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 7th, 2012

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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Julian Robertson

John Griffin Lee Ainslie

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

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

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

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

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

(Ignore him here.)

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

COMPARABLE FIRM ANALYSIS

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Uses valuation of peers to derive an implied value of the company you’re analyzing

Peers P/E Ratio P/B Ratio P/S Ratio

VNO 67.15 2.89 5.50GGP n/a 5.85 1.48SKT 108.10 5.08 7.00FRT 41.91 4.34 9.23AVERAGE 75.01 4.71 8.12

Implied SPG Price $93.76 $73.10 $108.09Actual SPG Price 94.53 94.53 94.53Premium (Discount) 0.8% 29.3% (12.5%)

SPG COMPARABLE FIRM ANALYSIS

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

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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Keep working on your MII membership memo! Memos are due by 10:00pm on September

12th to miirecruitment@gmail.com It is strongly recommended that you use the

template provided in the membership email We do not expect VAR or in-depth financial

analysis, but we do value creative and well-articulated ideas (Apple and Facebook do not count as creative ideas)

Work individually – this is your idea