To start the class off, Professor Shenoy wanted to talk about the causes of the tech bubble and real estate bubbles, the differences between them, and APM’s possible strategy for the future. We started by discussing the causes of the bubbles, with the tech bubble coming from an increase in productivity from the transition to computers by most companies. This led to increased margins, earnings, and eventually prices, which ended up being overvalued once the technical transition was finished in late 2000. The real estate bubble on the other hand came from the idea that “every American should own his/her own home.” Cuts in interest rates, lower underwriting standards, and deregulation of financial institutions led to the growth, and collapse of this bubble. It was not an actual bubble that came from an increase in productivity.
Professor Shenoy talked about the different economic theories by Nikolai Kondratieff, and Hyman Minsky and their relationship to the bubbles. She related Kondratieff’s theory to the tech bubble, and spoke of the possibility of deflation over the next couple years. The deflation is consistent with Kondratieff’s cycle, and there is evidence of it with the price declines in commodities since July. We also discussed Minsky’s belief that credit availability should tighten in prosperous times, when firms have the cash flows to pay off debt. Minsky argued that credit standards should loosen in bad times to promote economic growth. Professor Shenoy then likened this theory to how deregulation led to banks making riskier decisions, and consequently to some of the economic mess occurring because of those risks.
The class then discussed possible investments during a time when there may be deflation or no growth in the markets. Securities discussed were equities of firms with solid cash flows, such as ones with high dividend yields. We also talked about getting into industries that are part of a demographic trend, which may be insulated from adverse economic conditions.
We then transferred our discussion to our case for the week, AbitibiBowater (ABH). This is was not a typical case. ABH is distressed and so we did not do our usual buy, sell, hold recommendation for the security. Our guests for this class Todd Preheim from Campanile Capital, and Brett Young from Plainfield Asset Management discussed the company. Brett went into detail about our assignment because Plainfield worked with ABH in the beginning part of 2008. Brett generally agreed with our assessment, and gave us his own research and insight on AbitibiBowater from when he worked with the company.
After we discussed ABH, Todd and Brett started talking a bit about their roles in their jobs, and roles in investment banking. They talked about the sales and trading desks in investment banking and spoke to the different interactions within. The gentlemen then gave advice on career paths within finance in tough times. They reminded us that a career is a marathon, and our first job will not be our last.
We sold 1500 shares of KWK at $8.32 and bought 800 shares of HK at $14.32 during the previous week.
Monday, November 24, 2008
November 10, 2008
In class today we had a very special guest speaker, Mr. Dennis Gartman. Dennis Gartman is the primary author of the famous Gartman Letter. He runs a true hedge fund consisting of 5 million dollars of his own money and 250 million of others money. Mr. Gartman’s central theme to the class was that people do not listen to the market; when you lose money you should get out, not buy more. This theme was reiterated through clever anecdotes and catchy phrases such as “buy things that are going up, sell short things that are going down”, “value is crap, it is only good when the market is going up”, “admit when you are wrong, losing money means you are wrong”. Mr. Gartman discussed his personal beliefs about trading, that is a grinding, boring job. He spends all his time reducing his exposure to the market and if a trade goes against him by 7% he gets out. Mr. Gartman also suggested a few books for the class before opening up the floor to a Q&A session. These books were: “Reminiscence of a Stock Operator”, “Market Wizards” and “Market Wizards 2”.
The Q& A session offered more insightful anecdotes and opinions on the market. Mr. Gartman answered questions about the current economic climate. He believes that trading is smaller now because of high volatility, the system will be deleveraging for the next five years, and the bailout plan was extremely necessary but it is not necessary to bailout the automakers in Detroit. Mr. Gartman believes that China is the new growth opportunity in this global economy and as of today they announced that they would be changing from an exporter to focusing on its own consumers.
Todd Preheim of Campanile Capital listened to Mr. Gartman over the phone as Mr. Gartman spoke to the APM class. Mr. Preheim called in after the class to discuss what Mr. Gartman had to say. Todd reads the Gartman Letter daily, using it for its macroeconomic outlook. Todd agreed that reading charts can be important but he personally believes in the use of fundamental analysis. He suggested that the class use stop losses or loss limits in order to protect itself from downward trends in a long stock position.
After Todd Preheim spoke to the class there was a quick discussion about the company KWK. The stock mentor believes it is time to sell KWK because the company is decreasing its capital expenditures instead of increasing them. The stock mentor believes Petrohawk is a better natural gas alternative. This short discussion was followed by reporting of earnings calls from various stock holdings. Below is a short summary of the earnings call reporting:
Valero: Great earnings call. Repurchased 23 million shares this year. Decreased capital expenditures. Pushed back Port Arthur project.
Ryanair: Increased revenues but decreased net income due to poor hedging of oil. It plans to double its fleet by 2012. Investors liked the results which lead to the stock jumping up by 15%.
Scientific Games: Increased revenues, but did not meet expectations.
KWK: Increased revenues and EBITDA but had decreased net income because of equity loss from Wrightburn Energy partners. However, the loss is expected to reverse in the 4th quarter. Also, a very negative item was the decline in capital expenditures.
PXP: Gains from hedging, not operations. A decline in capital expenditure projections as well as 2009 guidance.
EGOV: Bad news from loss of contracts.
Interceramic: Increased revenues but decreased EBITDA. The company did not meet debt covenants.
The Q& A session offered more insightful anecdotes and opinions on the market. Mr. Gartman answered questions about the current economic climate. He believes that trading is smaller now because of high volatility, the system will be deleveraging for the next five years, and the bailout plan was extremely necessary but it is not necessary to bailout the automakers in Detroit. Mr. Gartman believes that China is the new growth opportunity in this global economy and as of today they announced that they would be changing from an exporter to focusing on its own consumers.
Todd Preheim of Campanile Capital listened to Mr. Gartman over the phone as Mr. Gartman spoke to the APM class. Mr. Preheim called in after the class to discuss what Mr. Gartman had to say. Todd reads the Gartman Letter daily, using it for its macroeconomic outlook. Todd agreed that reading charts can be important but he personally believes in the use of fundamental analysis. He suggested that the class use stop losses or loss limits in order to protect itself from downward trends in a long stock position.
After Todd Preheim spoke to the class there was a quick discussion about the company KWK. The stock mentor believes it is time to sell KWK because the company is decreasing its capital expenditures instead of increasing them. The stock mentor believes Petrohawk is a better natural gas alternative. This short discussion was followed by reporting of earnings calls from various stock holdings. Below is a short summary of the earnings call reporting:
Valero: Great earnings call. Repurchased 23 million shares this year. Decreased capital expenditures. Pushed back Port Arthur project.
Ryanair: Increased revenues but decreased net income due to poor hedging of oil. It plans to double its fleet by 2012. Investors liked the results which lead to the stock jumping up by 15%.
Scientific Games: Increased revenues, but did not meet expectations.
KWK: Increased revenues and EBITDA but had decreased net income because of equity loss from Wrightburn Energy partners. However, the loss is expected to reverse in the 4th quarter. Also, a very negative item was the decline in capital expenditures.
PXP: Gains from hedging, not operations. A decline in capital expenditure projections as well as 2009 guidance.
EGOV: Bad news from loss of contracts.
Interceramic: Increased revenues but decreased EBITDA. The company did not meet debt covenants.
November 3, 2008
Third quarter earnings season is in full swing. We started class by discussing the earnings calls that took place in the last few weeks. Earnings call discussed included: LKQ, GRMN, IBKR and KSU. We discussed fears of LKQ management enriching themselves and making poor acquisition decisions. Also, the class had mixed feelings about GRMN. Although the company has potential to do well in the future, the delayed release of the nuvi phone and uncertainly about a mapping company acquisition has led some class members to recommend selling. The class as a whole feels that KSU has a great business model, however, the uncertainly in the credit market may create a potential problem for this highly leveraged firm.
Steve Koenig, manager director and JP Morgan, was our guest speaker this week. He is managing director of the Latin America derivative trading and sales desk. He began his discussion by describing the five major components of a sales and trading floor: trading, sales, research, middle office and capital markets. The highest pressure and more demanding job was by far trading according to Koenig because they have to make the customer and trader(bank) “happy.” Trades include foreign exchange swaps, credit default swaps, exotic/hybrid securities and interest rate swaps. Of the Latin America countries, Koenig recommends staying clear of Argentina, Ecuador & Venezuela because of their default risk.
