COURSE SYLLABUS
FIN 237f (1) – Security Analysis, Spring 2018, Module 1
When: Thursdays, 6:30-9:15pm
Location: Lemberg Academic Center 054
Lecturer: Param Roychoudhury ()
Office: Sachar 1-G; Office Hours: Thursday, 5:30-6:20 pm, or by appointment
TAs: Yang Li () and Han Yan ( Ian) ()
OVERVIEW
Academic research has demonstrated the broad efficiency of financial markets and the difficulty of ‘beating the market’ on a risk-adjusted basis. Despite this, investors allocate trillions of dollars to mutual funds and hedge funds looking to generate alpha and ‘beat the market’. These funds have a considerable and growing influence on worldwide capital markets. In this course, we examine fundamental-based investment strategies funds use to generate alpha, or positive risk-adjusted returns with a particular focus on fundamental analysis and equity strategies used by hedge funds. Topics include:
•Market efficiency – where does it hold, where does it break down?
•History and structure of public market investing vehicles, actively managed long only mutual funds and hedge funds
•Fundamental-based strategies for generating alpha, with a special focus on long-only equity funds
•Fundamental investing in the context of the efficient market hypothesis, establishing the need for an investor to have an informed, differential view to deliver alpha
•Developing core fundamental investing tenets:
o‘Idea generation’: Identifying potentially attractive investments
o‘What will happen’: Developing a fundamental point of view on a company’s prospects, with a focus on forecasting company revenues and cash flows
o‘Where is my alpha?’: Comparing that point of view to ‘conventional wisdom’
o‘What can go wrong?’: Evaluating risks to your thesis
o ‘Declaring victory’: setting and applying exit targets
•Application of fundamental investing using alternative strategies:
o‘GARP’ (Growth at a Reasonable Price) investing
oRelative Value investing
oActivist Investing
oDeep Value Investing
The course is designed to be relevant not only to students considering a career in stock fund investing, but also to those in related careers such as investment banking and asset management.
LEARNING GOALS
At the conclusion of this course, the student should be able to understand:
•How to identify and evaluate a potential investment that can ‘beat the market’, applying fundamental investment principles
•How to set and maintain exit targets for an investment, using DCF/NPV and comparable analysis
•Exit strategies
•How to develop an integrated ‘stock pitch,’ supported by research, justifying a specific investment
COURSE REQUIREMENTS
Required Reading: Most of the readings for this course will be public financial filings, analyst research reports, and case study materials — distributed via LATTE. For students wishing to go deeper in selected areas, I have recommended some books. See Exhibit A for full details.
Prerequisite: ECON 210f, FIN 201a/205a and FIN 212a or equivalents are mandatory. FIN 217f and FIN 216f are recommended but not required. The course assumes that you have a working knowledge of accounting and financial ratios, probability theory and the ability to perform and interpret regression analysis. You should take this course at a later date if you do not have sufficient statistical, finance, accounting and financial statement analysis background.
Class Participation: Class participation is expected of everyone in this course, and class attendance is required. Most weeks a different company will be assigned for evaluation and every student is expected to be prepared to discuss the company in detail, including a thorough analysis of the financial statements. To facilitate participation, I will ask all students to place a name card on their desks. Absences will adversely affect your participation grade. Perfect attendance but no participation receives a grade of “B-“ towards the overall grade. Each absence results in a reduction in this grading element (B+ to B, and so on).
Written Assignments: Team assignments must be done in groups of four students. I will assign students to teams. Grades on each assignment are assigned to all members of the team (although I reserve the right to alter individual grades in certain circumstances, e.g., when it is clear to me that an individual did not contribute to the assignment in a consistent and meaningful way). Any changes to your team roster must be approved by me.
GRADING
Your grade will be divided equally between individual and team performance (55% INDIVIDUAL, 45% TEAM), as detailed below:
Three Individual Assignments (INDIVIDUAL)45%
•BECN US Income Statement Financial Projection (required)
•Fundamental Valuation (Guest lecturer choice)
•Boston Beer case study
•Individual Class Participation/Activist Research10%
Team Project
•Stock Pitch – Investment ThesisTEAM 5%
•Preliminary Stock Pitch ReportTEAM10%
•Final ‘stock pitch’TEAM20%
(14% for written assignment, 6% for class presentation)
Team AssignmentTEAM 10%
Screening using Bloomberg
Deutsche Post discussion and questions/Ocada discussion and questions
CLASS FORMAT
Classes will be a mixture of lectures introducing new material, discussions of homework assignments and guest speakers, and include individual and team work assignments. We will meet 7 times. Each team will be required to give a 10 minute ‘stock pitch’ presentation of their final project during the last class. Success in this two-credit course is based on the expectation that students will spend a minimum of 9 hours of study time per week in preparation for class (readings, papers, discussion sections, preparation for exams, etc.).
