M c I n t i r e I n v e s t m e n t I n s t i t u t e
MCINTIRE INVESTMENT INSTITUTEAT THE UNIVERSITY OF VIRGINIA
Prepared by the MII Managers | September 6th, 2013
Training Session
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
WHERE TO FIND THESE SLIDES
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
AGENDA
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Investment Overview Long vs. Short MII’s Strategy
Elements of an Effective Pitch Identifying an Opportunity Developing Theses Forming a Variant Perception Conducting VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
LONG / SHORT
Is a hedge fund more or less risky than an index fund?
“Long” – strategy that makes money when price of security rises
“Short” – strategy that makes money when security goes down
“Our mandate is to find the 200 best companies in the world and invest in them, and find the 200 worst companies in the world and go short on them.” – Julian Robertson, Tiger Management
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
VALUE VS. PRICE
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The value of any security, company, or project is determined by its cash inflows and outflows
Value investing is “the strategy of investing in securities trading at an appreciable discount from underlying value” – Seth Klarman
30282624222018
Value
Price30282624222018
Value
Price
Undervalued - Long Overvalued - Short
M c I n t i r e I n v e s t m e n t I n s t i t u t e
EFFICIENT MARKET HYPOTHESIS
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Thesis championed by economist Burton Malkiel All publicly available information is
priced into stocks Implication: stock pickers cannot
consistently beat the market without inside information
MII’s response: Certain stocks exhibit more
efficiency than others We can win with better information
and better analysis than the market
M c I n t i r e I n v e s t m e n t I n s t i t u t e
VARIANT PERCEPTION
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Variant Perception Your edge as compared to market expectations Focus on ideas where spread between value and
price is large Informational/analytical asymmetry
Informational: Knowing something that others don’t through tenacious research
Analytical: Superior understanding How is it generated?
Value-added Research (VAR)
Easy / Comfortable
Hard / Uncomfortable
Consensus Contrarianx
M c I n t i r e I n v e s t m e n t I n s t i t u t e
EXAMPLE OF AN INFORMATIONAL EDGE
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
1. IDENTIFYING AN OPPORTUNITY
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
“We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’” – Warren Buffett
M c I n t i r e I n v e s t m e n t I n s t i t u t e
TOP DOWN VS. BOTTOM UP
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
Top down approach Start with a promising (dying) industry and find the
best (worst) company in that industry Start with an interesting trend and identify the best
company by which to exploit the trend Bottom up approach
Start with a particular company, then determine whether or not its macro prospects are promising
Whether it’s top down or bottom up, stick to companies and industries that you can understand
M c I n t i r e I n v e s t m e n t I n s t i t u t e
BECOME AND ENGAGED READER
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
Identify general trends Recognize and evaluate corporate
strategies Short Flags
Poor Management – Inconsistencies Few barriers to entry Bond Downgrade Overly Optimistic Projections Overreaction to positive news Under reaction to bad news Sudden change in accounting firm or
methodology
M c I n t i r e I n v e s t m e n t I n s t i t u t e
PERSONAL EXPERIENCE
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Products/services you’ve experienced
Fashions becoming more/less fashionableIdentifying an
opportunityDeveloping
ThesesForming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
OTHER IDEA GENERATION SOURCES
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Google / Yahoo Stock Screener (http://screener.finance.yahoo.com/
newscreener.html) Blogs
Marketfolly.com distressed-debt-investing.com Seekingalpha.com
13-F Filings Fund holdings Available through EDGAR on SEC.gov
Consider taking the contrarian view on the investment ideas you find onlineIdentifying an
opportunityDeveloping
ThesesForming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
BLUE RIDGE CAPITAL 13-F
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
2: DEVELOPING THESIS POINTS
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“We enjoy the process far more than the proceeds.” -- Warrant Buffett
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
DEVELOPING THESIS POINTS
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Skim Form 10-K to better understand the company and Form 10-Q for a more recent update
Read latest earnings call transcripts Available on Seekingalpha.com, Bloomberg
terminal, and Morningstar.com For articles written on your company, visit
Business Source Complete database when you’re on Grounds http://guides.lib.virginia.edu/commerce
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
AVOIDING BIASES
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Social Bias
Groupthink
Pattern-Recognition
Biases
Stability Biases
AnchoringConfirmation
False Analogy
Loss Aversion
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
3: FORMING A VARIANT PERCEPTION
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“Price is what you pay. Value is what you get.” – Warren Buffett
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
GAUGING MARKET VIEW
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So I’ve identified a growing company with a sustainable competitive advantage. How do I know that every other investor hasn’t already identified this opportunity?