Many of the questions asked revolved around the ensuing economic crisis. Koenig stressed that he has never seen anything like this in his lifetime. Interestingly, the crisis didn’t reach Latin America until near the Lehman bankruptcy. They made it through the subprime very well—it wasn’t until currencies changed and corporations’ currency derivatives pushed them over the brink. Although Lehman has had its share of losses, the bank has withstood better than others because of its sound risk management group. Working out of New York, Koenig has seen the effect of the market collapse firsthand. It is his belief that the government should have prevented all major bank collapse, including Lehman. The bailout package was a necessary step that helped to prevent a second Great Depression. Banks and hedge funds not being able to get their money from Lehman has created devastating loss. Moreover, thousands of trades were lost.
Going forward, it is clear there is going to be a new breed of investment banks on the street. The merging of investment banks and commercial banks will create a new banking environment. According to Koenig, increased regulation will likely lead to banks seeing limits in private equity, tier two capital ratios coming to bank levels and a decrease in leverage ratios. Similarly, Koenig is concerned about not having enough counterparties to trade with. It seems that the crisis is far from over—the bailout is likely to top $1 trillion and move to consumer credit cards and Detroit. Commercial real estate will likely see a major decline. Emerging markets are likely to be bailed out through international monetary fund. Until public borrowing resumes, private borrowing will become the new trend.
Lastly, Koenig left the class with some insightful advice. “Nobody is too big to fail,” said Koenig. We should all keep this in the back of our heads. Furthermore, we were left with some encouraging words of wisdom regarding the job search. Although banking job opportunities are few to none, Koenig stressed that a career is a marathon, not a sprint. W may have to take an alternative route to reach our goal. He recommended that we continue our education or enter another job market temporarily because the financial market is destined to rebound.
Individual projects were due this Monday. Next week, we are extremely excited to have Dennis Gartman come to class. The case next week focuses on technical analysis. Since voting on forward calls has been unsuccessful, the class will vote on buy and sell limits for each company in the portfolio this week in the case that there is a swing from the election.
Steve Koenig, manager director and JP Morgan, was our guest speaker this week. He is managing director of the Latin America derivative trading and sales desk. He began his discussion by describing the five major components of a sales and trading floor: trading, sales, research, middle office and capital markets. The highest pressure and more demanding job was by far trading according to Koenig because they have to make the customer and trader(bank) “happy.” Trades include foreign exchange swaps, credit default swaps, exotic/hybrid securities and interest rate swaps. Of the Latin America countries, Koenig recommends staying clear of Argentina, Ecuador & Venezuela because of their default risk.
Many of the questions asked revolved around the ensuing economic crisis. Koenig stressed that he has never seen anything like this in his lifetime. Interestingly, the crisis didn’t reach Latin America until near the Lehman bankruptcy. They made it through the subprime very well—it wasn’t until currencies changed and corporations’ currency derivatives pushed them over the brink. Although Lehman has had its share of losses, the bank has withstood better than others because of its sound risk management group. Working out of New York, Koenig has seen the effect of the market collapse firsthand. It is his belief that the government should have prevented all major bank collapse, including Lehman. The bailout package was a necessary step that helped to prevent a second Great Depression. Banks and hedge funds not being able to get their money from Lehman has created devastating loss. Moreover, thousands of trades were lost.
Going forward, it is clear there is going to be a new breed of investment banks on the street. The merging of investment banks and commercial banks will create a new banking environment. According to Koenig, increased regulation will likely lead to banks seeing limits in private equity, tier two capital ratios coming to bank levels and a decrease in leverage ratios. Similarly, Koenig is concerned about not having enough counterparties to trade with. It seems that the crisis is far from over—the bailout is likely to top $1 trillion and move to consumer credit cards and Detroit. Commercial real estate will likely see a major decline. Emerging markets are likely to be bailed out through international monetary fund. Until public borrowing resumes, private borrowing will become the new trend.
Lastly, Koenig left the class with some insightful advice. “Nobody is too big to fail,” said Koenig. We should all keep this in the back of our heads. Furthermore, we were left with some encouraging words of wisdom regarding the job search. Although banking job opportunities are few to none, Koenig stressed that a career is a marathon, not a sprint. W may have to take an alternative route to reach our goal. He recommended that we continue our education or enter another job market temporarily because the financial market is destined to rebound.
Individual projects were due this Monday. Next week, we are extremely excited to have Dennis Gartman come to class. The case next week focuses on technical analysis. Since voting on forward calls has been unsuccessful, the class will vote on buy and sell limits for each company in the portfolio this week in the case that there is a swing from the election.
October 13, 2008
Approximately an hour before class, the DOW finished the day up 11%. It seems as if this is the first time all semester that we have started class without devastating financial news. As usual, we began class by discussing current news in relation to the portfolio. We also discussed various options that we should consider. The class came to the consensus that it is not the time to sell any of our positions. We also agreed that there are some bargains that we should consider. Prior to class, we purchased 500 shares of Valero. Last week, the class covered Valero and everyone was very bullish on the company. Mr. Craig Novorr, our guest speaker from last week is also bullish on Valero.
This week the class covered Kansas City Southern (KSU). Overall, we had three buy recommendations and three hold recommendations. KCS is an exciting company and they are set to benefit from the strategic decisions that they have made in the last ten years. For example, they are the exclusive transporter of goods to the US from the Port of Lazaro Cardenas in Mexico. This port is undergoing rapid expansion and is on pace to become the second largest port in North America. The majority of goods that are shipped into this port come from Asia. Also, KCS is benefitting from the migration of automobile manufacturing plants to Mexico, because they will transfer the automobiles to the US. The same goes for other types of manufacturing. KCS is also in the process of developing several intermodal centers.
Mr. Bill Galligan VP of Investor Relations was nice enough to visit class. He began his presentation by complimenting us on our research reports. However, he may have just been trying to soften us up. Either way, we all crossed our fingers that Professor Shenoy was listening. He then spoke about what it was like to work in an investor relations department. He mentioned that he was constantly on the road. That particular career path seems interesting, because of the mix between technical knowledge and correspondence with investors. Mr. Galligan then gave a presentation that he said is similar to what he gives to potential investors. He definitely did a good job selling his company. KCS currently makes up over 6% of the APM portfolio.
This week the class covered Kansas City Southern (KSU). Overall, we had three buy recommendations and three hold recommendations. KCS is an exciting company and they are set to benefit from the strategic decisions that they have made in the last ten years. For example, they are the exclusive transporter of goods to the US from the Port of Lazaro Cardenas in Mexico. This port is undergoing rapid expansion and is on pace to become the second largest port in North America. The majority of goods that are shipped into this port come from Asia. Also, KCS is benefitting from the migration of automobile manufacturing plants to Mexico, because they will transfer the automobiles to the US. The same goes for other types of manufacturing. KCS is also in the process of developing several intermodal centers.
Mr. Bill Galligan VP of Investor Relations was nice enough to visit class. He began his presentation by complimenting us on our research reports. However, he may have just been trying to soften us up. Either way, we all crossed our fingers that Professor Shenoy was listening. He then spoke about what it was like to work in an investor relations department. He mentioned that he was constantly on the road. That particular career path seems interesting, because of the mix between technical knowledge and correspondence with investors. Mr. Galligan then gave a presentation that he said is similar to what he gives to potential investors. He definitely did a good job selling his company. KCS currently makes up over 6% of the APM portfolio.
Thursday, November 20, 2008
November 17, 2008
To start the class off, Professor Shenoy wanted to talk about the causes of the tech bubble and real estate bubbles, the differences between them, and APM’s possible strategy for the future. We started by discussing the causes of the bubbles, with the tech bubble coming from an increase in productivity from the transition to computers by most companies. This led to increased margins, earnings, and eventually stock price appreciation, which ended up being overvalued once the technical transition was finished in late 2000. The real estate bubble on the other hand came from the idea that “every American should own his/her own home.” Cuts in interest rates, lower underwriting standards, and deregulation of financial institutions led to the growth, and collapse of this bubble.
Professor Shenoy talked about the different economic theories by Nikolai Kondratieff, and Hyman Minsky and their relationship to the bubbles. She related Kondratieff’s theory to the tech bubble, and spoke of the possibility of deflation over the next couple years. The deflation is consistent with Kondratieff’s cycle, and there is evidence of it with the price declines in commodities since July. We also discussed Minsky’s belief that credit availability should tighten in prosperous times, when firms have the cash flows to pay off debt. Minsky argued that credit standards should loosen in bad times to promote economic growth. Professor Shenoy then likened this theory to how deregulation led to banks making riskier decisions, and consequently to some of the economic mess occurring because of those risks.
