Session 6 - McGill Investment Club
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Transcript Session 6 - McGill Investment Club
Stock Analyst Program
Winter 2013
Ivan Di
Zeeshan Maqsood
MIC VP Portfolio
MIC VP Portfolio
[email protected]
[email protected]
January 25, 2013
Executive Summary
Stock Analyst Program 2013
Plans for the Semester
Investment Strategies Recap
Building an Efficient Investment Thesis
Holidays Book Reviews
Stock Analyst Program 2013
Delicious
Easy to read
Plans for the Semester
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?
Highlights
Stock Analyst Program 2013
The goal is to write & present a concise investment thesis
Format
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)
Key Dates
Stock Pitch Consultation sometime in
March
Mar 15: Official Competition
Research Report Evaluation
Stock Analyst Program 2013
Evaluation Criteria
Industry Analysis
Identification of key metrics and ratios
Identification of key trends
Choice and rationale for industry
30%
/10%
/10%
/10%
Presentation/Research Paper
Organization
Flow
Content
10%
/3.3%
/3.3%
/3.3%
Stock Analysis
Quality of valuation & depth of research
Investment rationale
40%
/20%
/20%
Technical Analysis
Clear investment horizon
Entry & exit strategies
20%
/5%
/15%
Total
100%
Investment Strategies Recap
Value Investing
Stock Analyst Program 2013
Stock is fractional ownership in a business
Business valuation can be assessed
More certain
Tangible assets
PV of cash flows
Less certain
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
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-networking-capital-nnwc-stock-screen.php
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
IBM
Stock Analyst Program 2013
“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
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.
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.
Growth: Stocks Follow Earnings
Stock Analyst Program 2013
Growth: Stocks Follow Earnings
Stock Analyst Program 2013
Growth: Stocks Follow Earnings
Stock Analyst Program 2013
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
Building an Efficient Investment Thesis
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
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
Appendix: Examples of Investment Thesis
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
Criteria Evaluation
Market Size (2011)
Subprime,
22
Types of
Credit, 10%
Alt-A, 198
New Credit,
10%
Payment
History, 35%
Length of
Credit
History, 15%
Prime, 900
Amounts
Owed, 30%
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
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)
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
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
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