Thursday, May 19, 2011

Company Visit --- Sands Capital

May 5th Thursday, the team had a luch meeting with Degelis, Perry and Davis from Sands Capital Management in their office at Arlington, VA.  Sands Capital is an independent investment management firm focused exclusively on portfolios of high quality growth companies.  Their clients include corporate pension plans, public plans, endowments, foundations, mutual funds, Taft-Hartley plans, family offices, and individuals.
We talked with analyst, associate and protfolio manager.  The topics ranged from Sands' unique investment philosophy to some random chat about an eduational institute in China.  Sands are pretty interested in what we're doing right now.  They agreed that what one learns from textbook will not qualify him to conqure the real market.  That's exactly why we started our team and try to learn as much as possible about the real world before graduation!
The meeting was informative and friendly.  We both enhanced our relationship and looked forward to further conversations.  The team will soon head to NYC to visit two more companies.  Please check our blog for more information. 


"Financial Statement Analysis for Investors" by Brian Lund

Here are the photoes from a lecture named "Financial Statement Analysis for Investors" on May 4th.  It was given by Brian Lund, the assistant director of research at Legg Mason Capital Management.  Check it out, guys!


Tuesday, May 10, 2011

"Fear the Boom and Bust" a Hayek vs. Keynes Rap Anthem

Apparently being a nerd just got cool.

- Saliq Khan & Lin Zhuo

Path - New Social Networking Site

Just when you thought that new social networking sites were not going to be popping up for a while, comes a brand new one with a slightly different concept.  Path is a slightly different variation of Facebook.  It allows you to share your personal life with a limited number of people.

Take a look:

- Saliq Khan

Monday, May 9, 2011

Commodities Hedge Fund Loses $400M

Betting for the commodities market to rise this past week turned out to be not a great idea for Clive Capital.  Oil dropped dramatically this past week and is sitting pretty at $98.90/barrel.  After reaching $115, investors knew that a correction was in the works, but going from touching $115 to coming down to $98.90 in a week is a drop which many didn't expect.  We're now closer to Goldman Sach's prediction of a $105 price for the year.

I see the prices going back up, by how much isn't something which I have been able to sit down and quantify.  I don't see the oil prices going back up to $150 because the global economy is still in a recovery mode and will be unable to absorb high oil prices.  This will hinder the ability for the economy to revive itself from the worst recession since the Great Depression.

More to come on a much more deeper level once exams are over this week.

- Saliq Khan

Wednesday, May 4, 2011

Lafarge – A Potential LONG investment

Lafarge is a French industrial company specialising in four major products: cement, construction aggregates, concrete and gypsum wallboard. It currently (2009) is the world's largest cement manufacturer by mass shipped ahead of Holcim. The company holds secure positions in numerous regions throughout the globe and employs approximately 80,000 full-time employees.
Revenue Growth
The executives within the company have forecasted revenue to increase between 3% and 6% in 2011.  I believe that revenue will likely increase by 5% in the year 2011 and gradually taper off to somewhere in the range of 3% to 4% within the next five years.  As most global economies have begun to climb out of the recession more funding is becoming available for new construction and infrastructure improvements.  This will be the cause of the 5% increase in 2011 however the reason that revenue will not continue to increase at a greater rate is because there are still a large percentage of lenders that are not going to be willing to invest the money that they would have three or four years ago.
Cost assumptions
Lafarge has been putting a lot of effort into reducing costs involved in both the manufacturing and distribution process.  Through this effort they were able to cut costs by €230 million in 2009 - 2010 data is not available at this time.  Even with these cost savings that have been successful I believe that raw material and labor costs are going to increase as the markets recover and inevitably cause an increase in costs.  Lafarge may be able to keep the growth in costs slow in the first few years but costs will gradually rise.  Hence I believe that Lafarge will see 0.25% increase in costs in 2011, growing to a 5% increase in 2012 then gradually increasing from 1% in 2013 to 3% in 2016.
Depreciation growth
Lafarge is set to sell €750 in fixed assets during 2011, which will have a large effect on depreciation.  In future years the company plans to invest heavily into emerging markets which will require additional material extracting plants and manufacturing facilities.  The result of this will be an increase in depreciation in 2011 followed by a sharp decrease in 2012.  Despite the new investments the company will continuously be involved in moving of assets and have some level of depreciation.  I believe that depreciation will grow by 25% in 2011 then back off by 25% in 2012 and continue at a .05% increase through 2016.
Change In working Capital and CAPEX
Capital expenditures will remain relatively constant in 2011 and then increase beginning in 2012 as the company invests in the emerging markets.  Under their current business plan I believe that they will have a larger percentage increase in CAPEX in 2012 and 2013 then the percentage increase will decline.  The companies future plans to expand in emerging markets as dictated by their senior management have led us to believe that CAPEX will follow this trend.  Interest expense and net borrowing should follow in line with CAPEX because Lafarge will likely borrow the funds required to expand their reach within emerging markets.  Hence CAPEX and interest expense will follow the same pattern, growing at 5% rate in both 2011 and 2012 then 4% in 2013 and 2014, followed by 3% in 2015 and 2016.  I believe that working capital will increase in 2011 as the projected sale of assets will lead to an increase in cash and other current assets.  After the initial sell-off and as the company invests in the emerging markets the change in working capital will decrease steadily.
After the recent market volatility that has been experienced it is unlikely to see dividend growth rates like have been witnessed in the past.  I do not believe that companies will increase dividend payments any more than investors require and in the current market that is not a very high number.  I conclude that a 2% growth rate is a fair value of what can be expected in the near future.  
Through my analysis I believe that Lafarge has an estimated price per share value of €56.25.  As of February 21, 2011 the stock was trading at €46.55.  Our conclusion is that Lafarge is trading under its value and would be a wise investment.