The class then discussed possible investments during a time when there may be deflation or no growth in the markets. Securities discussed were equities of firms with solid cash flows, such as ones with high dividend yields. We also talked about getting into industries that are part of a demographic trend, which may be insulated from adverse economic conditions.
We then transferred our discussion to our case for the week, AbitibiBowater (ABH). This is was not a typical case. ABH is distressed and so we did not do our usual buy, sell, hold recommendation for the security. Our guests for this class Todd Preheim from Campanile Capital, and Brett Young from Plainfield Asset Management discussed the company. Brett went into detail about our assignment because Plainfield worked with ABH in the beginning part of 2008. Brett generally agreed with our assessment, and gave us his own research and insight on AbitibiBowater from when he worked with the company.
After we discussed ABH, Todd and Brett started talking a bit about their roles in their jobs, and roles in investment banking. They talked about the sales and trading desks in investment banking and spoke to the different interactions within. The gentlemen then gave advice on career paths within finance industry during tough times. They reminded us that a career is a marathon, and our first job will not be our last.
We sold 1500 shares of KWK at $8.32 and bought 800 shares of HK at $14.32 during the previous week.
Professor Shenoy talked about the different economic theories by Nikolai Kondratieff, and Hyman Minsky and their relationship to the bubbles. She related Kondratieff’s theory to the tech bubble, and spoke of the possibility of deflation over the next couple years. The deflation is consistent with Kondratieff’s cycle, and there is evidence of it with the price declines in commodities since July. We also discussed Minsky’s belief that credit availability should tighten in prosperous times, when firms have the cash flows to pay off debt. Minsky argued that credit standards should loosen in bad times to promote economic growth. Professor Shenoy then likened this theory to how deregulation led to banks making riskier decisions, and consequently to some of the economic mess occurring because of those risks.
The class then discussed possible investments during a time when there may be deflation or no growth in the markets. Securities discussed were equities of firms with solid cash flows, such as ones with high dividend yields. We also talked about getting into industries that are part of a demographic trend, which may be insulated from adverse economic conditions.
We then transferred our discussion to our case for the week, AbitibiBowater (ABH). This is was not a typical case. ABH is distressed and so we did not do our usual buy, sell, hold recommendation for the security. Our guests for this class Todd Preheim from Campanile Capital, and Brett Young from Plainfield Asset Management discussed the company. Brett went into detail about our assignment because Plainfield worked with ABH in the beginning part of 2008. Brett generally agreed with our assessment, and gave us his own research and insight on AbitibiBowater from when he worked with the company.
After we discussed ABH, Todd and Brett started talking a bit about their roles in their jobs, and roles in investment banking. They talked about the sales and trading desks in investment banking and spoke to the different interactions within. The gentlemen then gave advice on career paths within finance industry during tough times. They reminded us that a career is a marathon, and our first job will not be our last.
We sold 1500 shares of KWK at $8.32 and bought 800 shares of HK at $14.32 during the previous week.
Wednesday, October 15, 2008
October 6, 2008
To help us on valuing companies, Professor Shenoy went over a handout on important “Numbers to Consider for Cases/Presentations.” The handout stressed the importance of margins including gross margin, operating margin, etc. Professor Shenoy emphasized that our valuation metrics like P/E and TEV/EBITDA need to come from our pro-forma income statements and should be based on our forward estimates.
Our speaker this week was Craig B. Novorr who works at Paragon Capital Management. Paragon is a bottom-up asset management firm that has over $300 million under management. Craig used to work at the Scout Fund at UMB bank. He initially left the bank to start his own business, but ended up being talked into working at Paragon Capital Management.
Craig showed us the way Paragon Capital values companies using Valero Energy Corporation as an example. He believes that when presenting an investment idea that you need to identify three positive catalysts along with three ongoing risks for the company. As long as the risks stay the same and the catalysts are still there, Paragon will continue to hold the stocks for the long term. His comprehensive valuation recognized that Valero is quite undervalued.
Our cases for the week were on Valero and most groups in the class had a buy recommendation on the company. Moreover, the class also asked him what he thought of current portfolio holding, Garmin, since Paragon Capital owns the stock. He said he is still a long-term believer of the stock. He also said that the drop in margins was to be expected as the average sales prices have fallen since introduction. Further, he said that their technology is still in the top of the industry. Although cell phones have GPS, he noted, he highlighted that people are unwilling to look at a small screen vs. having a screen on the windshield.
During the week, the class voted on buying Valero Energy, we ended up buying 500 shares at $21.19.
Our speaker this week was Craig B. Novorr who works at Paragon Capital Management. Paragon is a bottom-up asset management firm that has over $300 million under management. Craig used to work at the Scout Fund at UMB bank. He initially left the bank to start his own business, but ended up being talked into working at Paragon Capital Management.
Craig showed us the way Paragon Capital values companies using Valero Energy Corporation as an example. He believes that when presenting an investment idea that you need to identify three positive catalysts along with three ongoing risks for the company. As long as the risks stay the same and the catalysts are still there, Paragon will continue to hold the stocks for the long term. His comprehensive valuation recognized that Valero is quite undervalued.
Our cases for the week were on Valero and most groups in the class had a buy recommendation on the company. Moreover, the class also asked him what he thought of current portfolio holding, Garmin, since Paragon Capital owns the stock. He said he is still a long-term believer of the stock. He also said that the drop in margins was to be expected as the average sales prices have fallen since introduction. Further, he said that their technology is still in the top of the industry. Although cell phones have GPS, he noted, he highlighted that people are unwilling to look at a small screen vs. having a screen on the windshield.
During the week, the class voted on buying Valero Energy, we ended up buying 500 shares at $21.19.
September 29, 2008
This week Prof. Hirschey spoke to the class about the housing bubble. He encouraged us not to monitor the Case-Shiller Index, but the broader Housing Price Index from the Federal Housing Finance Agency (FHFA). He showed how the house price/income ratio in the hot spot regions of the housing market has grown. In California alone, the house price/income ratio is comparable to Hawaii’s. Hawaii’s house price/income ratio is the highest because it is based on a large supply of vacation homes. He also emphasized that the fourth quarter of 2006, largest boom in housing, doesn’t describe the overall housing market. Five states have severe housing problems: Massachusetts, Illinois, Colorado, Nevada, and Florida. In states like Missouri, housing prices have actually increased.
To take advantage of this disparity in perceptions and the political situation, he encouraged APM to buy Fannie Mae preferred stock: T. Because Fannie Mae has $41 billion in equity and is currently trading at a very low price, Prof. Hirschey thinks buying now would be a great opportunity.
After Prof. Hirschey’s presentation, we discussed the moral hazard that comes with banks getting to big too fail as it relates to the current bail-out proposal. We discussed the Dow falling over 700 points that day and the portfolio implications. The overall consensus was that selling was not an option at this point. All of our holdings have good long-term prospects. If anything we should perhaps buy more. There was a suggestion to write some calls on some of the holdings.
Each group gave a presentation on a current portfolio holdings. We had presentations on ConAgra, Launch Tech, Interceramic, A-Power, and Capital Federal. A common motif in the presentations was how the current economy is affecting each underlying industry.
The recommendations from each group were:
Group 1 – Reduce Interceramic (CERAMIC B/D) position
Group 2 - Sell Capitol Federal (CFFN)
Group 3 – Buy more A-Power (APWR)
Group 4 – Buy more LaunchTech (8196:HK)
Group 5 – Hold Diagio (DEO)
Group 6 – Hold ConAgra (CAG)
The presentations and models are available on the Research page for the class.
To take advantage of this disparity in perceptions and the political situation, he encouraged APM to buy Fannie Mae preferred stock: T. Because Fannie Mae has $41 billion in equity and is currently trading at a very low price, Prof. Hirschey thinks buying now would be a great opportunity.
After Prof. Hirschey’s presentation, we discussed the moral hazard that comes with banks getting to big too fail as it relates to the current bail-out proposal. We discussed the Dow falling over 700 points that day and the portfolio implications. The overall consensus was that selling was not an option at this point. All of our holdings have good long-term prospects. If anything we should perhaps buy more. There was a suggestion to write some calls on some of the holdings.