ACADEMIC HONESTY
You are expected to be honest in all of your academic work.Please consult Brandeis University Rights and Responsibilities for all policies and procedures related toacademic integrity. Students may be required to submit work to TurnItIn.com software to verifyoriginality. Allegations of alleged academic dishonesty will be forwarded to the Director of AcademicIntegrity. Sanctions for academic dishonesty can include failing grades and/or suspension from theuniversity. Citation and research assistance can be found at LTS - Library guides. For any work involving historical cases, under no circumstance may you search the internet (or turn to any other outside source) for any information regarding these cases without my permission. Failure to comply with this directive is cheating.
SPECIAL ACCOMODATIONS
If you are a student with a documenteddisability on record at Brandeis University and wish to have a reasonable accommodation made for you in this class, please see me immediately.
COURSE OUTLINE
Thursday, January 11, 2018 / Class One: Introduction to Security AnalysisAssignment Due Today / None
Reading / Reading for next class:
Public Filings (most recent 10-K at minimum, analyst conference calls)) for Beacon Roofing (ticker: BECN US)+ 1-2 representative analyst forecasts which demonstrate ‘conventional wisdom’ on BECN US.
Overview / In this introductory lecture we will answer the following questions, which will provide the foundation for our remaining sessions:
- What is the Efficient Market Hypothesis? Where does it hold, and where does it break down?
- A brief overview of Modern portfolio theory. What is CAPM Model, why is it important?
- How fundamental investors find, make and monitor equity investments? Bottom up stock selection. We will introduce the “portfolio candidate” framework and how to apply it to investment selection.
- Examples to illustrate the basic ‘alpha creation formula’ we will develop over the course of the class.
- Lastly, we will introduce basic techniques for building a financial forecast, providing background context for the first week’s homework.
Guest Speaker(s) / None
Assigned Work (and when due) / Individual Assignment – Develop a revenue forecast for Beacon Roofing (ticker: BECN US). This will form the basis for class discussion Week 2. Due: January 25, 2018.
Extra Individual Assignment – Start conducting preliminary research on Lululemon (ticker: LULU US) and Ocada (ticker: OCDO LN), the two stocks that will be discussed during Classes 3 and 4. Please email me your initial thoughts.
Thursday, January 25, 2018 / Class Two: Financial Forecasting Discussion / Fundamental Analysis / Different Valuation Methods
Assignment Due / Revenue Forecast for Beacon Roofing (assigned last week).
Extra Individual Assignment – Start conducting preliminary research on Lululemon (ticker: LULU US) and Ocada (ticker: OCDO LN), the two stocks that will be discussed during Classes 3 and 4. Please email me your initial thoughts.
Reading / Reading for this class:
Public Filings (most recent 10-K at minimum, analyst conference calls)) for Beacon Roofing (ticker: BECN US)+ 1-2 representative analyst forecasts which demonstrate ‘conventional wisdom’ on BECN US.
Reading for next class:
Public Filings and sell side research on UK company Ocada (ticker: OCDO LN)
Overview / We will discuss how to build a preliminary forecast for a ‘typical’ company using revenue, profit, cash flow projections, driven from historical analysis. Class discussion will walk through the BECN US revenue forecast. Key discussion topics to include: drivers of profitability, evaluating company performance in the context of its industry.
We will introduce the topic of building and testing a ‘differential point of view’. Key
topics are: developing an investment thesis, how that differs across different kinds of business (revenue based, margin based), how to get 100% of the usable information out of public filings, how to collect primary market data (effectively and ethically), how to interview management while complying with Regulation FD.
In the real world, the investment thesis is the first stage in the process. Thesis development is part rigorous evaluation of the profit and balance sheet drivers of a business, part creative exercise. We will use several examples to give a range of the types of investment these funds might develop and test through their work.
We will introduce the three basic methods of valuing a company:
•Discounted Cashflow
•Relative Valuation
•Sum of the Parts
Guest Speaker(s) / Paul deMoor, CFA, Vice President, Capital Markets Strategy, Fidelity Investments.
Topic: Investment Themes in Capital Management and Strategy
Assigned Work / Team assignment — Set up an EQS Bloomberg. Pick a country and an industry of your choice and identify 3 names that are attractive to you. Prepare a paragraph on each stock on why you think these names are worth pursuing. Due: February 1, 2018.