Blogs (Marketfolly, Distressed Debt Investing)
Other Investors
Equity Research
Do you have an original thesis point or catalyst?Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
EQUITY RESEARCH
There’s a right way and a wrong way to use equity research Right way: to gauge the market by
interpreting analyst commentary and financial projections
Wrong way: many non-MII investors base their investment decisions on sell-side analyst recommendations
Availability Limited research on Bloomberg terminal
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
EQUITY RESEARCH ON BLOOMBERG
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From main Bloomberg screen, type in name of company
Type “BRC <Enter>”
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
SMALL CAP PREFERENCE
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Small Caps (defined roughly as market cap < $1Bn) often fly under the radar, creating opportunities for analysts like you to exploit market inefficiencies
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
4. CONDUCTING VALUE-ADDED RESEARCH
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
“A public-opinion poll is no substitute for thought.” – Warren Buffett
M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR CASE STUDY: SUREBEAM CORPORATION
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR CASE STUDY: SUREBEAM CORPORATION
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Analyst Joel Ramin (MII alum, former analyst at Bridger) sought to determine whether the irradiation impacted taste
Visited the centers where SURE irradiated the beef and drove to upstate NY and IL to check out the stores where test marketing was going on Confirmed analysts reports that sales were
strong BUT, meat was being discounted by 20% using
in-store promotions Bridger added to short
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR CASE STUDY: SUREBEAM CORPORATION
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR CASE STUDY: SUREBEAM CORPORATION
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
Anthrax scare in September 2001
Almost overnight, SureBeam switched from irradiating meat to irradiating mail
USPS bought eight irradiating machines from SureBeam with option to purchase more
M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR CASE STUDY: SUREBEAM CORPORATION
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR CASE STUDY: SUREBEAM CORPORATION
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
Would USPS buy machines for every postal distribution center? Would Congress fund such a venture?
Did the technology work? Joel called postal inspectors and Congressional
aides to ascertain the government’s commitment to such a plan
Joel visited the company’s test facility in Iowa Discovered that a female employee had to sign a
disclaimer verifying that she wasn’t pregnant before working near the machine
Figured out that amount of radiation needed to kill anthrax was substantial enough to fry mail packages
M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR CASE STUDY: SUREBEAM CORPORATION
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
5: RISK ANALYSIS
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
“Only when the tide goes out do you discover who’s been swimming naked.” – Warren Buffett
M c I n t i r e I n v e s t m e n t I n s t i t u t e
RISK ANALYSIS
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
Tell us how your investment recommendation could be wrong
An analyst isn’t a salesperson. You don’t get a bonus if your company winds up in the portfolio
Yes, there are risks listed in the 10-K, but try to dig deeper
M c I n t i r e I n v e s t m e n t I n s t i t u t e
6. ANTICIPATING CATALYSTS
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“I buy on the assumption that they could close the market the next day and not reopen it for five years.” – Warren Buffett
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
ANTICIPATING CATALYSTS
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So it’s a good and undervalued company or a bad and overvalued company. How do we get paid?
New product, geography? Shorts are inherently risky
Theoretically, we can lose an infinite amount of money on them
We generally aim to hold shorts for less than two years
Thus, catalysts are an essential element to short pitches
Examples in “Good News, Bad News” part of the “Money and Investing” section of the WSJ
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
7. VALUATION ANALYSIS
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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.” – Warren Buffett
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
P/E RATIO
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Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
Provides rough indication of market’s perception of a company’s growth and value
Current market price/earnings per share Forward vs. Trailing Twelve Month
Varies according to industry Technology? Grocers?
As a yardstick, 15.5x is the long-term average P/E ratio
Far from perfect – negative earnings?
M c I n t i r e I n v e s t m e n t I n s t i t u t e
SPG COMPARABLE FIRM ANALYSIS Peers P/E Ratio P/B Ratio P/S Ratio VNO 67.15 2.89 5.50 GGP n/a 5.85 1.48 SKT 108.10 5.08 7.00 FRT 41.91 4.34 9.23 AVERAGE 75.01 5.09 5.90
Implied SPG Price $105.59 $166.49 $101.46 Actual SPG Price 94.53 94.53 94.53 Premium (Discount) (11.7%) (76.1%) (7.3%)
COMPARABLE FIRM ANALYSIS
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Uses valuation of peers to derive an implied value of the company you’re analyzing
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
8. DELIVERING THE GOODS
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“Your premium brand had better be delivering something special, or it’s not going to get the business.” – Warren Buffett
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
DELIVERING THE PRESENTATION/MEMO
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Practice before/submit rough draft to manager mentor (not applicable to membership application memos)
If you hold the stock in your personal portfolio, please disclose this fact
Have fun!
Identifying an opportunity
Developing Theses
Forming Variant
PerceptionConduct VAR Risks Catalysts Valuation Delivery
M c I n t i r e I n v e s t m e n t I n s t i t u t e
NOW THAT YOU’RE A STOCK PICKING EXPERT
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Application memos are due by 9:59 PM on Wednesday, September 11th, to [email protected].
You must use the template provided and limit your memo to one page only – no exhibits or appendices.
Your memo must be written on an individual publicly-traded stock (either long or short) not currently held in MII's portfolio – no ETFs, futures, commodities, etc.
Be mindful of avoiding plagiarism when conducting research, as your memo must represent your original analysis and insights. Work individually – this is your idea.
We do not expect VAR or in-depth financial analysis, but we do value creative and well-articulated ideas (Amazon and Facebook do not count as creative ideas)
This PowerPoint and other helpful resources are all available on MII’s website at www.uvamii.com to assist you.