Tuesday, May 3, 2011

International Coal Group (ICO) - Stock Pitch

Here's another one for today:

International Coal Group (ICO):  People on the ground are saying that this is a firm to go work for.  If employees like the firm, so do I.  You build great companies with great people and great companies build great stock prices.  Here's the quick & dirty:

Market Cap: $2.95B
Vol (3 month avg): 10,336,300 
P/E Multiple: 96.33

EPS: 0.15
52 wk range: $3.59 - $14.48
Current price: $14.45

- Saliq Khan

TradeStation Group (TRAD) Looking Hot - Stock Pitch

Take a look at TradeStation Group, TRAD. This stock is looking hot and has shown incredible momentum over the last 30 days after the announced merger with Tokyo based Monex Group. Here's the breakdown for you:

Market Cap: $390M
Vol (3 month avg): 898,310  
P/E Multiple: 34.64
EPS: 0.28
52 wk range: $5.22 - $9.91
Current price: $9.70

- Saliq Khan

What's Changed?

I mourn the loss of thousands of precious lives, but will not rejoice in the death of one, not even an enemy... "Returning hate for hate multiplies hate, adding deeper darkness to a night already devoid of stars. Darkness cannot drive out darkness: only light can do that. Hate cannot drive out hate: only love can do that." -- Martin Luther King, Jr.

Osama bin Laden's death leaves little room for reflection as celebratory patriotism takes hold across the USThe New York Daily News put it most bluntly, with a front page which read simply "Rot in hell!"

Across the US, local newspapers captured a similar sense of triumphalism, albeit in slightly more measured words. In Idaho, the Press-Tribune showed the Twin Towers burning on 9/11 after the planes have struck them with the headline "Justice has been done". The Examiner in San Francisco declared the "Butcher of 9/11 is dead". In Prescott, Arizona, just one word was deemed sufficient for the Daily Courier: "Dead".

On the streets of the capital the intense emotions unleashed by the news that the al-Qaida leader had been killed, captured by these headlines, were on full display right outside the White House. Not since 4 November 2008 had there been such a spontaneous outpouring of joy, on that occasion when a black man with sticking-out ears and a funny name – his own description – was elected president of the United States.

Crowds are justifiably celebrating Bin Laden's death in downtown Manhattan, where a decade ago al-Qaida terrorists infamously massacred nearly 3,000 people.

Less well known is the statistic that since the subsequent US invasion of Afghanistan, terrorists have killed nearly five times that number of people in Pakistan. The annual number of Pakistani fatalities from terrorism has surged from fewer than than 200 in 2003 to almost 1,000 in 2006, to more than 3,000 in 2009. In all, since 2001 more than 30,000 have died here in terror and counterterror violence; slain by bombs, bullets, cannons and drones. America's 9/11 has given way to Pakistan's 24-7-365. The battlefield has been displaced. And in Pakistan it is much more bloody.

