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Stock Analyst Program Winter 2013 Ivan DiZeeshan MaqsoodMIC VP Portfolio January 25, 2013.

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Presentation on theme: "Stock Analyst Program Winter 2013 Ivan DiZeeshan MaqsoodMIC VP Portfolio January 25, 2013."— Presentation transcript:

1 Stock Analyst Program Winter 2013 Ivan DiZeeshan MaqsoodMIC VP Portfolio minghui.di@mail.mcgill.cazeeshan.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  The goal is to write & present a concise investment thesis Highlights 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) Stock Analyst Program 2013 Key Dates  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 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  Purpose: Rational Investing, Relative Conviction, Selling Decision  Format: 2 – 5 bullet points  Content: Financials, Strategy, Valuation, Sentiment Every Stock you Own Should Have an Investment Thesis

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


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