Team Assignment — You are an analyst working for an Investment management firm and was asked to form an opinion on Deutsche Post (ticker: DPW GR), the German postal company. You have done some initial work on the company with information available to you publicly and with sell-side research. Then you have the opportunity to meet with Investor relations of Deutsche Post, who will want you to be a potential opportunity. What are some of your questions and concerns that you would like Deutsche Post’s investor relations to address? Please email these questions to me. Due: Monday, February 5, 2018.
Thursday, February 1, 2018 / Class Three: Developing an Investment Thesis / Sum of the Parts
Assignment Due / Team assignment — Ideas generated by equity screening (EQS) in Bloomberg. Pick a country and an industry of your choice and identify 3 names that are attractive to you.
Reading / Reading for this class:
Public Filings and sell side research on UK company Ocada (ticker: OCDO LN).
Reading for next class:
Public Filings (most recent 10-K at minimum, analyst conference calls)) for fundamental valuation homework, + 1-2 representative analyst forecasts which demonstrate ‘conventional wisdom’ on a business for this week’s valuation assignment chosen company Lululemon (ticker: LULU US).
Overview / We will discuss sum of the parts valuation with a stock example
We will explore investments in International, Emerging, and Frontier markets
Our Guest Speakers will go through international stocks to illustrate this further.
Guest Speaker(s) / Andrea Clark, CFA, currently a Portfolio Manager/Senior Research Analyst at Frontier Capital Management; formerly a Director/Senior International Equity Analysis at The Boston Company Asset Management.
Andrea will talk about investing in Frontier markets with stock examples.
Carolyn Kedersha, CPA, CFA, currently Board of Directors, New Hampshire Electric Cooperative, Inc.; more recently Chief Investment Officer and Senior Portfolio Manager, BPAS Asset Management, LLC; and previously Senior Portfolio Manager and Head of Emerging Market and International Small Cap, BNY Mellon (The Boston Company Asset Management).
Carolyn will walk through her investment thesis on Ocada (ticker: OCDO LN), a small cap company based in the UK.
Assigned Work / Individual Assignment – Build a fundamental valuation model for Lululemon (ticker: LULU US). Due: February 8, 2018.
Thursday, February 8, 2018 / Class Four: Fundamental Analysis / Management Meeting / Relative Valuation
Assignment Due / Individual Assignment – Fundamental valuation model for Lululemon (ticker: LULU US)
Reading / Readings for this class:
Public Filings (most recent 10-K at minimum, analyst conference calls)) for fundamental valuation homework, + 1-2 representative analyst forecasts which demonstrate ‘conventional wisdom’ on a business for this week’s valuation assignment chosen company Lululemon (ticker: LULU US).
Public Filings ( analyst conference calls) Sell side research on Deutsche Post (ticker: DPW GR).
Readings for next class:
Article on Dupont ratio analysis
Overview / We continue to develop our investment thesis using fundamental analysis, and We will
talk in more depth about approaches for applying relative valuation analysis with stock examples.
Guest Speaker(s) / Sarah Bowman, Vice President, Investor Relations, Deutsche Post.
Sarah will present the case to invest in her company Deutsche Post to you as potential Investors.
Deena Friedman, currently a consultant for PriceWaterhouseCoopers (PwC); formerly an Equity Research Analyst and Fidelity Select Retailing Portfolio Manager at Fidelity Investments. Ms. Friedman is a consumer and retail sector investor, expert, and thought leader.
Deena will discuss apparel maker Lululemon (ticker: LULU US) as a bottom up stock recommendation.
Assigned Work / Team Assignment — Prepare a report summarizing your management meeting with Deutsche Post. Were most of your questions/concerns addressed as a result of the meeting, and did your initial position on Deutsche Post change as a result of what you learned; why/why not? Due: February 15, 2018.
Team Assignment — What stock do you want to pitch for the final project? What is your investment thesis? How do you intend to prove it? Prepare a brief synopsis addressing these questions. Due: February 15, 2018, 5:00 pm.
Thursday, February 15, 2018 / Class Five: Activist Investing/Moncler discussion
Assignment Due / Team Assignments — Deutsche Post report, and Preliminary Findings Report on Stock Pitch (both assigned Week 4).
