Annual Report 2015 University of South Florida Muma College of Business
Fund Performance (Through December 31, 2015)
2015 Annual Return (Entire Portfolio)
2015 Annual Return (Active Portfolio)
Equal Weighted Market Cap Sharpe Ratio
USF SMIF
S&P 500
Russell 1000
Russell 2000
Russell 3000
-0.44%
1.19%
-1.06%
-5.06%
-1.41%
-3.32%
-
-
-
-
13.5B
16.84B
8.65B
805M
1.65B
.64
.63
-
-
-
SMIF Holdings
PROSPECTUS
(% of Entire Portfolio)
The Student Managed Investment Fund (SMIF) is a sub-portfolio of the overall portfolio of assets managed by the University of South Florida (USF) Foundation.
DSW
7.07%
PGT Inc.
3.69%
EMC Corp.
3.13%
Restoration Hardware
3.04%
Omega Protein Corp
2.71%
The SMIF Fund is expected to perform in a manner consistent with the performance of a focused equities fund with a time horizon of 3-5 years. Diversification across all equity markets and/or asset classes is not an objective. One Year Monthly Price Varation USF Fndn - SMIF Fund
S&P - 500 Index
12
2.56%
PKG
2.47%
Comerica
2.40%
CSX
2.32%
Precision Castparts
2.31%
Bank of New York Mellon
2.18%
Vasco Data Security
2.16%
Under Armour
2.01%
Vulcan Material
1.64%
Hershey
1.46%
ARM Holdings
1.37%
Inventure Foods
0.98%
University of South Florida Muma College of Business
8
Percentage
Independence Realty Trust
4
0
-4
-8
J-15
F-15
M-15
A-15
M-15
J-15
J-15
A-15
S-15
O-15
N-15
D-15
FUND CHARACTERISTICS The SMIF Fund in 2015 outperformed the S&P 500, Russell 1000, Russell 2000, and Russell 3000. In terms of average market cap, the SMIF Fund resembles more closely the S&P 500. However, since the SMIF Fund is heavily weighted in small cap stocks, we adjusted their nominal weights to reflect their market capitalization to better represent their impact on the portfolio’s return. Therefore, the equal weighted market cap that adjusts for our portfolio weights more closely resembles the Russell 3000.
1
INVESTMENT STRATEGY AND GUIDELINES The SMIF Fund will invest exclusively in US equities, ADRs, and near cash assets such as money market funds or securities. Investments in US equities and ADRs should be consistent with an expected holding period of 3-5 years at the time an investment is made. This is not to imply that any stocks purchased must be held for the complete term. The SMIF Fund may invest in large-cap stocks ($10 billion + market cap), mid-cap stocks ($2-10 billion market cap), small cap stocks ($300 million to $2 billion market cap) and micro cap stocks ($100 million - $300 million). Stocks may or may not pay dividends. Stocks may be in any industry group as defined in the Industry Classification Benchmark (ICB) system. Short-selling is prohibited. Leverage will not be used to magnify returns. Derivatives will not be used. The SMIF Fund’s assets may be invested in individual securities as defined above or in the Dreyfus S&P 500 Index Fund. Any cash that is not in the S&P 500 Index fund or invested in the stocks will be swept into the Foundation’s cash sweep vehicle, the Dreyfus Government Cash Management Fund. The maximum investment in the equity of a single issuer is 10% of fund assets at the time of the investment. Shares held in the SMIF Fund’s core equity index fund are not counted against this limit. The maximum investment in the stocks of a single industry (one of the 10 defined in the Industry Classification Benchmark (ICB) System) is 25% of fund assets. This constraint is binding on individual stock purchases that would otherwise exceed the allowable maximum. Shares held in the SMIF Fund’s core equity index fund are not counted against this limit. Students present their best stock investment ideas to members of the SMIF Fund advisory board, outside advisors and selected faculty. Following the presentation, the floor is open for questions that the students are expected to answer in an accurate, thorough manner. Once the discussion is over, a vote determines whether the recommended stock will be purchased.
