FIN 237f (1) – Security Analysis, Spring 2018, Module 1, Thursdays 6:30-9:15pm.

Room: Lemberg Academic Center 054

Param Roychoudhury TA: Yang Li ()

Lecturer Office Hour: TBD

OfficeHours: Sachar 1-G, 5:30-6:20pm Thursdays Han Yan ()

Office Hour: Tue 10:00-11:30

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 sizeable 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:
  • ‘Idea generation’: Identifying potentially attractive investments
  • ‘What will happen’: Developing a fundamental point of view on a company’s prospects, with a focus on forecasting company revenues and cash flows
  • ‘Where is my alpha?’: Comparing that point of view to ‘conventional wisdom’
  • ‘What can go wrong?’: Evaluating risks to your thesis
  • ‘Declaring victory’: setting and applying exit targets
  • Application of fundamental investing using alternative strategies
  • ‘GARP’ (Growth at a Reasonable Price) investing
  • Relative Value investing
  • Activist Investing
  • Deep Value Investing

The course is designed to be relevant not only to students considering a career in stock fund investing, but to those in related careers such asinvestment 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, with a special focus on legal and ethical data collection
  • 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 and analyst research reports 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 fourstudents. 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 (50% individual, 50% team)

  • Class ParticipationINDIVIDUAL5%

Team Project

  • Stock Pitch – Investment ThesisTEAM 5%
  • Preliminary Stock Pitch ReportTEAM10%
  • Final ‘stock pitch’TEAM20%

(14% for written assignment, 6% for class presentation)

Team Assignment – 15%

Screening

Deutsche post discussion and questions

Boston beer case study

Individual Assignments (3 totaling 45%)

  • BECN Income Statement Financial Projection (required) PLUS

Two of these three:

  • Fundamental Valuation (Guest lecturer choice)
  • Monte Carlo Simulation
  • Activist Research Assignment

Class Format. Classes will be a mixture of lectures introducing new material, discussions of homework assignments and guest speakers. Each team will be required to give a 10 minute ‘stock pitch’ presentation of their final project.

Office Hours I will be available from 5:30 – 6:20 on days before class, or by appointment

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 Accommodation. 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.

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.)

COURSE OUTLINE

CLASS ONE

Introduction to Security Analysis

Thursday 1/11/2018

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
  • CAPM Model why is it important?
  • How fundamental investors find, make and monitor investments?
  • Examplesto illustrate the basic ‘alpha creation formula’ we will develop over the course of the class:
  • Stock selection and screening
  • Top down stock selection, Industry screening, trends
  • Bottom up stock selection:“the three circles”
  • Develop an investment thesis fundamental analysis
  • Evaluate and manage risk and exit strategies. We will introduce the “portfolio candidate” framework and how to apply it to investment selection.

Lastly, we will introduce basic techniques for building a financial forecast, providing background context for the first week’s homework.

Homework for Week 1

(individual assignment) – Teams will develop a revenue forecast for Beacon Roofing (ticker: BECN). This will form the basis for class discussion Week 2.

Team assignment: Set up an EQS Bloomberg. Pick a country, Industry of your choice and come up with 3 names that are attractive to you. Write up a paragraph on each stock on why do you think these names are worth pursuing?

CLASS TWO

Thursday 1/25/2018

Financial Forecasting Discussion / Fundamental analysis/different valuation methods

Reading:BECNPublic Filings (most recent 10-K at minimum), + 1-2 representative analyst forecasts which demonstrate ‘conventional wisdom’ on BECN.

Article on Dupont analysis in Latte

In this lecture wewill 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 revenue forecast.

Key discussion topics to include: drivers of profitability, evaluating company performance in the context of its industry.

We will also introduce the three basic ways of valuing a company

The cashflow method

Relative valuation method

Sum of the parts method

Assignment due:

Income Statement Financial Projectionteam!

Screening assignment: Set up an EQS Bloomberg. Pick a country, Industry of your choice and come up with 3 names that are attractive to you. Write up a paragraph on each stock on why do you think these names are worth pursuing?

Paul deMoor, CFA, Vice President, Capital markets strategy Fidelity Investments

Topic: Investment themes in Capital Management and Strategy

Homework for Week 2:

Team assignment:

Team Assignment: You are an analyst working for an Investment management firm and was asked to form an opinion on Deutsche post, the German post office company. You have done some initial work on the company with information available to you publicly and sell side research. Then you have the opportunity to meet with the Investor relation of DPW GY. She is going want you to be a potential opportunity. What are some of your questions and concerns that you would like her to address? Please email these questions to by Monday 2/5/2018 ( you have about two weeks, make me look good!)

Individual Assignment:

Boston Beer case study homework This will form the basis for class discussion Week 2.

