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.

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.

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

• The classed decided what we needed to buy and sell based on presentations last week. Based on the votes, we sold 200 shares of RIO at $33.10 (1.4% position) and bought 5,800 shares of CHINA at $3.62. We bought back CHINA after selling it because of a recommendation from Kent McCarthy. He believed that it was a great buy at these prices, and estimates an intrinsic value of around $7-8. The RIO sale was to take profits and raise some cash. We bought RIO at an average cost of $11.58, and the price is now $34.11 (close 3/7/08) - a 200% increase.

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.

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.