MARKETS AND ECONOMY 2015 headwinds include: • • •
Devaluation of the Yuan Loosening of the U.S. monetary policy Surplus of oil
The world is watching to see what is going to happen with oil production, U.S. fiscal policy, and the overall economic stability of China. Chinese devaluation of the Yuan affected stock markets across the globe in August of 2015. Since China is so large, much of the world, including the U.S. economy, is tied to its successes and failures. This year we saw the market double bottom, which is common, but it was uncommon to see it triple bottom. This is tied to China, oil production, and political stability. U.S. monetary policy also greatly impacts global economies. Any increase or decrease in interest rates will have a ripple effect in other areas of the world. This year the U.S. dollar has been strong and we have seen a negative impact on our exports and on economies that import our goods. The Federal Reserve is worried about economic output of factors like China and wants to continue the expansion period by keeping rates low, which will also be beneficial to economies outside the U.S. A collection of data from the International Monetary Fund shows that the U.S. GDP has increased from 2.4% in 2014 to 2.5% so far in 2015 with a continued trend to project a 3% increase in GDP in 2016. We saw a significant drop in the price of oil down to $30 a barrel with predictions of further discounts down to even $20 and $10 a barrel. This happened because oil refinery, drilling, and fracking took off in 2014. Technology advances shifted the supply curve and more oil was produced than was demanded.
University of South Florida Muma College of Business
2
ECONOMIC FORECAST The economies of the Philippines, Malaysia, and Poland are set to replace the economies of Brazil, Russia, India, and China as the fastest growing economies through 2020. The Philippines’ economy has attracted countless companies to operate call centers in the region and will generate more growth as companies add higher value added voice services, information technology services, and business process outsourcing services in the Philippines. The Malaysian economy will continue to diversify its exports away from commodities and towards more desirable, high value exports such as electronic parts. The Polish economy has the most investment projects in Europe and can attract robust foreign direct investment with its low labor costs, stable financial sector, and strong ties with European Union members. Global stock markets will likely continue to be volatile until 2019 with the biggest driver behind upcoming market volatility being the state of the Chinese economy going forward. Global investors may find it difficult to forecast the future of the Chinese economy because of the opaque monetary policy from the People’s Bank of China and because of its transition towards a more domestic, consumption-oriented economy.
SOVEREIGN BOND MARKETS, RATES OUTLOOK, OUR METHODS, AND LONG-TERM CONCERNS The SMIF Fund uses discount rates based on a vareity of models to determine the price of securities from the present perspective. Considering the markets expectations of a required rate of return during our 3-5 year investment horizon is held to a thorough investigation. The Capital Asset Pricing model (CAPM) is one such model the SMIF analysts consider to discount future streams of cash flows of each equity we hold in the SMIF Fund. Concerned with accuracy and adhering to the concept of rate sensitivity, each variable in the CAPM was carefully projected based on a combination of ex-post and ex-ante data and assumptions. In determining the risk free rate (rfr) we approach the 10-Year U.S. Treasury Bond as the closest benchmark to a riskless investment, acknowledging the yield as the rfr used in the CAPM calculation. Historically the 10-Year Treasury Yield has fallen in the past decade to yields nearing 2%. Currently the rate is 1.97%. With the Federal Reserve issuing rate increases of 25 basis points per quarter in 2016 and cutting back those estimates in recent months, we project the rates of 10-Year Treasury Bonds between 2.2%-2.5% in 2016. As guidance has been dovish from the Federal Reserve, realistically we can expect without hesitation a second rate increase of 25 basis points within the first half of 2016. As for the outlook into the second half of 2016, based on the overarching dovish sentiment of the Federal Reserve we don’t expect any further rate increases until 2017. In a long-term view of the U.S. Treasury Yield, we recognize the possibility of a recessionary narrative based on the declining growth in the U.S. economy over the last few quarters. We expect to see a translation of these fears in the bond market, forecasting further declines in the Yield as institutional investors not wanting to take the risk in the volatile equities markets move funds into risk free securities or investment grade corporate bonds. The net effect could cause concern over time, yielding a slightly lower discount rate coupled with a declining interest in the equity markets. As a result, we extend our equity search into small to medium market capitalization equities with low analyst coverage to find opportunities for mispriced securities. Given the nature of the market, we are prepared to focus on equity strategies that can beat the benchmark even in a downturn, adapting to the cyclical market movements through the lens of professional money managers.
