Archived Information for Spring 2011. To be updated for Spring 2012 soon.
Rules: - Excluded industries/sectors:
- Financial companies (banks, insurance companies, real estate investment trusts, etc).
- Commodity companies (oil and gas, gold, copper, etc).
- Utitilies companies (electricity, water, gas, telecom, etc).
- Biotech companies are hard to understand. Choose them at your own risk.
- You can express both positive and negative views on the investment targets.
- I suggest choosing companies the products and services of which you can manage to understand in depth
- e.g. American Eagle Outfitters, McDonald, Starbucks, Viacom (MTV), ...
- It it unlikely that a 20-year-old finance major knows much about the biotech industry.
- No extra credits are given for tackling very difficult companies.
- It is easier to for you to say something intelligent about products or services that you actually understand.
- You cannot pick a company that is the main study subject of an FI414 case.
Schedule: - If more than one team picks the same company, the first-come-first-choice rule applies.
- This should encourage you to e-mail me your team's selection as early as possible.
- The event is consisted of two parts:
- Presentation session, and written Research Report
- The event takes place on three days: 3/21/2011 (Team 1,2,3), 3/23/2011 (Team 4, 5, 6, 7), 3/28/2011 (Team 8, 9, 10).
- A research report including DCF valuation tables will be submitted much later (the deadline is 04/27/2011)
- Recommended length: 7 pages of text plus any number of tables/charts.
- (Update: DCF valuation is not required any more, and the total length of the Report, including all tables and charts, is limited to 7 pages. There are no restrictions or prescriptions on font size, page layout, etc)
Presentation: - 25 minutes are allocated to each team.
- The presentation lasts about 20 minutes.
- Q&A for the about 5 minutes.
- In the presentation, you won't make a buy/sell/hold recommendation, or conduct a DCF analysis.
- You will do that later only in the Research Report. (Update: DCF valuation not required any more)
- This special arrangement can help you overcome the habitual "confirmation bias" (also known as "Monday-Morning-Quarterback")
- Warren Buffett: "Chains of habit are too light to be felt until they are too heavy to be broken."
- In the presentation, you should at least tell us:
- The economics: How does this company make money?
- This is probably the most important part of your presentation.
- Explain to us in plain language the company's business model.
- If it is too complicated to explain, this company is probably not really making money (think Bernard Madoff Ponzi scheme, Enron Scandal, etc).
- Pick a company with a simple business model and make your life easier.
- Market definition: What market is this company serving?
- Be specific. Product markets are "local"!
- A snowboard maker doesn't compete with a surfboard maker, although both are sports equipment companies.
- Whirlpool doesn't make TVs and doesn't compete with Sony.
- Hawaii Airlines doesn't compete with Air France, although both are airlines.
- Sizing the market: How large is the market?
- Use common senses and educated guesses
- e.g. There are 100 million households in the U.S. If each household spends $3,000 /year dinning out, then the restaurant market is $300 billion.
- Market potential: How fast do you expect this market to grow (decline) in the next five years and in the long term?
- Be realistic: diaper unit sales in the US are not going to grow more than 2% a year.
- The industry competitive landscape: Who's the major competitors? Their market share?
- Porter's 5-Forces Analysis: Competitive pressure from existing rivals and potential entrants, potential substitute products, bargaining power of suppliers and buyers, etc.
- The strengths and weaknesses of this company vs. competitors
- Do you think this company is going to grow faster or more slowly than the industry? (i.e. is it gaining or losing market shares).
- The company's "economic moat"
- What barriers does this company have to fend off competitions?
- For how long can this company sustain its current high profitability and high growth?
Research Report:- While the goal of the presentation is to inform, in the research report you also try to persuade.
- Pay attention to the aesthetics of the report.
- Make your reports look as professional as possible. Form is as important as content.
- You can find in the Class Notes section some samples of real research reports from Wall Street firms.
- Update: DCF model, target price, buy/sell/hold recommendation is not required any more
- In the Research Report, you should explain to us the assumptions you make in your valuation model about the company's future.
- Future revenue growth, profitability, capital investment requirement, etc.
- Back them up with convincing arguments.
- Anyone can come up with some random numbers and plug them into a DCF model.
- Coming up with reasonable and plausible numbers is much harder.
- Tell us what assumptions may justify the stock's current price.
- That is, tell us the future business prospect of the company implied by its current market valuation.
- Tell us what you think the more plausible assumptions should be.
- That is, what future you are envisioning for the company.
- Set a target price
- We would like to know not only whether a stock is a good investment, but also how good it is.
- Recommend BUY if the stock is >25% undervalued, SELL if >25% overvalued, and HOLD for stocks in between.
Grading: - You are graded based on how well you understand the company and how convincing your arguments are
- Demonstrate that you are the expert of a company and its industry.
- In fact, actual future performance of the stocks you pick has no impact at all on your grade.
My advice for selecting stocks to pitch: - Look around you (home, mall, etc), identify a product or service you like, and find out whether the product/service is provided by a publicly-listed company.
- For example, you are shopping in a mall owned by Simon Property Group, where you find a Dick's Sporting Goods store;
- You walk into the store and pick up a sweater made by Columbia Sportswear;
- You then go to Foot Locker to get a pair of shoes
- Then you sit down in the the food court with a sandwich from the Wendy's.
- If you pay close attention, every day you come into direct contact with hundreds of publicly-listed companies.
- Sometimes the connections are not obvious by name.
- Do you know that VF Corporation (NYSE: VFC) is the owner of famous brands such as Wrangler, Lee Jeans, JanSport, The North Face, and Nautica?
- Do you know that Darden Restaurants (NYSE: DRI) operates Olive Garden, Red Lobster, and LongHorn Steakhouse?
- Do you know that Yum! Brands (NYSE: YUM) runs Taco Bell, KFC, and Pizza Hut?
- Here is a list of publicly-traded companies the products and services of which college students regularly consume.
- Pick a company that you are familiar with.
- Become an "expert" on a company, its businesses, its economics, its markets, its competitions, and its industry.
- You goal is to impress your classmates as an expert knowing every aspect of a business.
- Focus on the business aspect of a company, and not its abstract EPS numbers .
- Use the Cheat Sheet to guide you to the "value drivers" of a company.
- You will get a better grade if I think I've learnt something from you.
- And it is extremely unlikely that you will impress me with some advanced, complicated, financial concepts.
- Most likely you will impress me by demonstrating your good business insights into an industry, a company, its businesses, and its products.
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