Each group gave a presentation on a current portfolio holdings. We had presentations on ConAgra, Launch Tech, Interceramic, A-Power, and Capital Federal. A common motif in the presentations was how the current economy is affecting each underlying industry.
The recommendations from each group were:
Group 1 – Reduce Interceramic (CERAMIC B/D) position
Group 2 - Sell Capitol Federal (CFFN)
Group 3 – Buy more A-Power (APWR)
Group 4 – Buy more LaunchTech (8196:HK)
Group 5 – Hold Diagio (DEO)
Group 6 – Hold ConAgra (CAG)
The presentations and models are available on the Research page for the class.
Monday, October 13, 2008
September 22, 2008
He discussed every sector of the real estate industry; the risks involved investing in real estate and explained in depth how to value property. Students were very curious about the future in the real estate industry and asked several questions to Aaron about his future outlook on the industry.
Wednesday, September 24, 2008
September 15, 2008
September 15, 2008
The class discussed market events that took place in the market over the weekend - the Chapter 11 Bankruptcy filing by Lehman Brothers late Sunday night, Bank of America’s buyout of Merrill Lynch and the probable failure or bailout of AIG. Professor Shenoy led the discussion on the underlying causes and bad assets that led to Lehman’s failure.
We were fortunate to have two guest speakers representing UMB, CFO Mike Hagedorn and IR representative Begonya Klumb. Mike has 20 years of experience in the finance and banking industry working at Wells Fargo before being hired on by UMB in March 2005. He presented an overview of the bank, its operations and how UMB manages risk to make a profit. The highlights were: UMB is growing and focused on fee-based businesses that currently account for 56% of total revenue, UMB prefers the commercial lending business, but likes diversification, and UMB has been risk-averse and is performing well in the current market.
Several students were curious about the HSA business and its ability to remain profitable. Mike said that is Obama was elected, that revenue would likely not exist anymore.
Professor Shenoy highlighted our group cases and discussed the company’s balance sheet and revenue segments. The class felt like UMB was a great bank providing excellent service to customers but was overvalued. The term “flight to quality” was used to describe the trading volume and share appreciation. There was no need to vote on the stock as majority of the groups recommended a “Sell” on UMB.
Wednesday, September 17th Special Class
Brett Leeth of Koch Equity Capital presented to the Security Analysis and APM classes. Brett discussed the business development group and how the market based management philosophy is implemented by Koch Industries. His presentation provided students insight on how Koch builds models and what type of information decision makers at Koch want highlighted. A focus is the work done prior to the model, particularly a thorough Industry Analysis.
Friday, September 19th 4th Annual APM Golf Tournament
We hosted 36 golfers at Lawrence Country Club. The tournament was a great success and we would like to extend our thanks to our sponsors and players!
Until next time,
APM
The class discussed market events that took place in the market over the weekend - the Chapter 11 Bankruptcy filing by Lehman Brothers late Sunday night, Bank of America’s buyout of Merrill Lynch and the probable failure or bailout of AIG. Professor Shenoy led the discussion on the underlying causes and bad assets that led to Lehman’s failure.
We were fortunate to have two guest speakers representing UMB, CFO Mike Hagedorn and IR representative Begonya Klumb. Mike has 20 years of experience in the finance and banking industry working at Wells Fargo before being hired on by UMB in March 2005. He presented an overview of the bank, its operations and how UMB manages risk to make a profit. The highlights were: UMB is growing and focused on fee-based businesses that currently account for 56% of total revenue, UMB prefers the commercial lending business, but likes diversification, and UMB has been risk-averse and is performing well in the current market.
Several students were curious about the HSA business and its ability to remain profitable. Mike said that is Obama was elected, that revenue would likely not exist anymore.
Professor Shenoy highlighted our group cases and discussed the company’s balance sheet and revenue segments. The class felt like UMB was a great bank providing excellent service to customers but was overvalued. The term “flight to quality” was used to describe the trading volume and share appreciation. There was no need to vote on the stock as majority of the groups recommended a “Sell” on UMB.
Wednesday, September 17th Special Class
Brett Leeth of Koch Equity Capital presented to the Security Analysis and APM classes. Brett discussed the business development group and how the market based management philosophy is implemented by Koch Industries. His presentation provided students insight on how Koch builds models and what type of information decision makers at Koch want highlighted. A focus is the work done prior to the model, particularly a thorough Industry Analysis.
Friday, September 19th 4th Annual APM Golf Tournament
We hosted 36 golfers at Lawrence Country Club. The tournament was a great success and we would like to extend our thanks to our sponsors and players!
Until next time,
APM
Tuesday, September 16, 2008
September 8, 2008
As many of you know we usually start class by discussing current events that are relevant to the APM portfolio. After Sunday’s announcement that the government would be bailing out Fannie Mae and Freddie Mac, there were plenty of topics to discuss. Professor Shenoy explained that many community banks hold the preferred stock of Fannie and Freddie. Having a preferred stock position in Fannie or Freddie is not good. This could be important to the APM portfolio due to our holding of Capitol Federal. Students will check those holdings. Also, the class is performing an analysis of UMB this week so a breakdown of the securities that they hold is important.
We also discussed the iron ore industry. Companhia Vale Do Rio Doce (an iron ore minor) makes up approximately 1% of the APM portfolio. We need to form an opinion on the commodity and the industry. We will return to the topic again in the coming weeks.
On August 29, the class voted to sell our position in Energy Conversion Devices (ENER). At the time they were trading at around $75 and recently they were trading as low as $53.55. We still believe in the long term prospects of the company, but at the time of the sell their valuation was just too high. Scott Jones, our mentor for the stock provided us with a timely and excellent analysis.
Our speaker this week was APM alum Joe Onofrio. Joe is an analyst for Jayhawk Capital and just returned from China. While in China, Joe visited the various Golden Meditech locations and also spent time with Golden Meditech’s management and employees. Our first group assignment was to write a research report on Golden Meditech. We discussed how to value Golden Meditech. We discussed each segment of the company in detail. Two of the class models are on the APM website .
A couple of the key uncertainties in valuing some of the segments are the time of the plasma exchange release. The device’s release has been repeatedly delayed, but the company says it should be out within the year. When released will the product cannibalize the sales of the ABRS? Perhaps, but it should increase sales over all because the target market is emergency rooms, while ABRS is used for surgery.
Until Next Time,
The APM Class
We also discussed the iron ore industry. Companhia Vale Do Rio Doce (an iron ore minor) makes up approximately 1% of the APM portfolio. We need to form an opinion on the commodity and the industry. We will return to the topic again in the coming weeks.
On August 29, the class voted to sell our position in Energy Conversion Devices (ENER). At the time they were trading at around $75 and recently they were trading as low as $53.55. We still believe in the long term prospects of the company, but at the time of the sell their valuation was just too high. Scott Jones, our mentor for the stock provided us with a timely and excellent analysis.
Our speaker this week was APM alum Joe Onofrio. Joe is an analyst for Jayhawk Capital and just returned from China. While in China, Joe visited the various Golden Meditech locations and also spent time with Golden Meditech’s management and employees. Our first group assignment was to write a research report on Golden Meditech. We discussed how to value Golden Meditech. We discussed each segment of the company in detail. Two of the class models are on the APM website .
A couple of the key uncertainties in valuing some of the segments are the time of the plasma exchange release. The device’s release has been repeatedly delayed, but the company says it should be out within the year. When released will the product cannibalize the sales of the ABRS? Perhaps, but it should increase sales over all because the target market is emergency rooms, while ABRS is used for surgery.
Until Next Time,
The APM Class
Monday, May 5, 2008
April 30, 2008
We had our conference call with Golden Med at 9 am this morning. Each group had the opportunity to ask Albert a few questions regarding individual segments and business in general. They do expect to release their Plasma Exchange machine next fall. The stem cell industry has been receiving quite a bit of negative press recently, and Albert thought the negative press was actually a good thing for Golden Med because it was bringing attention to the industry. Golden Med bought back a lot of stock a couple of times in the past month, and Albert said that was because they felt it was undervalued. He also mentioned that they expected very little cannibalization on the ABRS numbers with the introduction of the plasma exchange machine this year.
Kent called in to discuss how the call went, each group reported to him on how Albert answered their questions. Kent didn't have much to say, but thanked us for all our hard work and wished us a great summer.
