Session 6 - McGill Investment Club

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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
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