Bear Stock Pitch


How it works

  • In a stock pitch, normally you're asked to argue in favor of a stock that you like. You will sing it praises and tell us enthusiastically about the postives and upsides.
  • In our Bear Case Stock Pitch, we are going to do the opposite 
  • You will choose a stock from the Stock Pool I provide, and argue against investing in it
  • I will give your a bull scenario for each stock, that can justify an about 20% upside. 
  • You will focus on the risks and the downsides
  • You will try to convince the class and me that I am wrong, that the bull scenarios are overly optimistic and these stocks are actually not undervalued at all.
  • Identifying risks and avoiding mistakes are important in investing. 
    • Even the best stock pickers have <.550 batting averages, which means that they are wrong at least 45% of the time. When they buy 20 stocks, they are expected to be wrong in at least 9 of them. Yet, an edge so small, if maintained consistently, can translate into a large wealth difference in the long run and place one in the top 5% among investment managers.
    • Successful stock investing is all about being wrong less frequently (Of course, you have to be right at least more than half of the time). In a way, it's a "loser's game": Like in amateur baseball, it's just about making fewer mistakes than your opponents. Swinging for the fences and home runs have much smaller impacts on game outcomes than you think.
    • Pay more attention to how much you can lose than to how much you can make from investing in a given stock

Preparation

  • I am going to provide you with a simple DCF valuation model, which value a stock based on the inputs (a set of assumptions) you choose.
    • Every investor has his/her different assessment about a stock's value because his/her assumptions about the company's outlooks are different. Trading in a stock can take place at all only because there must be a lot of buyers who believe that a stock is worth more than what the sellers believe it's worth. The buyers and sellers are probably equally intelligent, but they have different views.
  •  It's a very simple model. I like it to be as simple as possible because then it is easier for us to identify what exactly is driving stock values. I've seen so many complicated DCF models in which the coding errors are the main drivers of stock values. 
    • You are allowed to change only the four values in columns F, G, H and I, which describe a company's future growth trajectory.
    • More specifically, the growth rate of NOPAT in year 1, year 2, year 3 to 5, and after year 5  
  • The default values in the DCF spreadsheet describes a bull scenario that can support a target price ~20% above the current level. 
    • The scenario does not necessarily reflect my own views. It mixes Wall Street analysts' current consensus, my personal views, and some random adjustments.
  • You are going to use the model to identify two additional scenarios.
    • Each scenario is a set of assumptions about future growth rates
    • Specifically, you are going to play with four numbers describing future NOPAT growth.
  • The Market-Implied Scenario is one that justifies the current stock price, and the Bear Scenario is one that justify a stock price 15% below the current level. 
  • With the three scenarios at hand, the model's role ends right here. You don't need it anymore.
  • Then comes the real work: you have to collect information, organize facts, conduct analysis, and make arguments to support your view that the Bear scenario or the Market-Implied Scenario is more plausible than the bull scenario. 
  • For example, if the model tells you that a bear scenario in which Apple's future growth rate plummets to only 5% a year starting from next year can justify a $500 stock price (it was $600 today), then you have to explain to the class why you believe that such a drastic slowdown may happen and happen so soon, and why this bear scenario is more likely to happen than my bull scenario  (e.g.  Apple continues to grow at +10%/year for at least the next five years). 
  • You can utilize whatever information, tools, research, methods to demonstrate your point, so long as they make common sense. 

Presentation

  • About 25 minutes are allocated to each team. 
    • The presentation lasts about 20 minutes.
    • Questions and discussions for about 5 minutes.
  • We do not have a template for what you should do in the presentation
    • During these several months, I've been forcing you to get used to ambiguous instructions. 
    • High-paid jobs normally require you to work without specific instructions and with a lot of autonomy and independent thinking.
    •  McDonald waiters receive very specific instructions, and they are paid a minimum wage.
  • Make arguments, back them up with facts. Convince yourself, and convince us that what you say make sense.
  • Remember your two main goals:
    • (1) Help us understand the company's business. We rely on you, the experts, for information.
    • (2) Convince us that the scenario you are envisioning is more plausible

Company Background

  • There are many ways you can help your classmates understand a company. What I describe below are just examples. 
  • The economics, i.e., the business model: 
    • How do you make money? (Here "You" means the company; I am trying to put you in management's shoes)
    • Explain to us in plain English your business model
    • What customer needs are you addressing? Why are they willing to pay?
      • e.g. You are willing to pay more for the drinks from the vendor machines in Akers Hall because of the convenience 
  • The market: What market are you serving? Be more specific.
    • Who are you competing against? 
      • Use your common sense and judgement. Don't completely rely on Bloomberg or Yahoo: Computers sometimes are stupid
    • How do you compare with them? What makes you different (better, worse, strong in different areas)?
    • How large is the market? How much is your market share? Is the market growing, flat, or declining in the next five years and in the long term? Are you expected to gain or lose market share?
    • Use common senses and educated guesses. There are 100 million households in the U.S. If each spends $3,000 a year dinning out, then the restaurant market is $300 billion. Diaper unit sales in the US are not going to grow more than 2% a year, because there are not many newborns

Grading

  • Both the presentation and the Powerpoint slides are graded (The weights are about 2:1)
    • Apologies to users of iWork Keynote, Prezi, etc
  • Presentation:You are graded based on
    • How well you explain the business to your classmates
      • Demonstrate that you are experts of the business and the industry
    • How much I learn from you
      • New information, new perspectives, new insights. I've done a lot of homework on these stocks, and I's like to hear fresh ideas!
      • Convince me that I am wrong, completely or partially; Remind me of hidden dangers that I am not aware of, or that I probably haven't paid enough attention to
  • Powerpoint slides:
    • You can send in an updated and final version by 4/27
    • Self-contained
      • Ask yourself: assume that I were asleep in class, would I be able to see your main points simply by reading the slides?
    • Professional: form is as important as content
    • The second slide (after the title slide) should summarize your main arguments. But don't play the "tiny font-size" game to fit 5,000 words into one slide.
  • Future stock performance has no impact at all on your grade. I can be wrong and you can be wrong too.
    • However, we will be watching them closely in the next one month, just for fun and for education.
Subpages (2): Broker Research Stock Pool