Joe went over Brooke with us briefly. They have a large amount of loans coming due this summer, and Joe confirmed today that they had gotten those extended until the end of the year, which is good news for them. Joe had complete a liquidation model for BXXX, and based on that model they're worth about $450 million. It's very hard to value Brooke Capital though, so not an exact number.
Class was cut short early, so that everyone had plenty of time to make it to the Lied Center to listen to Chief Justice John J. Roberts Jr. speak. He provided and interesting lecture on the Louisiana Purchase and then fielded questions from a panel of students from both the Business School and Law School.
Kent called in to discuss how the call went, each group reported to him on how Albert answered their questions. Kent didn't have much to say, but thanked us for all our hard work and wished us a great summer.
Joe went over Brooke with us briefly. They have a large amount of loans coming due this summer, and Joe confirmed today that they had gotten those extended until the end of the year, which is good news for them. Joe had complete a liquidation model for BXXX, and based on that model they're worth about $450 million. It's very hard to value Brooke Capital though, so not an exact number.
Class was cut short early, so that everyone had plenty of time to make it to the Lied Center to listen to Chief Justice John J. Roberts Jr. speak. He provided and interesting lecture on the Louisiana Purchase and then fielded questions from a panel of students from both the Business School and Law School.
April 23, 2008
Today we were lucky enough to have the CEO of Tradebot, Dave Cummings, attend our class to tell us a little more about the company he started and how it operates. Tradebot trades on the principal of ultra short-term trading. Their average hold time for a stock is about 11 seconds. Dave created an algorithm that determines when to buy and sell a stock, based on certain parameters. They're currently trading over 100 symbols and have had great success since the beginning.
Dave also created a new market, Bats Trading. What started out as a little market he started on the side to compete with Nasdaq, now boasts 10% of the market share. Because of Bats Trading success, Dave has now shifted back over to Tradebot as CEO, and has left Bats Trading in the hands of one of his partners.
Since we had a speaker recently discuss risk management with our class, we asked Dave what methods Tradebot employs to manage risk. He said there is an overall limit on the firm as to how many orders can be placed, and traders also have individual limits on how much they can trade in a single day. A more experience trader will obviously have more freedom, then someone just starting out.
Our case for the week was IBKR, and Dave spent a little time with us going over our cases and discussing IBKR. He felt there were two factors to be aware of in the case of IBKR. One being the fact the market-making business is only getting tougher and there's more competition. The second factore is their customer market, which should do well in the future. We dicussed IBKR's performance in relation to Ameritrade and Scotttrade.
Professor Shenoy discussed IBKRs balance sheet with us. They list a 12% minority interest, which made some of our calculations a little tricky to sort out. Every year the minority interest has the option to convert their 360 million shares, so this made forecasting earnings tricky. One option is to assume that 12% is renewed each year.
Next week the entire class will be attending the Vickers lecture to hear Chief Justice John Roberts Jr. speak. We will have a conference call with Golden Meditech on Wednesday morning, and Kent should be calling in during class to go over our notes from the call.
Dave also created a new market, Bats Trading. What started out as a little market he started on the side to compete with Nasdaq, now boasts 10% of the market share. Because of Bats Trading success, Dave has now shifted back over to Tradebot as CEO, and has left Bats Trading in the hands of one of his partners.
Since we had a speaker recently discuss risk management with our class, we asked Dave what methods Tradebot employs to manage risk. He said there is an overall limit on the firm as to how many orders can be placed, and traders also have individual limits on how much they can trade in a single day. A more experience trader will obviously have more freedom, then someone just starting out.
Our case for the week was IBKR, and Dave spent a little time with us going over our cases and discussing IBKR. He felt there were two factors to be aware of in the case of IBKR. One being the fact the market-making business is only getting tougher and there's more competition. The second factore is their customer market, which should do well in the future. We dicussed IBKR's performance in relation to Ameritrade and Scotttrade.
Professor Shenoy discussed IBKRs balance sheet with us. They list a 12% minority interest, which made some of our calculations a little tricky to sort out. Every year the minority interest has the option to convert their 360 million shares, so this made forecasting earnings tricky. One option is to assume that 12% is renewed each year.
Next week the entire class will be attending the Vickers lecture to hear Chief Justice John Roberts Jr. speak. We will have a conference call with Golden Meditech on Wednesday morning, and Kent should be calling in during class to go over our notes from the call.
Monday, April 21, 2008
4/16/08
On April 11, 2008 the class conducted a vote on what securities to buy, hold, or sell. Below is the outcome of the class vote conducted via e-mail.
# of Votes To Buy # of Votes to Hold Avg. Vote on Position
BXXX 15 19 2.3
ELRN 20 14 1.4
SGMS 9 25 3.0
ZOLT 21 13 1.8
GRMN 18 16 3.6
# of Votes to Sell # of Votes to Hold Avg. Position
SGMS 6 28 0.2
KWK 21 12 5.0
SOHU 24 10 1.1
LHTCF 19 15 1.9
EGOV 13 21 0.2
KSU 12
Total Votes 34
Since the vote the portfolio has made 10 new transactions. The details of those transactions are below.
14-Apr-08 SOHU 500 share SOLD at $48.38 - $24,190.00
14-Apr-08 KWK 900 shares SOLD at $39.72 - $35,749.80
14-Apr-08 GRMN 300 shares BOUGHT at $44.76 - (-$13,428.60)
14-Apr-08 ZOLT 1,000 shares BOUGHT at $25.65 – (-$25,653.00)
14-Apr-08 BXXX 3,000 shares BOUGHT at $2.29 - (-$6,861.00)
14-Apr-08 ELRN 2,000 shares BOUGHT at $8.95 - (-$17,900.00)
14-Mar-08 8196 10,000 shares SOLD at $0.13 – $1,250.00
14-Mar-08 0904 35,000 shares SOLD at $1.00 - $35,000.00
14-Mar-08 CHINA 7,000 shares BOUGHT at $4.03 - (-$28,210.00)
13-Mar-08 BXXX 5,000 shares BOUGHT $3.26 – (-$16,310.00)
Our first speaker was Marc Hensel of Plains Exploration (PXP). He talked about the companies new reserve build up project called T-Ridge development. He explained the company’s strategy regarding oil and natural gas reserves. Most of their properties are acquired through an auction process, because they aren’t big enough to be buying an oil property straight out. They usually fund the construction of an oil rig, and then split profits with whomever they split the license with. He explained the differences between how energy companies classify and account for their types of reserves. They’re only able to extract about 40% of each properties resources, so they base their proved reserve numbers on what they can expect to get. They also use several different processes to extract the oil. Everything from using a water flush, to forcing carbon monoxide into wells.
He discussed Master Limited Partnerships with us, and explained why they were hesitant to form an MLP last year despite pressure from The Street to do so. PXP’s take on the situation was that MLPs have a hard time generating cash flows, and their profits are unsteady with the volatility of gas prices. Choosing not to form an MLP turned out to be a wise decision, as most MLPs have taken a dive in the market since November of last year. He was also very bullish on the future of oil prices in the future, and expects profits at PXP to continue growing.
Our next speaker was Peter Went from GARP. He taught us all about risk management. He delved mainly into credit risk and market risk, and questioned us on ways to prevent these different types of risks. His main emphasis was on the importance of risk management and he gave a number of examples of companies and individuals that failed horribly at managing risk. We discussed the current mortgage crisis, and the resulting collapse in the credit market. He attributes the crisis to the greed of Wall Street.
He wrapped up by speaking about the GARP organization and how their structure works. It’s preferred that students have a few years of work experience before taking the GARP exam. The job potential in risk management is big right now, especially with the current fallout from the housing bubble. He encouraged us all to look into GARP in the future as a possible career.
Wednesday, April 9, 2008
April 2, 2008
Class started with the R.I.S.E. presentation that the assistant portfolio managers presented at the national R.I.S.E. conference the previous Friday. The portfolio managers were faced with several questions at the end of their presentation about everything from how they handle ethical issues to our methods of diversification. The winners are based on their return in 2007, unfortunately APM wasn't able to take home this award this time. A special thank you to Scott Jones for providing the funding so that 8 students could go.
We discussed the Bear Stearns events that have been in the news recently. The issue of moral hazard came up, and the concern that nothing will be learned from this fiasco. Now investment banks have access to lending from the Fed, much like commercial banks. Commercial banks are much more tightly regulated, and have to keep a certain amount in reserves. Investment banks are getting the privilege of lending from the Fed, without meeting the requirements that commercial banks have to keep. Some question if this is really a fair policy.