University of South Florida Muma College of Business
3
GROWTH AND INFLATION Multiple factors shaped the U.S. economic growth in 2015. Oil prices falling to historical lows were expected to boost spending due to higher disposable incomes, but consumers decided to save the extra cash instead. Moreover, throughout the year, the U.S. experienced a weakened exports environment due to the strong dollar, as well as slumping commodity prices due to the Chinese slowdown, and an overall global weakening in demand since emerging markets’ economies dependent on commodities caused their economies to slow down. The labor market, on the other hand, was strong and the unemployment rate went down to 5% from a high of 10% in 2009. Amid uncertanties around the U.S. economy, the consumer confidence index rose to 96.5 in December from 92.6 in November, showing an improvement in people’s opinion about the current and future conditions of the economy. The U.S. economy shrank 0.64% in the first quarter of 2015, mainly because of poor weather conditions and a small inventory build in the previous year. In the second quarter, there were signals of recovery as consumer spending improved and GDP grew at 3.9%. However, the third quarter brought slowdown fears again, as the economy grew below 2%. The fourth quarter of 2015 brought economic growth at a weak 0.7%, as both consumers and businesses cut back on spending and U.S. exports were hurt by economic weakness in overseas markets. Overall, the U.S. economy grew around 2.4%, the same as in 2014. In 2016, consumer spending will be a key factor to boost the U.S. economy amid further global economic slowdowns, an even stronger dollar due to an increase in domestic interest rates and commodity prices that continue to fall. Continued solid job growth can encourage consumers to spend more. Even though U.S. exports will continue to be limited and concerns about global growth worsens, people will probably have more condifence in spending as they realize that the low oil prices will remain low for longer. CPI inflation hit 0.73% for the year 2015, with low energy prices and a strong dollar keeping it low. Food prices fell, with some items posting their biggest decline since August 1979, such as meat, poultry, fish and eggs. The growth in the core inflation was helped by increases in rents and medical costs. The Federal Reserve expected a constant inflation rate at their 2% target for 2015, and since that was not achieved, interest rate hikes were delayed to December. This lack of confidence in the U.S. economy demonstrates dovish decision-making by the Federal Reserve. Going forward, there is continued uncertainty about the Federal Reserve’s policy to raise interest rates. The 2% inflation target is not expected to be met again in 2016.
U.S. GDP GROWTH IN 2015
U.S. GDP INFLATION IN 2015
University of South Florida Muma College of Business
4
HEADWINDS 2016 Since the mid 1990’s, China has been the economic engine that drives growth worldwide as production becomes cheaper and a growing middle class in China promotes growth opportunities for firms around the world. Similar to the growth in the industrial economies of the 20th century like the United States, England, and Germany, growth proved to be very fruitful. However, growth must eventually slow. As the world’s most populated country has developed its financial markets, the demand for equities based on the expected growth, primarily in the industrial sector, has increased. In the last couple of years, as growth deteriorated, equity prices in China have appreciated to largely unsubstantiated levels. Apart from the various factors affecting this including a lack of fundamental economic knowledge by a growing majority of investors in China, and the continued easing of capital, equity prices have reached ludicrous levels in the past year. Coupled with the uncertainty of the underlying economy, the subsequent reversal of the expected ebb and flow of the market with a boom and bust philosophy have left economic prospects far from reaching ideal levels. More importantly, the actions taken by the Beijing government have led international investors to withdraw funds at alarming rates as harsh capital restrictions and freezing of assets have become commonplace in order to cool the constant dumping of stocks. This all leads to the impact of all of this volatility on the world’s more developed markets. Where exposure to China was an incredible incentive for growth in the valuation of domestic firms in 2014, 2015 has proven to provide a sour outlook to that exposure. At the end of 2015, the performance among peers in most high-growth segments can be largely attributed to exposure to volatile markets, as investors value strategic defensive positions in the ever more volatile environment. Whenever Wall Street, and especially economists, begin to assess the future performance of a segment of the economy based solely on the historical performance of that segment, there is a need for concern. This is highlighted when this attitude is attributed to a commodity that reflects political risk at such a high degree. Many of the arguments for a bullish outlook of oil in mid 2014 revolved around the idea of worldwide production continuing to grow, driven mainly by the developing Asian economies. And yes, that prospect has played out as worldwide productions increased. However, that