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Culverhouse Investment Management Group
Training Session – Spring 2015Day 3 – Equity Research Methodologies
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EQUITY RESEARCH METHODOLOGIES
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Question Everything
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Why do research?
1. The market is erratic2. People are emotional3. To render reasons 1&2 obsolete
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What are we trying to avoid
• Risk– Risk is losing permanent capital– Beta• Beta is incorrect
– MOS saves risk• Pay too much for something you introduce risk
(becomes a speculation)• Larger discount, higher return, lower risk
– Taught that higher return needs higher risk
• Emotional fervor
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What are we looking for
• Cheap?• Moat• Management• Money• Unreasonable downturn• Stable capital structure
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Read
• Read• Read• Read• Eat• Read• Sleep • Read
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Starting Points
• Mr. Drunk– Research is key
• Bottom Up vs. Top Down– Screens– News – Financials– Multiples
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Important Websites
• http://mycba.ua.edu/cimg• Google Drive
– Watchlist and Current Holdings• http://seekingalpha.com/• http://library.morningstar.com/• http://www.mergersandinquisitions.com/• http://www.investopedia.com/• http://online.wsj.com/home-page• http://www.sec.gov/edgar/searchedgar/companysearch.html• http://www.finance.yahoo.com/ • Http://www.ibisworld.com/
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Identifying Opportunities
• Value Screens• 52-Week Low Lists• Value Blogs• 13-F Filings– Warren Buffet- Berkshire Hathaway– Seth Klarman- Baupost Group– Mason Hawkins- Longleaf Partners– David Einhorn- Green Light Capital– Mario Gabelli- BAMCO Investors, Inc.
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Evaluating a Company
• Once you have found a company you need to do an initial evaluation
• This includes: – Reading the 10-k to learn more about the industry
and company as a whole– Looking for competitive advantages– Checking financial health
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Industry
• Movement• Exposures• Competition– Size?– Diversification?– Geographic reach?
• Ratios• Advantages
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Company
• What do the numbers tell us?• Growth drivers?– Organic?– Synergies? – Commodity exposure?
• Highly levered?– Why?
• What is the market missing?
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3 M’s
• Moat• Management• Money