Also on the agenda was to discuss upcoming Proxy votes. Budweiser has 6 different issues coming up for vote including: Re-electing their directors, bumping up the directors compensation, and approval of their auditors. Other issues proposed by the shareholders were the the thought that the directors are getting overpaid, and asking for more disclosure about donations.
Other proxy votes included ELRN, their vice president is going to take a part time position with the company and earn 25% of his salary. KSU is voting on the election of three new board members and auditor selection. TTO has just one big issue, deciding whether or not they should be allowed to sell assets below net asset value.
Our speakers for the class were Scott Jones and Todd Preheim, both former APM students. We are grateful to them for providing our Thomson One subscriptions for the class each year. They spoke to us about career options in the finance industry and different career path options. they told us about their experiences and recommendations. We discussed the case for the week about ZOLT, a manufacturer of carbon fibers. Then they fielded questions for the remainder of the class period about their personal investment strategies and career options.
We discussed the Bear Stearns events that have been in the news recently. The issue of moral hazard came up, and the concern that nothing will be learned from this fiasco. Now investment banks have access to lending from the Fed, much like commercial banks. Commercial banks are much more tightly regulated, and have to keep a certain amount in reserves. Investment banks are getting the privilege of lending from the Fed, without meeting the requirements that commercial banks have to keep. Some question if this is really a fair policy.
Also on the agenda was to discuss upcoming Proxy votes. Budweiser has 6 different issues coming up for vote including: Re-electing their directors, bumping up the directors compensation, and approval of their auditors. Other issues proposed by the shareholders were the the thought that the directors are getting overpaid, and asking for more disclosure about donations.
Other proxy votes included ELRN, their vice president is going to take a part time position with the company and earn 25% of his salary. KSU is voting on the election of three new board members and auditor selection. TTO has just one big issue, deciding whether or not they should be allowed to sell assets below net asset value.
Our speakers for the class were Scott Jones and Todd Preheim, both former APM students. We are grateful to them for providing our Thomson One subscriptions for the class each year. They spoke to us about career options in the finance industry and different career path options. they told us about their experiences and recommendations. We discussed the case for the week about ZOLT, a manufacturer of carbon fibers. Then they fielded questions for the remainder of the class period about their personal investment strategies and career options.
Thursday, March 27, 2008
March 26, 2008
Our case for the week was Capitol Federal, therefore we had the CEO, John Dicus join us for class. He started by explaining the corporate structure of Capitol Federal, and how Mutual Holding Companies work. The reason they chose to go with a Mutual Holding Company was to maintain control while raising money. The MHC holds 52 million shares, which they didn't pay for when first originated. The MHC doesn't conduct any business, and carries only enough money to pay for professional services. The MHC shares must be counted for GAAP purposes, which distorts their EPS numbers, down from $.44 a share with Non-GAAP measures, to $.11 a share.
They are consistent with their annual dividend of $2.00 a share. They like to maintain enough reserves at the MHC to payout dividends for 9-10 years. On occasion they payout a special dividend if they have extra money after paying out their $2.00 dividend. They don't foresee the credit crunch having any implications on their ability to continue paying out there regular dividend.
Because of their stringent underwriting standards for all of their loans, they have been able to avoid much of the fallout from the subprime mortgage crisis. Because of their high standards, they have no problem selling their loans, because they are of such high quality. They currently have $4.4 million set aside for bad loans, but a relatively low default risk of .14% for 2007. While Capitol Federal has been able to make it through the subprime crisis unscathed, John did mention they're a little worried that they might be hurt by the regulations imposed as a result of the recent credit crunch.
Capitol Federal also set up the Capitol Federal Foundation. The goals of the foundation are to provide funding for educational purposes, affordable housing, the United Way, and through traditional gifts. In 2007 alone, they donated $3.4 million to numerous nonprofit and charitable organizations in their market areas. To date they have given away about $18.8 million.
We followed the Capitol Federal presentation with updates on portfolio stocks, and earnings calls. WFI had an earnings call over spring break, and they reported net income grew by 35%, but most impressive was the growth in international sales of 80% due to the weak dollar. Because of the housing downturn in the U.S., sales were down 7% , yet margins improved.
LHTCF also had an earnings call and they reported good earnings. Their new line of diagnostics has performed better than expected, which is good news. They expect to release a new, better version of this product in June. We should monitor the release of this product to see if it's on time or not.
SMGS reported that the numbers from the first few new outlets in China were much better than they had expected, which is a good sign for the lottery business in China. They had $5.6 million in sales on the first day alone. currently then have 1500 outlets, and hope to expand as to many as 5000 in the future. Their director also just bought back some shares, another encouraging sign for SGMS.
They are consistent with their annual dividend of $2.00 a share. They like to maintain enough reserves at the MHC to payout dividends for 9-10 years. On occasion they payout a special dividend if they have extra money after paying out their $2.00 dividend. They don't foresee the credit crunch having any implications on their ability to continue paying out there regular dividend.
Because of their stringent underwriting standards for all of their loans, they have been able to avoid much of the fallout from the subprime mortgage crisis. Because of their high standards, they have no problem selling their loans, because they are of such high quality. They currently have $4.4 million set aside for bad loans, but a relatively low default risk of .14% for 2007. While Capitol Federal has been able to make it through the subprime crisis unscathed, John did mention they're a little worried that they might be hurt by the regulations imposed as a result of the recent credit crunch.
Capitol Federal also set up the Capitol Federal Foundation. The goals of the foundation are to provide funding for educational purposes, affordable housing, the United Way, and through traditional gifts. In 2007 alone, they donated $3.4 million to numerous nonprofit and charitable organizations in their market areas. To date they have given away about $18.8 million.
We followed the Capitol Federal presentation with updates on portfolio stocks, and earnings calls. WFI had an earnings call over spring break, and they reported net income grew by 35%, but most impressive was the growth in international sales of 80% due to the weak dollar. Because of the housing downturn in the U.S., sales were down 7% , yet margins improved.
LHTCF also had an earnings call and they reported good earnings. Their new line of diagnostics has performed better than expected, which is good news. They expect to release a new, better version of this product in June. We should monitor the release of this product to see if it's on time or not.
SMGS reported that the numbers from the first few new outlets in China were much better than they had expected, which is a good sign for the lottery business in China. They had $5.6 million in sales on the first day alone. currently then have 1500 outlets, and hope to expand as to many as 5000 in the future. Their director also just bought back some shares, another encouraging sign for SGMS.
Sunday, March 16, 2008
March 12, 2008
March 12, 2008
The APM class would like to congratulate Professor Shenoy for the completion of her book, titled “Applied Portfolio Management: How University of Kansas Students Generate Alpha to Beat the Street”. Half of the royalties of this book will go to the APM class in hopes we can use this to continue to outperform the market. The CEO of Office Max called in sick, we discussed how to break down the balance sheet to distinguish between operating and non-operating cash flows and assets
- We reviewed the three policies that companies must consider: dividend policy, financing policy, and operating policy. The most important policy is a company’s operating policy.
Golden Meditech
- Kent McCarthy and Joe Onofrio from Jayhawk Capital Management came to class to discuss the market and Golden Meditech (8180.HK).
The key points: - The China Stem Cell IPO may be pushed back due to the tough IPO market. Although this is a catalyst for GM being listed on the NASDAQ, it will still eventually happen when the IPO market is a bit more generous.
- The release of the Plasma Exchange may also be pushed back. Even if the release is delayed, the Plasma Exchange is still expected to be a main driver for the Medical Device segment, and should contribute substantially to their bottom line.
- We haven’t heard much about the new BlueTouch technology that is going to be sold through their PYPO distribution network. This should provide more consistent revenue on their Associate Income line in the future.
- We still believe that GM is trading at a significant discount to its peers listed on NASDAQ. They have a dominant, high-margined industries which are in the initial growth stage of their lifecycle, and have been historically successful in acquiring and developing healthcare businesses.
- Kent McCarthy expressed his concern about inflation in the US and in China. He talked about the roles that monetary and fiscal policies have played in the recent decline of the dollar. He believes that the government is overspending and injecting too much money into the economy.
Brooke Corporation (BXXX) and CDC Corporation (CHINA).