growth has slowed along with the macroeconomic growth in these countries. More importantly, the supply perspective was largely overlooked as analysts assumed that OPEC would price and reconcile its members in order to maintain relative oil prices. The tail end of 2014 highlights the monopoly power of OPEC, as it began to escalate production driving prices down in order to squeeze the permeable U.S. fracking industry. The political risk of such an organization is best highlighted by its continued conviction in this high-production strategy. Saudi Arabia is now running a deficit for the first time as it must remain competitive in this environment, while still driving prices lower as Iran is set to re-enter the market in the next year. The combination of political risk posed by OPEC alongside the need to increase production worldwide to fuel a slowing economic world will likely continue into the foreseeable future. This situation has led to a challenging year in many segments of the economy. 2015 was an interesting year for healthcare. The segment had been among the strongest performing segments coming out of 2013/2014, as the technological advancements in the biotechnology segment created many exciting opportunities for a variety of firms. However, the continued concern regarding a harsher regulatory environment has driven the segment down. As domestic healthcare stocks are largely priced according to the pricing power of the firm relative to its positions in the marketplace, the continued debate of implementing more governmental controls has largely hurt the best performing stocks of the past decade. This is because as their growth is largely priced in very ambiguously, material change to the underlying assumptions like pricing power greatly hurt valuations. Additionally, new government programs might help specific industries. In the tail end of 2015, the extension of the tax credit for solar panel usage drove up these stocks overnight as it would mean continued natural growth in a firm’s top and bottom line growth.
The end of 2015 was incredibly volatile, leading to the extremely challenging environment during the first quarter of 2016. Apart from the aforementioned factors, the U.S. economy has also had to address the concern of slowing domestic growth and the probability of a contraction in GDP. The stronger dollar has provided both beneficial and extremely discouraging consequences to different segments. In 2015, positive perception of foreign production and domestic revenues has generally led to an appreciation of stock price. Inversely, the domestic production of goods like microprocessors for sale abroad, especially in Asia, has proven to be a difficult business strategy to justify in the short run as more firms begin to hedge their foreign revenues. The growing production of oil worldwide has led to the tightening of profits for fracking operations in the U.S. As these firms established themselves during the lead up to the drop in oil, their expected revenue projections are largely incompatible with current market conditions. Thus, many emerging energy firms with exposure to this space have gone bankrupt and have affected the demand for services connected to energy. One such example of the impact of low oil prices is the contraction of demand for green energy sources. Additionally, industries that support the energy sector, like the railroad industry, have observed lower levels of demand for their services as alternative energy has become more affordable versus standard energy sources such as coal and natural gas. The impact of macroeconomic trends in the worldwide economy need to be observed through a wider lens, as specific changes can have widespreading effects. Going forward, the growth concerns in the emerging markets must not only be observed to predict the degree of contraction of growth, but also the impact of that contraction on domestic markets that are more connected now than ever before.
University of South Florida Muma College of Business
5
SECTOR AND INDUSTRY EXPOSURE Sector Breakdown As of 2015 our active portfolio holds a double digit exposure in two sectors: Industrials (12.42%) and Consumer Services (10.11%). PGTI and PKG as a whole represent approximately 49.56% of our portfolio’s current exposure to the Industrials sector. Within the Consumer Services sector, DSW comprises 69.91% and RH 30.08% of the exposure.
SMIF Sector Breakdown
Technology
6.00%
Industry Breakdown
9.10%
Since 2013, we have maintained a much more diversified portfolio. Throughout the year we exited our portfolio’s exposure to the Oil & Gas Industry and minimized our exposure to the Asset Management Industry, our two largest exposures in 2013.
Consumer Services
6.43%
Financials
6.44%
The SMIF Fund holds 56.51% in the S&P 500 Index. This is to have the ability to purchase new positions for the next round of stock pitches that take place in the Spring of 2016. When a new stock is purchased, shares in the S&P 500 Index are liquidated to purchase that stock.
55.33%
Consumer Goods
11.18%
Industrials
The SMIF Fund has two industries where there are multiple holdings. The Food Products Industry has HSY, OME, and SNAK that makes up a total of 5.15%, and the Building and Construction Industry has PGTI and VMC that makes up a total of 5.32%. The largest holding is in apparel stores (7.07%) represented by Designer Shoe Warehouse.
