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Stock Analyst Program Winter 2013

Stock Analyst Program Winter 2013

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Stock Analyst Program Winter 2013

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  1. Stock Analyst ProgramWinter 2013 Ivan Di Zeeshan Maqsood MIC VP Portfolio MIC VP Portfolio minghui.di@mail.mcgill.ca zeeshan.maqsood@mail.mcgill.ca January 25, 2013

  2. Executive Summary Stock Analyst Program 2013 • Plans for the Semester • Investment Strategies Recap • Building an Efficient Investment Thesis

  3. Holidays Book Reviews Stock Analyst Program 2013 Delicious Easy to read

  4. Plans for the Semester

  5. Tentative Topics Stock Analyst Program 2013 • Recap & Investment Thesis • Short Selling • Bloomberg Tutorial – if the schedule permits • The industry (guest speakers) – if the schedule permits • Stock competition • Any idea?

  6. Highlights Stock Analyst Program 2013 • The goal is to write & present a concise investment thesis Format Key Dates • Team: 1 to 3 people • Research report : 2 to 3 pages • Description of company • 3 – 5 points investment thesis • Detailed Rationale • Presentation: 8 minutes • Present key ideas and rationale • Evaluation Procedure • Valuation • Comprehensiveness • Consistency • Prize: TBD (there will be food) • Stock Pitch Consultation sometime in March • Mar 15: Official Competition

  7. Research Report Evaluation Stock Analyst Program 2013 Evaluation Criteria

  8. Investment Strategies Recap

  9. Value Investing Stock Analyst Program 2013 • Stock is fractional ownership in a business • Business valuation can be assessed • Tangible assets • PV of cash flows • PV if cash flows with growth • Mr. Market Creates Opportunities • Misunderstood situation • Buy with a margin of safety and wait • RIMM @ $7 in 2012 • Canadian Pacific Railway @ $70 in 2012 • AT&T @$28 in 2011 More certain Less certain

  10. Graham’s Cigar Butts Stock Analyst Program 2013 • Not as Many Today • Buffett (Stock Example) • Balance Sheet Driven • Emphasis on Diversification • Graham Beat by 2%/Year over 20 Years • http://www.oldschoolvalue.com/stock-screener/net-net-working-capital-nnwc-stock-screen.php

  11. Broadening Intrinsic Value Definition Stock Analyst Program 2013 • A Stream of Cash Flow has Value • How much is $100/year forever worth? • How much is $100/year growing at 2% forever worth? • Not all growth is profitable • Requires capital, capital has a cost, profitable of ROIC>WACC

  12. IBM Stock Analyst Program 2013

  13. “Magic Formula” Investing Stock Analyst Program 2013 • High ROIC as a proxy for good business • Low P/E as a proxy for cheap • https://www.magicformulainvesting.com

  14. Growth: Philip Fisher Stock Analyst Program 2013 • Long-term growth investor • Talk with suppliers, customers, competitors, clients • Concentrated Portfolio • 15 Points (Session X) • Large and expanding market • Vision of management • Great R&D and sales force • Profit margin • Depth in management • Factors of success in industry • Etc.

  15. Growth: Catalysts for EPS Growth Stock Analyst Program 2013 • Stocks Follow EPS • Improving Fundamentals • Examples • New products • Cost-cutting • New management team • M&A • Industry turnaround • Etc.

  16. Growth: Stocks Follow Earnings Stock Analyst Program 2013

  17. Growth: Stocks Follow Earnings Stock Analyst Program 2013

  18. Growth: Stocks Follow Earnings Stock Analyst Program 2013

  19. Arbitrage/Special Sits Stock Analyst Program 2013 • Risk Arbitrage • Bankruptcies (Post-Re org equities) • Warrants • Spin offs selling effect • Dual class arbitrage • Closed-end fund/NAV discount

  20. Building an Efficient Investment Thesis

  21. Investment Thesis Stock Analyst Program 2013 Every Stock you Own Should Have an Investment Thesis • Purpose: Rational Investing, Relative Conviction, Selling Decision • Format: 2 – 5 bullet points • Content: Financials, Strategy, Valuation, Sentiment

  22. ENTER Framework Stock Analyst Program 2013 • Exceptional: Insights about the future • Novel: Must be out-of-consensus • Thorough: Backed by sound research • Examinable: Provide your data • Revealing: Explain contra thesis as well as conviction level Source: James Valentine, Best Practices for Equity Research Analysts

  23. Appendix: Examples of Investment Thesis

  24. Home Capital Group (HCG) Stock Analyst Program 2013 • Leading mortgage lender (non-prime) • Post-Flaherty rules benefits HCG • Housing market is hot but management has high underwriting standards • Attractive risk/reward as market underestimates risk of housing boom • Attractive valuation as a standalone

  25. Toronto-Dominion Bank (TD) Stock Analyst Program 2013 • TD is Canada`s second largest bank operating four business segments: personal and commercial (Canada), wealth management and wholesale banking. TD operates in Canada`s regulated banking market. • We like TD`s execution of its core banking businesses in Canada and the U.S. There are opportunities and growth in the bank`s U.LS. Markets will outweigh any slowdown in its native Canada as their U.S. subsidiaries gain market share • Increased U.S. presence- Acquisitions (Banknorth Group 2004 & Commerce Bancorp in 2007) • High growth (15.7% over the past 7 years) • High returns (15% average over the past 12 years) • High quality loan portfolio

  26. American International Group (AIG) Stock Analyst Program 2013 • AIG is an international insurance company, serving customers in more than 130 countries. AIG companies serve commercial, institutional and individual customers through property-casualty insurance, life insurance and retirement services. • Great Franchises that earn 10% on equity • #1 in global property and casualty insurer under Chartis • #1 in America for life insurance and retirement services under SunAmerica • De-risked Balance Sheet • 89% reduction in derivative exposure • 94% reduction of trade positions • 95% reduction of CDS portfolio • Significant Discount to Peers • Trades at 0.56x book value against Chubb Insurance (1.2x), Ace (1.1x), Travelers (0.9x) and Allstate (0.8x)

  27. American International Group (AIG) Stock Analyst Program 2013 • What you pay vs. what you get • Pay • $36 – market cap of $53bn • Get • Tangible book value / share of $60 – book value of $80bn • Reserves of $103bn • DTAs of $17bn to $25bn • 10% ROE • Catalyst • $18bn in share buybacks at 0.50x book value • Government exited its investment (Dec 2012) which $22bn profit • 20% ROI

  28. ADT Stock Analyst Program 2013 • ADT is a provider of electronic security, interactive home and business automation and related monitoring services. Spun off Tyco International in November 2012 • Unique Franchise • #1 market share, 25% market share (second is 4%) • 15-21% unlevered IRR on new subscribers • Growing industry • Defensive, predictable business model • Recession resilient  4% growth • 90% revenues are recurring (3 year contract, 7-8 years of customer life) • Strong financial profile with stable, consistent cash flows • 40% EBITDA margin, 16% UFCF margin

  29. ADT Stock Analyst Program 2013 • ADT is a provider of electronic security, interactive home and business automation and related monitoring services. Spun off Tyco International in November 2012 • Unappreciated secular growth tailwinds • Pulse and Home automation (30% higher price point) • Home ownership is on the rise • Balance Sheet optionality • 3.0x net debt/EBTIDA to repurchase 30% of outstanding shares • Valuation • Levered Steady State FCF / AFFO Multiple • ADT at 9x, MLP 15x, Staples at 17x, REITs at 22x