stock analyst program winter 2013 ivan di mic vp portfolio [email protected] february 1 st,...
TRANSCRIPT
Stock Analyst ProgramWinter 2013
Ivan DiMIC VP Portfolio
February 1st, 2013
Zeeshan MaqsoodMIC VP Portfolio
Short Selling Mechanics
Picking Good Targets
Examples
Executive SummaryStock Analyst Program 2013
Short Selling Mechanics
What is Short SellingStock Analyst Program 2013
Why? Ability to benefit from stock price decline
Profit/loss of short-seller: [Initial price – selling price] – trading commission – dividend payment
Source: http://www.invest2success.com/
Particularities of Short SellingStock Analyst Program 2013
Short selling is not simply the opposite of long positions from a risk and return perspective.
Unlimited losses: 100% vs. unlimited loss; as trade plays out, less capital allocated
Stock Loan: Can be called, if tough to find loan can be very expensive
Short Squeeze: Positive news triggers margins calls and creates self-reinforcing cycles of forced buying back.
A Famous Short SqueezeStock Analyst Program 2013
The number of short sold shares may even exceed those in circulation
Porsche/VW example Porsche buildings stake in VW VW overvalued, HF short it Porsche announce they had
increased their control of VW to 74% leaving only 6% of the stock as free float (due to derivatives)
13% of float was sold shortStock went from 200euros to over 1000 euros, briefly making VW the world’s most valuable company.See http://www.economist.com/node/12523898
Picking Good Targets
Idea GenerationStock Analyst Program 2013
How to find ideas? Fundamental analysis, same as long! Reading 100's of financial statements Hot sector, with a companies multiple that’s too expensive
Terminal shorts:
Stock prices overvalued by at least two times (valuation) Fundamental company problems (business/strategy) Weak financial conditions (financial analysis) Weak or crooked management (red flags analysis)
Want at least a 50% decline in price (margin of safety)
Red FlagsStock Analyst Program 2013
Declining cash flows
Serial chargers
Serial acquirers
Change of CFO or auditor
Bills aren’t getting paid
Declining cash flowsStock Analyst Program 2013
Increasing net earnings, declining cash flows Rationale: CF harder to manipulate (non-cash & NWC)
Example: Lucent 1999-1997 Easy credit to anyone Piling up inventory Net earnings boosted by one-time gains in pension plan
1997 1998 1999
Net Income 449mm 1,000mm 3,500mm
Cash Flow 2,100mm 1,900mm (276mm)
Serial…Stock Analyst Program 2013
Serial chargers Frequent one-time charges Big baths (future charges written off now) Often they try that we ignore and economic loss/weak accounting?
Serial acquirers Try to mask declining results in core business? Risk of bigger nasty acquisitions
Source: BCG
Back in FY 2009…Jean Coutu ROE: 33%Shoppers ROE: 15%Walgreens ROE: 16%
Bills not getting paid…Stock Analyst Program 2013
Bills aren’t getting paid… Loose credit terms to grow sales faster Risk of never getting paid Reasonable allowance for doubtful accounts? A/R as % of sales How fast does A/R increase relative to sales? The two should roughly track
each other. If sales increase by 15% YoY, but A/R increases by 25% YoY, the company is booking sales faster than it’s receiving cash from its customers.
Source: BCG
CFO & Auditor Turnover…Stock Analyst Program 2013
Change of CFO or auditor No justification Potential for fraud Bloomberg function RSKC<GO>
Source: BCG
Bloomberg: RSKCStock Analyst Program 2013
Source: BCG
1
Altman’s Z Score (predicting bankruptcy ): <1.1 Bankruptcy zone, >2.60 safety zone
2
3
4
5
Examples
Green Mountain Coffee Roasters (Einhorn)Stock Analyst Program 2013
Short thesis (October 17, 2011)
http://online.wsj.com/public/resources/documents/EinhornGMCRpresentation_Oct2011_VIC.pdf
China Media Express (Muddy Waters)Stock Analyst Program 2013
“China’s largest television advertising operator on inter-city and airport express buses.” Sexy Chinese growth story (Beware of THEME stocks)
Reverse takeover (avoids most regulations) Incredible growth with low capital (unbelievable ROIC) Bulls arguments:
Neat industry Very cheap (low single digit P/E) Large cash balance Deloitte as an auditor North American PE firm made investment
Source: BCG
China Media Express (Muddy Waters)Stock Analyst Program 2013
Short thesis involved heavy ground work: <1/2 of buses it claims to have Most buses don’t play content Management lying on agreements Unknown in the industry (customers, competitors) Audience has very low buying power Management tries to keep share price high and sell shares to pocket profit
See report http://www.muddywatersresearch.com/wp-content/uploads/2011/02/CCME_MW_020311.pdf
Source: BCG
CCMEStock Analyst Program 2013
Source: BCG
Netflix (Whitney Tilson)Stock Analyst Program 2013
Short thesis (December 16, 2010) Main short thesis here is valuation: 63.1x the high end of the company’s EPS
guidance for the full year 2010 Switching business model:
o Streaming business was a less profitable one than its DVD-by-mail operation
o Increasing competition in streamingo Weak streaming content, increasingly expensive licensing dealso Bandwidth challengeso Growing disparities between cash & accrual accounting (amortization
of content) CFO Resignation
See entire thesis: http://www.marketfolly.com/2010/12/why-whitney-tilson-is-short-netflix.html
Source: BCG
NetflixStock Analyst Program 2013
Source: BCG