Wilshire 5000
16%
14.25%
14% 12%
10.72%
10.39%
10% 8% 6.13%
6% 4%
4.40%
4.83%
4.68%
6.30% 4.65%
4.98%
4.04%
4.36%
5.15%
2.77%
2% 0%
University of South Florida Muma College of Business
6
NEW POSITIONS Date Bought
Price Bought
Price (As of 12/31/15)
Yield
Gain/ Loss
Total Return
DSW (DSW)
11/12/2015
$22.43
$23.86
0.84%
$1.43
7.21%
PGT Inc. (PGTI)
11/12/2015
$10.82
$11.39
-
$0.57
5.27%
Vasco Data Security (VDSI)
5/1/2015
$25.36
$16.73
-
$8.63
34.03%
Vulcan Materials (VMC)
5/1/2015
$86.11
$94.97
0.42%
$8.86
10.71%
Inventure Foods (SNAK)
5/1/2015
$9.77
$7.10
-
$2.76
27.33%
Independence Realty Trust (IRT)
5/1/2015
$9.12
$7.45
10.12%
$1.67
8.19%
Arm Holdings (ARMH)
4/1/2015
$48.33
$45.24
0.79%
$3.09
5.61%
Restoration Hardware (RH)
3/1/2015
$90.64
$79.45
-
$11.19
12.35%
Omega Protein Corp (OME)
3/1/2015
$10.91
$22.20
-
$11.29
103.48%
Under Armour (UA)
2/10/2015
$73.34
$80.61
-
$7.27
9.91%
Company
NEW POSITIONS The spring 2015 analysts added eight securities into the SMIF Fund. These stocks were not held to any specific investment thesis, but instead the analysts were encouraged to develop their own philosophies. The most common philosophy has been to invest in small and mid-cap securities that are under covered by the street. The lack of information available to the market creates a mispriced and misunderstood security with a greater margin of safety and more likely to outperform the benchmark in our investment horizon. Securities that fit this philosophy are OME, VDSI, SNAK and IRT. This year marked the first time the SMIF Fund purchased an additional $6,000 in a security after the analysts updated guidance after an earnings report (VDSI). DSW (DSW) – DSW was a deep value play on the sharp pullback in the shoe industry. DSW will see continued growth as its attractive marketing schemes will drive online and in-store sales. PGT Inc. (PGTI) - PGT Inc. is an attractive firm with exposure to the growing Florida market and will see continued growth as commercial municipal infrastructure is built to higher integrity standards, utilizing PGT products to meet new regulations. Under Armour (UA) - Under Armour was purchased because of its ability to see robust growth in international markets coupled with its ability to gain market share in the footwear industry. UA will continue to outperform the benchmark as it transitions into a global lifestyle brand; it is the Nike of the future. Omega Protein Corp (OME) - Omega Protein is a pure play on consumers living healthier lifestyles. It produces fish oil used in aquaculture by catching menhaden and has an 85% share of the menhaden catch market, providing it with a wide moat. This, coupled with its nutritional supplements, will counter seasonality in its animal segment. The combined portfolio will allow vertical integration, improving margins, which drive the security to outperform the benchmark over its investment horizon. In 2015 we sold half of the position in the security on behalf of the SMIF Fund’s sell discipline. Restoration Hardware (RH) - Restoration Hardware is on the forefront of revolutionizing the retail experience, with its mega-sized galleries elegantly displaying an interior-design quality assortment. RH is the best growth opportunity in retail home furnishing as our analysts expect earnings to double in the investment horizon. Arm Holdings (ARMH) - ARM Holdings is the leading designer of processor chip technology for mobile devices. It will continue to benefit from the adoption of mobile devices globally as it has a dominant footprint in the market as well as a war chest of intellectual property. ARMH gives the SMIF Fund exposure to the proliferation of micro-processors as innovations such as The Internet of Things begin to accelerate.
