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.

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.

September 22, 2008

Today the class began discussing the roots of the Financial Crisis. Professor Shenoy put a presentation together on “Financial Crisis Roots: Fear and Greed”. We discussed the culprits of the current problem, what spurred it and the consequences we will encounter in the near future.

We were fortunate to have Aaron Mesmer from Block Funds in Kansas City, come inform our class about the Real Estate industry. Aaron Mesmer currently works at Block & Company, Inc., Realtors, as an investment sales specialist focused on achieving maximum returns for his clients through the acquisition or disposition of real estate assets. In 2007, Aaron was recognized by the Kansas City Regional Association of Realtors as the city’s second largest investment sales broker by dollar volume.

Over the previous three years, Aaron has been involved in 70 investment real estate transactions valued at more than $231 million. Aaron’s responsibilities include the review and analysis of potential acquisitions and dispositions, due diligence, transaction valuation and execution, and detailed financial modeling for investment analysis, including Discounted Cash Flows and Net Present Values.

Aaron graduated first in his class and with Highest Distinction from the University of Kansas, where he received a bachelors degree in business administration while studying finance, marketing and Italian. Aaron has earned his Certified Commercial Investment Member (CCIM) designation as a recognized expert in the disciplines of commercial and investment real estate.

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.