CLASS THREE

Developing an Investment Thesis/Sum of the parts/

Thursday 2/1/2018

Assignment due:

Individual Assignment

Boston Beer case study homework This will form the basis for class discussion Week 2.

In this lecture we will discussfinancial ratios and their role in analyzing a company

We will use theBoston beercase study to illustrate

We will explore International and Emerging and Frontier markets for investment ideas

Our guest lecturer will go through international stock to illustrate this further

We will also look at Frontier markets with

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 Fronier markets with stack 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 an Ocada, an small Cap company based in UK

Homework for week 3:

Team Assignment due FRIDAY 2/5/18 5PM. What stock do you want to pitch for the final project? What is your investment thesis? How do you intend to prove it?

Individual Assignment – Build a fundamental valuation model for a stock selected by next week’s guest speaker.

CLASS FOUR

Monday 2/8/2018

Fundamental analysis/Management meeting/ Relative valuation

Assignment due:

Team Assignment: DPW Preliminary questions due by 2/5/2018 (group assignment)

(Individual Assignment) – Build a fundamental valuation model for a stock selected by guest speaker

In this lecture we will discuss we will continue to develop our investment thesis using fundamental analysis

We will talk about the global building material industry to illustrate different geographical exposures might influence investment decision in the mid to long term

We will discussion

Reading: Appropriate public filings and research to develop your investment thesis

Guest Speakers

Sarah Bowman, Vice President, Investor Relations, Deutsche Post DHL Group.

Sarah will present the case to invest in her company Deutsche post DHL Group to you 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 Lulu as a bottom up stock reccomendation
Homework for Week 4:

Write up your questions on Deustche Post. Were they answered. Based on this answers did your investment thesis change?

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” (time for style points in the pitch presentation!).

CLASS FIVE

Comparable Analysis / Monte Carlo

Thursday 2/15/2017

Preliminary Stock Pitch team assignment due!

DPW Preliminary Stock Pitch team assignment due!

Reading: Public Filings (most recent 10-K at minimum) for fundamental valuation homework, + 1-2 representative analyst forecasts which demonstrate ‘conventional wisdom’ on a business for this week’s valuation assignment chosen company (via LATTE).

In this lecture 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 discuss Monte Carlo simulation as a tool to help devise exit targets and learn how to use Crystal Ball, a popular Monte Carlo Excel add-in.
  • Crystal Ball example
  • Value approach to Investment
  • Explore “sum of the parts analysis” approach to investment? When and how do you apply it

Guest Speakers:

Matthew Waterbury, Bain and Company. Matt will discuss how activist investors value a specific company, and discuss activism generally.

Homework for week 5:

Individual Assignment – use Crystal Ball to build a Monte Carlo simulation

Activist Research Assignment (due 3/1). 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. 2-4 page paper, answering the following questions:

  • 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?

CLASS SIX

Other forms of Activism/ ESG Investments/ Does management make a difference? What are hedge funds

Thursday 3/1

  • In this class we will learn more about activism and discuss socially responsible investments which is a very interesting growth opportunity in active management
  • We will also illustrate the key role management can play in transformation of a company through examples from Emerging markets and International markets
  • 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 theyconvergent and divergent vs. their limited partners and financing sources?

Due:

Crystal Ball individual assignment due!

Note: Activist Research Project is due Thursday, March 1 at 5pm

Homework (Team Assignment). Complete your ‘stock pitch’ that advocates an investment, complete with exit targets and any risk management recommendations. That material should be turned in as a 2-4 page written recommendation, along with a short (<10 pages) PowerPoint the team should be prepared to present at our last class.

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?”

Guest Speakers: (I will update the topic)

Matt Patsky, CFA, currently CEO Trillium Asset Management and is a Member of the Board of Directors: 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.

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.

CLASS SEVEN

Making a Stock Pitch / Knowing Yourself as an Investor

Thursday3/8

Stock Pitch team assignments due!

Reading:Public Filings (most recent 10-K at minimum) for your final project, + 1-2 representative analyst forecasts which demonstrate ‘conventional wisdom’ on your business.

Each team will have 10 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.

EXHIBIT A – Case and Reading Assignment List

  • For most classes, I will assign the reading of a set of public filings and analyst reports. Those materials will be posted each week on LATTE.
  • In addition, I suggest the following recommended readings to students looking to get a fuller understanding of the topics we will develop during this class
  • Week 1: Malkiel, “A Random Walk down Wall Street”
  • Week 2: Graham and Dodd, “Security Analysis”
  • Week 3: Graham, “The Intelligent Investor”
  • Week 6: Brown and Goetzmann, “Hedge Funds with Style”, EFA 2001 Barcelona Meetings (distributed via LATTE)
  • Week 7: Goodspeed, “The Tao Jones Averages”

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