2020-2021 Investment Committee Workshop 3 – Thesis Development
mcgillinvestment.club Agenda
I. What Is An Investment Thesis?
II. How To Come Up With A Thesis
III. Investment Thesis Example
IV. Thesis Development Exercise
V. Due Diligence
VI. To-Do For Next Session
McGill Investment Club 2 What Is An Investment Thesis? Section I Investment Thesis Introduction
What is an Investment Thesis?
“A reasoned argument for a particular investment strategy, backed up by research and analysis”
Intrinsic value based What do we think the company is worth? on our view
What is the market missing? Stockprice
Current price based on market view What is the company’s commonly perceived worth?
A strong investment thesis answers the question: “Why do we think the share price should be trading at a higher price than it is now?
McGill Investment Club 4 Risks & Catalysts of an Investment Thesis
What are Risks? ▪ Factors that would bring down the common perception of the value of the company Intrinsic value based ▪ Are crucial to investment theses because: on our view − They can be the cause of the current differential between perceived and intrinsic value. − Risk factors can prevent the stock price from reaching its intrinsic value.
What are Catalysts? Risks
Catalysts ▪ Factors and events that would increase the common perception of the
value of the company. Stockprice ▪ Are crucial to investment theses because: − Misunderstanding and/or underestimation of catalysts can be central to strong theses. Current price based on − Without a strong catalyst, a stock’s price may not move towards market view its intrinsic value.
Stock prices move due to news related to the company, these can either be risk or catalysts
McGill Investment Club 5 How To Come Up With A Thesis Section II Universe of Investing Strategies
Bad Company, Expensive Price Good Company, Expensive Price
Expensive ▪ “Pump and dump” stocks ▪ Well-know ‘safe’ companies ▪ Companies that are overhyped ▪ Popular companies with good business models
Most likely a ‘get rich quick’ scheme A safer bet but with limited upside
Bad Company, Cheap Price Good Company, Cheap Price Share Price Share
▪ Distressed companies ▪ Overlooked companies with strong fundamentals ▪ Companies in their declining stage ▪ “Not-so-sexy” businesses with good financials
A gamble with high payoffs and losses High potential investment with limited risk Cheap
Low Company Quality High
A good business does not equate a good investment!
McGill Investment Club 7 How to Earn Outsized Returns
Consensus (Agree with Crowd) Non-Consensus (Against the Crowd)
You don’t make money You make money Right
You don’t make money You don’t make money Wrong
If making money was so easy, everybody would do it right?
McGill Investment Club 8 Common Ways to Develop an Investment Thesis
Exploiting Alpha-Generating Strategies
Source of Mispricing Exploiting Strategy Examples
Value Investing Bombardier (BBD) traded at a discount after funding Over & Under Invest in companies that appear to be overly punished due issues pushed back the debut of its flagship C-Series Reactions to: recent negative headlines, slowing growth, or poor aircraft. Shares bounced back after the provincial execution government purchased a stake in the program
Growth Investing Boingo (WIFI), a company specializing in mobile internet Over & Under Invest in companies experiencing a period of high growth technology, saw 20-30% revenue growth in the past 4 Reactions due to: initial under-reaction to a catalyst materializing, quarters, but it jumped to 50% once the company became disruptive technologies, increased profitability profitable
Apple (AAPL) was trading at similar multiples to other Quality Investing technology companies at the start of the decade while Invest in companies that are higher quality than their peers, Timing offering a more sticky customer base that was ready to but trade at similar multiples purchase products at a brand-based premium
Special Situations Invest in companies going through structural changes PayPal (PYPL) was famously spun-off by eBay in 2015, Timing (spin-offs, M&A, restructuring, etc.) or any event that may only to reach ~3x its spin-off value today affect short-term prospects (shareholder activism)
Markets are not always fully rationale and can exaggerate or ignore news
McGill Investment Club 9 Thesis Development
Steps to Developing an Investment Thesis
Step 1: Sourcing
A Have A Clear Idea Of Your Industry’s Subsector Learn about your industry B Understand Value Drivers of Each Subsector (industry overview presentation) C Map Out Potential Business Model Differences, Competitors
Step 2: Market Analysis
A Analyze Street’s Thoughts Form your opinion on B Look At Recent Industry Trends and Stock Price Movements certain stocks / industry trends C Compare Valuations of Different Companies
Step 3: Thesis Structure Present your A Compare Valuations of Different Companies investment idea in a thesis
McGill Investment Club 10 Investment Thesis Example Section III McGill Investment Club 12 McGill Investment Club 13 McGill Investment Club 14 McGill Investment Club 15 McGill Investment Club 16 Thesis Development Exercise Section IV Are These Investment Theses Good or Bad?
G Good O Okay B Bad ? 1 Emerging markets will drive growth of revenue
? 2 Earnings are expected to double this next quarter
? 3 The market overestimates the company’s debt load and underestimates its ability to repay it
? 4 Statistical analyses show …. (r-sqrd larger than 0.9)
? 5 Profit margins of company X are much higher than its competitors
? 6 A friend who works for the company told me….
? 7 The market is clumping in the company with the wrong subsegment leading to a lower multiple
? 8 Capital structure is not optimal
? 9 Investors underestimate the company’s total addressable market in the near future
? 10 The market is mispricing the effect of a loss in a lawsuit
? 11 Investment into a new product line with higher margins will lead to margin expansion
? 12 Future regulatory change will help the company
McGill Investment Club 18 Are These Investment Theses Good or Bad?
G Good O Okay B Bad B 1 Emerging markets will drive growth of revenue
B 2 Earnings are expected to double this next quarter
G 3 The market overestimates the company’s debt load and underestimates its ability to repay it
O 4 Statistical analyses show …. (r-sqrd larger than 0.9)
B 5 Profit margins of company X are much higher than its competitors
I 6 A friend who works for the company told me…. ILLEGAL! You will go to prison!
G 7 The market is clumping in the company with the wrong subsegment leading to a lower multiple
O 8 Capital structure is not optimal
G 9 Investors underestimate the company’s total addressable market in the near future
G 10 The market is mispricing the effect of a loss in a lawsuit
O 11 Investment into a new product line with higher margins will lead to margin expansion
B 12 Future regulatory change will help the company
McGill Investment Club 19 Due Diligence Section V Some Questions To Ask Yourself…
Key Questions to Test Your Investment Thesis
▪ What is the market missing? ▪ Why does the market not agree with my point of view right now? ▪ What will make the market change its views to realize my investment thesis? ▪ What are the downside scenarios if my investment thesis is not right? ▪ What are some counter-arguments towards my investment thesis? − Every argument has 2 sides to debate from − Ask your friends why your investment thesis might not make sense
How to Back Up Your Investment Thesis Argument ▪ Use numbers to back up your arguments − Discounted Cash Flow analysis − Comparables analysis − Market projections (EPS, growth rate, margin) vs. Your own projections ▪ Precedent examples or case studies − Examples where something similar happened in the past − Use company-specific history to show patterns that the market is missing
Investment theses should be challenged, or else they wouldn’t be a thesis
McGill Investment Club 21 To-Do For Next Session Section VI Homework!
1. Finish working on your industry overviews 2. Submit your industry overview slides before next session 3. Start thinking about what kind of investment theses can be interesting for companies in your industry
McGill Investment Club 23 Q&A MIC Disclaimer
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