- Kent McCarthy discussed complex BXXX is, and once fully understood there is a chance to make money. He also discussed how CHINA has recently settled gaming disputes and is on the path to further profitability.
- The CEO owns about 50% of the stock BXXX, meaning that if the stock price goes to zero, as does his investment. We believe there is a solid potential upside. Also, Kent was optimistic because before the recent decline of insurance companies, BXXX was injected with $60 million of cash, which they were not able to use to make loans. Therefore, it is just sitting on their books, which is always a good sign.
- CHINA just recently announced the resolution of its dispute with Mgame, the developer of Yulgang. There is no charge to play the game, but most revenue is made off of merchandise. Hopefully this resolution will lead to new on-line merchandise and revenue for Yulgang. Kent McCarthy currently believes that CHINA is undervalued and the endowment should increase their position. He believes their software segment has a book value of $420 million and CHINA’s market capitalization is only $320 million, meaning there is a lot of room to generate value.
Kent ended the discussion, with a Q&A, where a student asked him his idea generating process, and reasoning behind his decision making.
- His biggest tip was to re-circle back on past ideas. He said the companies he gets to know the best are the ones that have underperformed. Those are the companies that he gets to know the most, because he believes that the market is missing something. Like BXXX and GM, where the stock price has been beating down recently even though there has been no new information that would cause such behavior.
- He makes his employees evaluate what the performance of a company will be before they release quarterly or annual results to see what metric the company has exceeded or fallen short on during the period.
On Friday, March 13, students from the APM class are going to Kansas City for Interceramic’s Grand Opening. They are meeting with the CEO, Victor Almeida.
On March 26, the CEO of Capital Federal, John B. Dicus, is coming to talk to the APM class.
Monday, March 10, 2008
March 3, 2008
March 3, 2008
We discussed Golden Meditech (8180.HK) with Joe Onofrio, a former APM class member, now working for Jayhawk Capital. He covers GM. We had a conference call with Joe and Kent McCarthy to update the APM class progress with Golden Meditech. The take-away is:
- GM subsidiary, China Stem Cell Holding, beat revenue expectations, while margins rose as well. This is a good sign, because CSC’s is a catalyst for listing on NASDAQ. We hoped for a spin-off of this segment, but given the tough IPO market, this will be delayed until Spring.
- GM core segment, Medical Devices, chambers’ salse grew. Hospitals are buying the machine. However, some hospitals might be holding off on the purchase of the ABRS, until the release of the Plasma Exchanger.
- The new Plasma Exchange is expected to be released early to mid 2009 (June-Sept.). The big question for the APM class was if this new product was going to cannibalize their existing ABRS machines? After asking this to Kent McCarthy on a conference call, he did indeed believe that there would be some cannibalization.
- There should be flat growth in the Medical Device segment, but the Associate Income line would be up by 30% because of Pypo.
- Kent McCarthy discussed his inflation concerns. He notes that China is experiencing the first inflation in 10 years, following a time of deflation. His preferred asset class is cash right now. He recommended staying away from government bonds, as inflation eats into the interest payments.
Brooke Corporation Discussion:
- Brooke Corporation (BXXX). The credit crunch is hurting profits. There is some evidence that their franchises aren’t profitable right now, but they are replacing failed franchises. On the bright side, the company can be a good investment once you understand it. When this happens in the market, the share price should increase.
- The largest shareholder is the CEO which owns 50%, so he has an incentive to perform accordingly.
Class Buy/Sell Discussion
Earnings announcements during the week included SGMS, RIO, Pernard Ricard (competitor of DEO), and Plains Exploration.
- SGMS reported earnings February 29, 2008. Key takeaways are managements continued bullishness on China. Sisal terminal contracts should offset lost revenues in 2009/2010. Also, the lottery market will steer away from the internet into more printed products.
- RIO reported iron ore price increases of 67%, which drove many analysts to revise estimates. However, their pending acquisition with Xstrata will only be good if they buy at the right price. This acquisition could reflect management overconfidence.
- Pernod Ricard had positive sales for their high-end liquor, which is a good sign for Diageo (DEO), because they service a high-end liquor segment. They have also focused more on higher R&D, which led to positive earnings results.
- Plains Exploration bought land in South Texas, which they will use to drill. The land already has proven reserves, but they think that they will be able to get more from it. The Vice President of Plains Exploration is expected to come talk to the APM class later in the year.
- The class ended with a discussion on the proxy vote for Tortoise, who is a Master Limited Partnership (MLP) that invests in midstream energy companies. The proxy vote that has to do with them selling their assets below NAV in order to raise capital. This will dilute the current mutual fund holders; therefore we agreed that we should vote against this possible dilution.
Sunday, March 2, 2008
February 27, 2008
Class began with professor Shenoy instructing us on how to properly calculate the YTD return and annualized return of our stock portfolio. The point was to educate us on how to properly calculate returns when there has been adjustments, transfers, and withdrawals from the portfolio. Calculations provided in class are as follows:
01/01/08 - 2.559m beginning value
01/22/08 - 2.281m beginning value
01/22/08 - 1.433m ending value
(large reduction in value came from a transfer of Golden Meditech (8180.HK) stock to a separate account)
This indicates a -10.9% return over that 22 day period ranging from 01/01/08 to 01/22/08.
02/26/08 - 1.514m beginning value
02/26/08 - 1.470m ending value
(value reduction came from a $45,000 cash withdrawal.)
This indicates a 5.7% return over the 34 day period ranging from 01/22/08 to 02/26/08.
02/27/08 - 1.473m ending value
This indicates a 0.2% return for that one day.
We were instructed to use time weights over this 57 day total period to calculate the YTD return.
Days Weight
22 .38
34 .60
1 .02
YTD Return: -0.8%
Annualized:
((1-.0008)^(360/57))-1 = -4.95%
Following this lesson, Professor Shenoy informed us about our next week assignment on updating our Golden Meditech case. She also reminded us that Kent McCarthy will come and visit our class.
After this we gave our group presentations on some of our portfolios current holdings. These companies included RIO, DEO, IBKR, SGMS, LKQX, WFI, and SOHU.
When these presentations were finished we wrapped up the class with Professor Shenoy explaining to us what is embedded into the stock price of foreign companies on foreign exchanges. This included exchange rates, dividends, and a discussion on ADRs.
01/01/08 - 2.559m beginning value
01/22/08 - 2.281m beginning value
01/22/08 - 1.433m ending value
(large reduction in value came from a transfer of Golden Meditech (8180.HK) stock to a separate account)
This indicates a -10.9% return over that 22 day period ranging from 01/01/08 to 01/22/08.
02/26/08 - 1.514m beginning value
02/26/08 - 1.470m ending value
(value reduction came from a $45,000 cash withdrawal.)
This indicates a 5.7% return over the 34 day period ranging from 01/22/08 to 02/26/08.
02/27/08 - 1.473m ending value
This indicates a 0.2% return for that one day.
We were instructed to use time weights over this 57 day total period to calculate the YTD return.
Days Weight
22 .38
34 .60
1 .02
YTD Return: -0.8%
Annualized:
((1-.0008)^(360/57))-1 = -4.95%
Following this lesson, Professor Shenoy informed us about our next week assignment on updating our Golden Meditech case. She also reminded us that Kent McCarthy will come and visit our class.
After this we gave our group presentations on some of our portfolios current holdings. These companies included RIO, DEO, IBKR, SGMS, LKQX, WFI, and SOHU.
When these presentations were finished we wrapped up the class with Professor Shenoy explaining to us what is embedded into the stock price of foreign companies on foreign exchanges. This included exchange rates, dividends, and a discussion on ADRs.
Monday, February 25, 2008
February 20, 2008
Last class period we discussed the need to raise some cash to pay for scholarships this semester. The class voted, and it was decided to sell all of our holdings in China($28,000) and VLO($23,000). This will raise enough cash for us to pay for our MBA student scholarship and our KU basketball scholarship.
There were several earnings calls last week to report on. Diageo had a good half, with their operating margin up 80 basis points. They also increased their dividends by 5%, and bought back $600 million of there shares. Their dividends and share buyback both signal good cash flow for Diageo.
Garmin also had an earnings call, and they beat all the estimates for the last period. The automotive segment margins were down, and they may go down a little more in the future. Many see this as a good buying opportunity, and in fact the stock price dropped during the call.