University of South Florida Muma College of Business
7
Vasco Data Security (VDSI) - Vasco Data Security is a pure play on cyber security. The number of annual data breaches have doubled since 2013; VDSI provides user two-step authentication systems via cloud, mobile and hardware based solutions. It provides solutions to 50 of the top 100 global financial firms and governments worldwide. VDSI will leverage its expertise in security for financial firms into providing healthcare and enterprise firms the same high quality systems. Independence Realty Trust (IRT) - Independence Realty Trust is a Multi-Family Real Estate Investment Trust (REIT). There is a fundamental shift within the industry as millennials are starting families later in life, seeking properties in secondary markets and lacking the funds, credit and desire to purchase new homes. All of these factors will directly benefit IRT and lead to its outperformance of the benchmark in its investment horizon. Inventure Foods Inc (SNAK) - Inventure Foods will benefit from the increasing demand for healthier snacks. Their large distribution network and strong portfolio of brand names will drive the outperformance of the security versus the benchmark. Vulcan Materials (VMC) - Vulcan Materials provides cement and asphalt materials to commercial construction. The increasing infrastructure spending and the need for road improvements will drive VMC’s stock.
BIGGEST MOVERS OF 2015
TOP PERFORMERS (YTD)
The Student Managed Investment Fund’s biggest movers for 2015 were Designer Shoe Warehouse (DSW), Omega Protein (OME), PGT INC. (PGTI), and Vulcan Materials Company (VMC). All of these positions were incepted to the fund by analysts during the year and were the majority of the companies that outperformed the S&P 500 during the same time period. The highest return was from our position in Omega Protein, which was purchased in March 2016 of this year and since then, half of the position has been sold.
Company
YTD Return
Omega Protein Corp (OME)
103%
Vulcan Materials Co. (VMC)
11%
DSW (DSW)
7%
PGT (PGTI)
5%
DENIED POSITIONS (2015 - 2016) Date Pitched
Price
Price (12/31/15)
Yield
Gain/ Loss
Total Return
Reynolds American Inc. (RAI)
10/7/15
$45.46
$46.15
3.01%
$0.69
1.52%
Mohawk Industries (MHK)
10/7/15
$194.82
$189.39
-
$5.43
2.79%
Spirit Airlines (SAVE)
10/7/15
$48.61
$39.85
-
$8.76
18.02%
Company
* A re-buy of ARMH and sell of CMA were denied in the 11/5/15 deep value stock pitch
DENIED POSITIONS The denied positions are stocks that have been rejected by the SMIF Fund’s advisory board. Keeping track of the denied positions is essential to making sure the correct decision was made and the SMIF analysts did not miss out on positive alpha positions. The denied positions are stocks pitched by two different analyst groups. During the fall of 2014 there were five positions out of the six pitched that were denied. Of the companies that the student analysts pitched in the spring of 2015, the SMIF Fund’s advisory board voted a buy on 8 out of the 12 stocks pitched. Many factors influenced the rejections, including the inability to portray the investment thesis, mitigation of risks associated with the company, and lack of conviction in presenting the stocks. University of South Florida Muma College of Business
8
SOLD POSITIONS in 2015 * Indicates a half of the position has been sold Date Sold
Price Sold
Date Purchased
Price Bought
Yield
Gain/ Loss
Total Return
* Omega Protein Corp (OME)
11/12/15
$21.85
3/1/2015
$10.91
-
$10.94
100.3%
* Under Armour (UA)
7/24/15
$96.05
2/10/2015
$73.34
-
$22.71
31.0%
Whirlpool (WHR)
5/1/2015
$179.75
4/28/2014
$154.99
1.9%
$24.76
16.0%
SPX Corporation (SPW)
4/29/2015
$79.49
11/17/2010
$92.65
3.4%
$13.16
14.2%
Activision Blizzard (ATVI)
4/15/2015
$23.07
4/28/2014
$19.47
-
$3.60
18.5%
Cerner Corporation (CERN)
4/15/2015
$74.08
3/3/2014
$60.81
2.0%
$13.27
21.8%
Cummins (CMI)
4/15/2015
$135.31
4/9/2013
$120.00
0.1%
$15.31
12.8%
Company