If Osama Bin Laden's death means that the war in south and central Asia can now begin to end, that America can begin to withdraw its forces from the region, and that Pakistan and Afghanistan can somehow rediscover peace, then one day there may be celebrations here as well.

In the meantime American, Pakistani, Afghan, and terrorist commanders will go on conducting their operations, the slaughter will continue, and human beings – all equal, all equal – will keep dying, their deaths mostly invisible to the outside world but at a rate evoking a line of aircraft stretching off into the distance, bearing down upon tower after tower after tower. Bin Laden is dead. But many Pakistanis sense the impending arrival of yet another murderous plane, headed their way (Hamid, M. 'Osama bin Laden's death: Pakistan will pay the blood price' The Guardian)

- Hamza Malik

Saturday Meeting: SGR and the PRAT model

Last Saturday, we officially start the systematic discussion of fundamental analysis. In addition to a review of the balance sheet, I brought something interesting to the table: Sustainable Growth Rate (SGR) along with the PRAT model!

The SGR is a very important concept in fundament analysis and equity evaluation, because it measures how quickly earnings can continue to grow indefinitely if the company holds an unchanged debt-to-equity ratio and doesn’t issue any new equity; in other words, the rate at which a firm can grow with only internal generated funds. It is a little tricky because people (even including some teammates :-P) may easily think the SGR is the same thing with the growth rate g we use in the FCF equity evaluation, however, the answer is yes and no.

SGR is the rate we can calculate based on the historical data from financial statements with the PRAT model, where SGR is the product of the profit margin (P), the retention rate (R), the asset turnover (A), and the financial leverage (T). Among them, R and T are the firm’s financing decision, while the product of P and A is the ROA, which presents firm’s performance. We then can use those four factors as building blocks in developing an estimate of a firm’s growth rate g. If we forecast the actual growth rate greater than SGR, the firm need increase either its retention ratio, profit margin, total asset turnover, or leverage; otherwise, the firm will have to issue equity. In sum, when you are looking for an appropriate growth rate for the terminal value, you’d better have a look at the calculated SGR as a benchmark for the overall analysis.

The part I enjoy most in our meetings is that all of we are always expecting to learn new knowledge from each other, through challenging each other, intensive group discussion, or even debates. We trust our teammates, and push each other move forward as well.

By the way, it was a pretty beautiful day last Saturday.
Folks, summer is coming…
But before enjoying the summer time, good luck with all of your finals!


Sunday, May 1, 2011

First week of JHU Equity Analyst Team

When I was still a Quant master student at Rutgers Business School last December, I knew that Carey Business School was about to launch a high-power research team named Equity Analyst Team.  It really made me feel thrilled that I could be part of the team 4 months later.  Now I am a first-year MSF student at the Johns Hopkins University and last week was my first week working full-time with the other 6 team members.
When the team president, Saliq Khan, found me at the mid of March and talked to me about the team, he emphasized many times that this is not a student club, which you can pay for the ticket and get on board.  He mentioned “Six of us are interviewed, hand-picked and committed for a 12-months work load.  We study as a group and work as a firm”.  Couple weeks ago when I was chatting with Chang Liu about the team, the president of the JHU Finance Club as well as a member of the team. He responded with a charming smile, ”You’re gonna miss your days right now”.  The first sentence that jumped into my mind is: What? Are you serious?
After one week’s work, I confirm that Chang was not joking.  I don’t remember when last time that I woke up at 6:30 was.  But I’ll continue doing so from now on. Morning conference is not new to me.  Back to my days of internships at Securities Institution, I’d already got used to it.  But the difference right now is everyone needs to speak quite a lot during our morning conference call.  If you don’t do enough homework, certainly you cannot contribute enough.  Also you need to prepare for other members’ friendly challenges.  On Saturday’s meeting, we walked through different components of fundamental analysis and every member brought their unique insights about their parts. To learn and to share is always a joy!
As a new comer of the team, I realized that I need to work really hard to catch up with other fellows. Sometimes I felt my points of view sounded naïve and lack of experience. The other members helped and encouraged me all the time. And I have to admit, despite the high-demanding work load, our working environment is really fun. Hussain is definitely the most hilarious person and our two female members---Lorena and Soujianya are really attractive, or increasingly attractive according to Hussain. J
I’m feeling lucky that I can be involved in this family and do my humble contributions to it. I firmly believe that when we look back this December, we could proudly say we didn’t waste our time and all the efforts were worthwhile.
"Keep it up, Lin."   
- Lin