SOHU saw their online gaming revenue up 89% on the quarter. This may be attributed to the second add-on package for the online gaming, which was recently released. Another cause , would be small revenue to start with. Their advertising prices have gone up significantly, due to the Summer Olympics in Beijing. A sell on SOHU is being considered because of the Olympic hype.
Tim Burger, Senior Analyst, and Derek Smashey, Assistant Portfolio Management for Scout Funds were our speakers for the week. They gave us a brief description of their job at Scout Funds and provided some great advice for those interested in following that career path. They fielded several questions from the class about their personal experiences as portfolio managers.
Our case for the week was to compare two companies that produce machinery for coal mining, Bucyrus and Joy Global. Coal has seen a big price increase over the past year, and we needed to analyze how the demand for coal will affect each of these companies. Currently they have a duopoly in their industry, and the barriers to entry are high. Derek and Tim made some comments about our cases and gave us their insight on the coal industry.
We gained some excellent career advice as well as valuation tips from our speakers this week, and we're thankful to have them join us for class. Next week the groups will be giving presentations over current holdings in the portfolio. On March 5 we're looking forward to having Kent McCarthy in class with us.
There were several earnings calls last week to report on. Diageo had a good half, with their operating margin up 80 basis points. They also increased their dividends by 5%, and bought back $600 million of there shares. Their dividends and share buyback both signal good cash flow for Diageo.
Garmin also had an earnings call, and they beat all the estimates for the last period. The automotive segment margins were down, and they may go down a little more in the future. Many see this as a good buying opportunity, and in fact the stock price dropped during the call.
SOHU saw their online gaming revenue up 89% on the quarter. This may be attributed to the second add-on package for the online gaming, which was recently released. Another cause , would be small revenue to start with. Their advertising prices have gone up significantly, due to the Summer Olympics in Beijing. A sell on SOHU is being considered because of the Olympic hype.
Tim Burger, Senior Analyst, and Derek Smashey, Assistant Portfolio Management for Scout Funds were our speakers for the week. They gave us a brief description of their job at Scout Funds and provided some great advice for those interested in following that career path. They fielded several questions from the class about their personal experiences as portfolio managers.
Our case for the week was to compare two companies that produce machinery for coal mining, Bucyrus and Joy Global. Coal has seen a big price increase over the past year, and we needed to analyze how the demand for coal will affect each of these companies. Currently they have a duopoly in their industry, and the barriers to entry are high. Derek and Tim made some comments about our cases and gave us their insight on the coal industry.
We gained some excellent career advice as well as valuation tips from our speakers this week, and we're thankful to have them join us for class. Next week the groups will be giving presentations over current holdings in the portfolio. On March 5 we're looking forward to having Kent McCarthy in class with us.
Friday, February 15, 2008
APM February 13, 2008
Stock Sells
The class began with a discussion on stocks that we need to sell to raise money for scholarships. The APM class offers two scholarships: a basketball scholarship and an MBA scholarship. Our basketball scholarship funds Russell Robinson. We came up with 7 possibilities, and students voted to sell as follows: RIO (11), BRK.B (9), EGOV (9), CHINA (15), LKQX (7), BUD (2), and VLO (12). After tallying the votes, the APM class decided to sell all shares of VLO and CHINA.
We decided to sell our 7000 shares ($28,000) of CDC Corporation, because they really only have one profitable segment, the software segment, while the other areas of business have been an overall drag on profitability. Also, their stock price has taken a steady nose dive since September of 2007, so we are selling on weakness.
The original investment thesis for Valero had to do with their competitive advantage in refining sour crude and California gasoline (which is different from the rest of the US). This gave them higher margins than other refiners. Put that together with a big shortage of refining capacity in 2002 when we first bought, the mentor Robert Tracy thought this would be a good buy. Now that refiners have added a lot of capacity and capability to refine sour crude, Valero’s competitive advantage is being eroded. Thus, we liquidated our entire position of 400 shares for a cash consideration of $28,000. Since 2002 we have had a compound annual return of 42%!
The overall cash that we generated from the sale of these securities is approximately $51,000, which should be enough to cover both scholarships.
Company News
KC Southern (KSU) said they didn’t meet revenue expectations because of a weak economy; however their operating ratio was up 37%. It is also worth noting too, that the APM class is looking to find someone from KC Southern to come to class and speak, so if anyone has any information, please contact Prof. Shenoy (apm@ku.edu).
Inergy Holdings LP (NRGP) met expectations. Mainstream gross profit increased driven by the propane sector. The reason we hold this company is its strong dividend yield of almost 5%.
There was some concerns expressed in regards to NIC Corp (EGOV), the APM class is worried because the just replaced CEO, Jeff Frasier. He was both CEO and Chairman of the board of directors before he stepped down for misappropriating corporate expenses. The alarming news is that he is remains Chairman of the Board.
Visit from Brad Shoup
Brad Shoup started his visit with a quick update on Brooke Corp (BXXX) and Golden Meditech (8180.HK). He also went on to give us a very informative lesson on corporate governance and an intricate look at Quicksilver Resources, Inc (KWK). Mr. Shoup is Chief Investment Officer for Armstrong Equity Partners, LP. He graduated from the University of Kansas with an engineering degree, and is very knowledgeable of the petroleum and natural gas industry.
· BXXX - he just met with their new CEO. He believes it is a very disjointed story. The stock has been down about 50%, and the CEO is, essentially trying to get money from their subsidiaries to kind of turn the company away from lower tier insurance to the banking business. He went on to say that some deconsolidation has occurred, and that we really won’t get a good gauge on their performance until their 10-K comes out in March of 2008.
· Golden Meditech (8180.HK) just came out with their third quarter earnings results. In the Medical device segment, sales from the ABRS were flat. The company also just sold their TangHerb segment to a company that markets organic products in Europe.
· Corporate governance. Some of the key items that worth noting are that he likes to see more than one large investor on the board, so they will energize the board meetings. He also illustrated the importance of knowing what state a company is incorporated in, in order to understand the legal implications of a proxy fight and the rules by which a corporation must abide. He also said that easy for large capitalization company’s board to get separated from the shareholders.
· KWK. He discussed the Darden family who he has spoken to many times. There are two brothers, one is the CEO and the other is chairman of the board. He thinks from talking to the Darden family they are concentrated on their company’s performance. They have a lot of experience and energy tied up into this business. This is important, because they should continue to expand and act in the best interest of the shareholders.
In this industry, it is important to note, no company can affect their margins (they are set by market forces). Therefore, the lowest cost producers are better, and this is where KWK happens to be an industry leader.
He mentioned the Fort Worth Basin’s proved reserves have seen substantial growth. There is tremendous upside in the area, because right now they are working on 55 acre spacing and they are doing pilots for 27 acre spacing, which could drastically increase their production. He finished by explaining his valuation model.
Thursday, February 7, 2008
January 30, 2008
The portfolio managers started class of with a beautiful presentation with some tips for success in APM. Here are a few of their suggestions:
- Check the APM website
- Prepare by reading Yahoo, WSJ, Financial Times, and Thomson One analysis reports
- Reading Bio on speaker for the week
We discussed the Golden Meditech Case that each group prepped for today’s class. Professor Shenoy had the following comments for our work overall:
- State recommendation clearly, and follow with bullet points
- Provide a summary table
- Make sure forward P/E ratio matches the projections you have on your pro forma statement
- Too much company description, and not enough valuation analysis
- Make better use of graphs, and format them to stand out from the standard excel graphs
- Make sure to value segments separately in the pro forma, unless a particular segment makes up less than 5% of the company
A question was raised about what criteria we should follow when considering new stocks for the portfolio. The primary criteria is for the stock to provide a learning experience for the class. The student recommending the student needs to remain a mentor on that stock for future APM classes. We prefer to limit the number of companies in the portfolio. Obviously we want to earn an adequate return on the investment, and finally the portfolio needs to have international diversification.
Joe Onofrio from Jayhawk Capital Mgmt. was our guest speaker for the evening. He came to discuss Golden Meditech with us a little more in-depth. He answered any questions we had when valuing Golden Meditech, and their various segments. We talked about the impact of their latest transaction and where they are headed in the future.
Kent McCarthy called and spoke to the class a little more about Golden Meditech and the expectations for the class over the upcoming semester. As Golden Meditech is the largest holding in our portfolio he wants to put the most emphasis on following GM over the course of the semester. He will be attending class on March 5th.
Tuesday, January 29, 2008
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