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Generating Investment Ideas. Presented by Ryan Rechkemmer September 12, 2012. Sage Advice. “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” - PowerPoint PPT Presentation
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Generating Investment Ideas
Presented by Ryan RechkemmerSeptember 12, 2012
Sage Advice “It's far better to buy a wonderful company at a fair
price than a fair company at a wonderful price.”
“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”
“Never invest in a business you can’t understand.”
-Warren Buffett
Thesis Points Key arguments justifying the pitch
Specific to company’s unique situation and investment time horizon
Builds on Value-Added Research (VAR) to reveal informational edge and explain variant perception
Complements valuation analysis
Considers relevant risks
Example: Apple, Inc.
New Entrants: Low -Established brand name -Intellectual property
Suppliers: Low -Economies of scale -Retains pricing power
Buyers: Moderate -Significant switching costs -Carrier subsidies
Substitutes: Moderate -Indispensible gadgets -Incremental tech change
Rivalry: High -Oligopolistic competition -Mimicry and knock-offs
Threat of New
Entrants
Rivalry Among Existing
Competitors
Bargaining Power
of Suppliers
Threat ofSubstitut
e Products
or Services
Porter’s Five Forces Analysis
Bargaining Power
of Buyers
Superb management Competitive moat Limited downside risk Underappreciated
growth potential Under-reaction to
positive news Hidden assets /
overstated liabilities Actionable catalysts
for outperformance
Poor management Few barriers to entry Bond downgrade Overly optimistic
projections Under-reaction to
negative news Acquisition hungry Accounting
irregularities Actionable catalysts
for underperformance
Long Short
Long vs. Short
What to Look for Small-cap stocks (market capitalization < $1 B)
Overlooked by most analysts Untouched by large investors Likely to be inefficiently valued
Foreign companies Same as above, plus offers international
diversification (but check with me to make sure that MII can trade it)
Special situations Includes IPOs, spin-offs, distressed / post-bankruptcy
companies, takeover / buyout targets, etc. Potentially wide disparity between price and value Inherent catalysts to resolve temporary inefficiency
Easily accessible Expert opinions Current events
Pros
News(including online portals like CNBC, Forbes, Bloomberg, etc.)
Widely read Potential biases Too broad
Cons
Timely commentary Individual
perspective Very specific focus Detailed analysis
Pros
Investing Websites
Highly opinionated Questionable veracity Possible hidden
conflicts of interest
Cons
Stock Screeners(also applies to industry browsers)
Instantly compares stocks by relative valuation, past performance, etc.
Pros
Purely quantitative
Anchoring bias Myopic snapshot
Cons
Informational asymmetry Discover emerging trends
before professional investors Foundational to VAR
Pros
Personal Experience
Potential biases Limited scope
Cons
Other Resources Professional stock reports
(Standard & Poor’s, Thomson Reuters, etc.)
Yahoo! Finance stock screeners(http://screener.finance.yahoo.com/newscreener.html)
Yahoo! Finance industry browser(http://biz.yahoo.com/p/)
Individual company’s annual and quarterly SEC filings(http://www.sec.gov/edgar.shtml)
Mutual fund and hedge fund holdings (Blue Ridge Capital, Fidelity Contrafund, etc.)
How to Learn More These slides will be made available on MII’s website
under the “Research – Presentations” tab, and more information can be found in the “Fundamentals” section.
Questions?
Thank you!