of new management, and growing international exposure.

3) Idea validation

In terms of valuation, the stock was on 20% EV/Sales 2009, an all time low compared to the sector and historical average.

In addition to very undemanding valuation the stock took advantage of its strong Asian growth (20% of sales growing double digit), successful restructuring (management significantly reduced break-even) and new strategic plan upgrading in 2010 long term growth and profitability targets. Strong free-cash -flow generation cancelled financial stress.

slide7

2nd edition

2010

Introduction

GLG case study: Valeo

3) Investment structuring and execution

We initiated long position in October 2009 post a meeting with management in Paris. Trimmed position in January 2010, before adding again during the Summer. Our position is still open after a 47% performance since initiation. The stock is now trading at 40% EV/Sales, closer to our target price.

slide8

2nd edition

2010

Introduction

GLG case study: Rockhopper Exploration

Exposure

Price

slide9

2nd edition

2010

Introduction

GLG case study: Rockhopper Exploration

1) Idea generation

GLG first met this company in Autumn 2009 when it was a high risk ‘exploration-only’ company, seeking to raise money to fund a high impact exploration program in the North Falklands basin. After this meeting, we assessed the risk profile as too high to warrant an investment, with specific concerns around exploration risk and stock liquidity.

2) Idea validation

However, during and after the meeting we conducted preliminary due diligence on the technical, political and commercial risk associated with the company’s asset base.

slide10

2nd edition

2010

Introduction

GLG case study: Rockhopper Exploration

3) Investment structuring and execution

Following this capital raise (with GLG not invested) the company started to explore its acreage and announced it first exploration well result in March/April 2010 to be unsuccessful. This led the stock price to halve from its post-placing peak.

However, several months later the company went on to announce that it had made an oil discovery; providing certain technical data points but without specifically quantifying volumes.

From our experience we understood from the technical data that what the company had found was most probably a material discovery, substantially better than had been expected on a pre-drill basis. We also assessed it as highly likely that further material exploration discoveries would be made. In other words we saw the investment proposition as significantly de-risked.

We therefore decided to invest at this juncture, and over the last four months the stock has more than quadrupled. Since this, investment we have conducted a substantially greater amount of political, technical and commercial due diligence and remain invested. The likely terminal price of this stock is an industry take-out, although sufficient liquidity is available in the stock should the share price move to anticipate their eventuality allowing for an earlier exit.

slide11

Stock picking methodology

2nd edition

2010

1) Choose a theme

  • Food Inflation
  • Truck recovery in South America
  • Luxury boom in Asia
  • Healthcare reforms in the US

2) Identify Industries/Companies which are exposed to your theme

3) Gather fundamental information

4) Analyse supply chains/ Environment/ Customers

5) Identify changes in:

  • Supply & Demand
  • Competitive position
  • Business Strategy
  • Profitability

6) Calculate valuation Matrix (DCF and Multiples)

7) Identify catalysts

8) Assess your Risks (Maximise Sharpe ratio and Minimise tail risk)

Make your investment decision

slide12

Stock picking methodology

2nd edition

2010

Theme (1) :Food inflation to increase to 4-5% by year end and should keep on rising…

Corn price – 3m change +45%

Milk price – 3m change +20.3%

slide13

Stock picking methodology

Identify players (2) : i.e. supermarkets - Positive effect of operating leverage arising from higher price per unit sold

  • Basket (1) EBIT margin 5/100 = 5%
  • Basket (2) EBIT margin 7/110= 6.3%

(1)

EBIT= 5

Fixed costs =25

COGS =70

Soft commodities = Demand and Supply

+10%

(2)

Fixed costs =25

COGS =77

EBIT= 7

slide14

Stock picking methodology

Identify players (2) : i.e. supermarkets – Ability to control pricing when input costs are moving up

Overweight Food Retailers

slide15

Stock picking methodology

2nd edition

2010

Gather fundamental Information (3)

  • FY Reports
  • Papers
  • Google
  • Bloomberg (Access at Solvay)
slide16

Stock picking methodology

2nd edition

2010

Analyse Market/Supply chain/ Environment/ Customers (4)

a) Market Analysis: Market concentration and Rationalisation

i.e. The UK’s food retail market is the most highly concentrated and rational in Europe, with the top four players having c.80% of market share >< Germany (Nielsen data, July 2010)  Less price competition.

b) Consumers Analysis: Consumer react to inflation by buying slightly less and by trading down to less expensive categories: From beef to Chicken or Salmon, from brand to own label. This has the effect of benefiting cheaper format. Delhaize ><Colruyt or Waitrose >< Tesco.

Invest in Oligopolistic market & low price format

slide17

Stock picking methodology

2nd edition

2010

Identify changes (5)

  • Supply & Demand
  • Management (Morrison in the UK)
  • Competitive position (Colruyt in Belgium)
  • Business Strategy (Carrefour, Morrison & Tesco)
  • Profitability (Jeronimo Martins in Portugal & Carrefour in France)
slide18

Stock picking methodology

2nd edition

2010

Calculate your valuation Matrix (6)

…Using your assumptions based on your theme and structural changes.

  • Discounted Cash flow model (See video tutorial)
  • Relative value (Multiples)

 Check if your long term “fairly price” is above the current price.

slide19

Stock picking methodology

2nd edition

2010

Identify catalysts (7)

  • Upcoming Results
  • Roadshow (Conference to investors, sell-side analysts…)
  • Economics publication
  • Survey publication (i.e. Survey on retail sales, purchasing power,..)
  • Investor days

Make your investment decision based on your valuation Matrix and on your upcoming catalysts

slide20

2nd edition

2010

Timing

Step by Step

Kick-off

October 1 2010

Dec 30 2010

End of June 2011

TBD 2011

Stock Simulation

slide21

2nd edition

2010

Templates

Introduction

2 excel sheets (See attached templates)

  • Summary sheet (limited number of words)
  • Valuation sheet (limited number of cells/words)
  • You are free to provide extra charts
  • You should have to send it back to us in .xls and .pdf formats in order to avoid any conversion problems
slide24

Material

2nd edition

2010

Material

Website

Handbook

Answer-Template

Registration/ uploading forms

2nd edition

2010

Up-to-date Performance data (follow-up)

New

+ Examples

+ Comparison between students’ report and Sell-side’s report

+ Stock picking handout

+ Bloomberg terminals

+ Video tutorial

slide25

2nd edition

2010

Scoring/Reward

Scoring/Reward

Report and Performance prize

  • 3 days in New York
  • 4 Flight tickets
  • 2 nights in Manhattan
  • Visit of the NY Stock Exchange

Calculations

Questions

Share your view 5/5

Good Job 4/5

Valuation

Stocks selection

OK 3/5

Data/Resources

Charts/Calculations

NOK 2/5

Statements

Justifications/ Arguments

Report scores (30% of your grade)

_____ _____