Generating Investment Ideas
Presented by Ryan Rechkemmer
September 12, 2012
Sage Advice
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
“It's far better to buy a wonderful company at a fair
price than a fair company at a wonderful price.”
“I try to buy stock in businesses that are so
wonderful that an idiot can run them. Because
sooner or later, one will.”

“Never invest in a business
you can’t understand.”
-Warren Buffett
Thesis Points


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Key arguments justifying the pitch
Specific to company’s unique situation and
investment time horizon
Builds on Value-Added Research (VAR) to reveal
informational edge and explain variant perception

Complements valuation analysis

Considers relevant risks
Porter’s Five Forces Analysis
New Entrants: Low
-Established brand name
-Intellectual property
Threat
of New
Entrants
Bargaining
Power of
Suppliers
Rivalry
Among
Existing
Competitors
Threat of
Substitute
Products or
Services
Example: Apple, Inc.
Suppliers: Low
-Economies of scale
-Retains pricing power
Bargaining
Power of
Buyers
Buyers: Moderate
-Significant switching costs
-Carrier subsidies
Substitutes: Moderate
-Indispensible gadgets
-Incremental tech change
Rivalry: High
-Oligopolistic competition
-Mimicry and knock-offs
Long vs. Short
Long
Superb management
 Competitive moat
 Limited downside risk
 Underappreciated
growth potential
 Under-reaction to
positive news
 Hidden assets /
overstated liabilities
 Actionable catalysts
for outperformance

Short
Poor management
 Few barriers to entry
 Bond downgrade
 Overly optimistic
projections
 Under-reaction to
negative news
 Acquisition hungry
 Accounting irregularities
 Actionable catalysts for
underperformance

What to Look for

Small-cap stocks (market capitalization < $1 B)
Overlooked by most analysts
 Untouched by large investors
 Likely to be inefficiently valued


Foreign companies


Same as above, plus offers international diversification
(but check with me to make sure that MII can trade it)
Special situations
Includes IPOs, spin-offs, distressed / post-bankruptcy
companies, takeover / buyout targets, etc.
 Potentially wide disparity between price and value
 Inherent catalysts to resolve temporary inefficiency

News
(including online portals like CNBC, Forbes, Bloomberg, etc.)
Pros
Easily accessible
 Expert opinions
 Current events

Cons
Widely read
 Potential biases
 Too broad

Investing Websites
Pros
Timely commentary
 Individual perspective
 Very specific focus
 Detailed analysis

Cons
Highly opinionated
 Questionable veracity
 Possible hidden
conflicts of interest

Stock Screeners
(also applies to
industry browsers)
Pros

Instantly compares
stocks by relative
valuation, past
performance, etc.
Cons
Purely quantitative
 Anchoring bias
 Myopic snapshot

Personal Experience
Pros
Informational asymmetry
 Discover emerging trends
before professional investors
 Foundational to VAR

Cons
Potential biases
 Limited scope

Other Resources

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Professional stock reports
(Standard & Poor’s, Thomson Reuters, etc.)
Yahoo! Finance stock screeners
(http://screener.finance.yahoo.com/newscreener.html)

Yahoo! Finance industry browser
(http://biz.yahoo.com/p/)


Individual company’s annual and quarterly SEC filings
(http://www.sec.gov/edgar.shtml)
Mutual fund and hedge fund holdings
(Blue Ridge Capital, Fidelity Contrafund, etc.)
How to Learn More

These slides will be made available on MII’s website
under the “Research – Presentations” tab, and more
information can be found in the “Fundamentals” section.
Questions?
Thank you!