Reading / Readings for this class:
Article on Dupont ratio analysis
Reading for next class:
Boston Beer Case Study
Articles pertaining to Socially Responsible Funds and Activist Investing (to be posted to LATTE)
Overview / We will debrief on the investment thesis. We will introduce how to think about an exit strategy. Core to this is thinking about a range of possible outcomes, and understanding the point at which you have generated as much alpha as you can reasonably expect.
We will also address:
•Value approach to Investment
•Explore “sum of the parts analysis” approach to investment? When and how to apply it?
Guest Speaker(s) / William Kelly, currently CEO of CAIA Association and Advisory Committee Member, Certified Investment Fund Director Institute and Chairman of the Board, Boston Partners Trust Company; and previously Independent Trustee and Audit Committee Chairman, BofA Funds Series Trust.
Matthew Waterbury, Bain and Company.
Topic: Matt will discuss how activist investors value a specific company, and discuss activism generally.
Assigned Work / Team Assignment — Begin primary and secondary research for your stock pitch.
Each team will test the investment thesis it has developed, and present preliminary findings in a 2-4 page written report plus exhibits. This report should focus on “content” and not “style” (there will be time for “style points” in the pitch presentation!). Due: Febr15, 2018.
Individual Assignment — Activist Research Assignment. Select a situation where activist investors have attempted to generate alpha. I will provide some current and recent examples, but students will be free to select any example they are interested in learning about that we did NOT explicitly talk about in class. Prepare a 2-4 page paper, answering the following questions (Due: March 1, 2018):
•Why did the fund in question believe there was value to be gained from taking an activist approach? (put another way: what was their investment thesis?)
•What is the fund’s history – is it typically activist in its approach, or was this unusual? Was its approach on this company always activist, or did become activist over time?
•What happened? Did the activism deliver ‘alpha’ (e.g., market beating returns)? Why or why not?
Thursday,
March 1, 2018 / Class Six: Different Types of Funds / Value Funds / Socially Responsible Investments / What are hedge funds?/Boston beer case
Assignment Due / Individual Assignment — Boston Beer case study homework (assigned Week 5).
Team Assignment — Begin primary and secondary research for your stock pitch.
Each team will test the investment thesis it has developed, and present preliminary findings in a 2-4 page written report plus exhibits. This report should focus on “content” and not “style” (there will be time for “style points” in the pitch presentation!). Due: March 1, 2018.
Reading / Reading for this class: recent. Articles pertaining to Socially Responsible Funds and Activist Investing (to be posted to LATTE).
Reading for next class: Public Filings for stock pitch (most recent 10-K at minimum).
Overview / We will learn more about activism and discuss socially responsible investments which represents an interesting growth opportunity in active management.
What are value funds?
What are hedge funds? Who invests in them? How are they structured? What are they
trying to achieve? Given the above, what are the motivations for a HF investor? Where are they convergent and divergent vs. their limited partners and financing sources?
We will discuss the role financialratios play in understanding strategy of a company through the discussion of the Boston beer case study.
Guest Speaker(s) / Matt Patsky, CFA, currently CEO Trillium Asset Management. He is a Member of the Board of Directors to: the Environmental League of Massachusetts, Pro Mujer, and Shared Interest; and previously Portfolio Manager/Partner at Winslow Management Company, and Director of Research and Managing Director at Adams Harkness.
Assigned Work / Team Assignment — Complete your ‘stock pitch’ that advocates an investment, complete with exit targets and any risk management recommendations. The deliverable should be turned in as a 2-4 page written recommendation, along with a short (<10 pages) PowerPoint presentation which the team should be prepared to present during our last class. Due: March 8, 2018.
Individual Assignment — I will provide via LATTE a short ‘investor style’ questionnaire to prepare for discussion at the last class. It should take no more than 10 minutes to prepare. This is an ungraded assignment, but the discussion is intended to help you understand “what kind of investor am I?”
Thursday,
March 8, 2018 / Class Seven: Making a Stock Pitch / Knowing Yourself as an Investor
Assignment Due / Team Stock Pick Presentation and Deliverable(s).
Reading / Reading for this class: Public Filings (most recent 10-K at minimum) for your final project, + 1-2 representative analyst forecasts which demonstrate ‘conventional wisdom’ on your business.
Overview / Each team will have 15 minutes to deliver its ‘stock pitch’ – its investment thesis and recommendation (complete with exit strategy), based on its primary and secondary research facts.
An important part of being an investor is knowing your own strengths and weaknesses. We will discuss the ‘investor style ratings’ from the style questionnaire, and talk about how to apply each person’s strengths and weaknesses to make better investment decisions.
Guest judge(s) to be announced.
EXHIBIT A