SOLD POSITIONS The SMIF Fund has put a bigger emphasis on selling our winning stocks or ones that the analysts do not believe will outperform the market in the next 3 to 5 years. Below is a brief description on why the above stocks were sold. Omega Protein Corp (OME) - Although our investment thesis did not alter or break, OME exceeded our 2018 terminal value and therefore we decided to sell half of the position. Our price target was $18 and our exit price was $21.85 and our P/E was double what was projected. Under Armour (UA) - The investment thesis for UA partially materialized as it gained market share from Adidas, particularly in footwear; additionally, it exhibited strong growth in international sales, specifically in China. Although it did not reach our target price of $106, it did exceed the intrinsic value of $80, so we exited half of the position. Whirlpool (WHR) - Whirlpool was purchased for its replacement cycle sales and a broad housing market recovery. After a strong 2014 there is not a positive outlook for WHR with weak demand in EMEA and Latin America coupled with a strong U.S. dollar. With a low margin of safety at its current price and management providing very low guidance for 2015, the analysts saw this as an exit opportunity and sold its position in WHR for a 16% return. SPX Corporation (SPW) - SPW was added in the fall as a pure play on flow industrial equipment. Unfortunately the greater macro factors of a strong U.S. dollar and a low crude oil price environment created significant headwinds for SPW. The analysts realized it would not overcome these headwinds in the near term and sold their position in the security. Activision Blizzard (ATVI) - Activision was purchased for its legacy video games (Destiny, Call of Duty and World of Warcraft). These video games have not been as successful as our past analysts expected. Furthermore, ATVI spent millions of dollars on the game Titan, but then cancelled it because it wasn’t marketable. ATVI was sold by the analysts because it didn’t see strong growth prospects in its investment horizon as its competition continues to release higher quality video games that are more desired by consumers. Cerner Corporation (CERN) - Cerner was sold because the analysts viewed the stock price as being too stretched and overvalued. Despite the acquisition of Siemens, Cerner has struggled to meet the quality needed by its medical clientele. Our analysts’ believe that Cerner will lose market share as its clients switch to its competitors, systems instead and its stock price will suffer. Cummins (CMI) - Cummins has underperformed since its inception into the SMIF Fund as even a peak engine sales cycle wasn’t enough to move the stock much higher. The stock was sold on three platforms; 2015 will be cyclical downturn in engine sales, stagnate power generation demand and weak management guidance. The analysts believe CMI will not outperform the benchmark this year for these fundamental reasons. Synaptics (SYNA) - The SMIF Fund exited the other half of its position in Synaptics. With the sales of the Samsung Galaxy S6 sky rocketing and analysts growing more bullish on the mobile phone and its hardware, the analysts saw this as a selling opportunity and exited its position.
University of South Florida Muma College of Business
9
Analyst Class Fall 2015
Austin Boyle - boyle2@mail.usf.edu Austin Boyle learned the importance of hard work, teamwork and leadership as a member of Delta Chi and as a player on the USF’s Men’s Lacrosse team. Majoring in finance with a minor in leadership, Boyle has studied abroad and has traveled to nearly a dozen countries on three continents. On one of these trips, he ran with the bulls in Pamplona, Spain! Boyle served as an intern at Ameriprise Financial where he got his first taste of the finance industry. The Honors College student expects to graduate in 2016.
Hailey Davis - haileydavis@mail.usf.edu Finance major Hailey Davis is the first person in her family to attend college. After graduating high school a year early, she developed a passion for the financial markets. Davis learned the value of hard work after working in her family’s organic peach orchard and serving as an intern for JPMorgan Chase and Ballast Point Ventures. She aspires to work as an equity research analyst in Tampa.
Isabella Duarte - isabellad@mail.usf.edu Isabella Duarte’s road to USF traversed three continents. A native of Sao Paulo, Brazil, Duarte learned English when she studied abroad solo in New Zealand as a 16 year old. Later, she came to America to study finance because of its well-developed financial markets. She has held three internships: one in Brazil at an import company and two in Tampa at AXA Advisors and InvestAmerica Capital Advisors. She speaks Portuguese, English and Spanish, skills which she hopes will help her land a career as an international investment manager.
Rick Eldee - ahmadeldee@mail.usf.edu Rick Eldee came to USF as a biology major because his family expected him to pursue a career in medicine, much like the rest of his family. Strong willed, Eldee changed his major to finance two years later and hopes to learn more about portfolio management and career opportunities in the industry. His hobbies include football and fishing.
Bradley Gordon, Jr. - gordonb@mail.usf.edu Bradley Gordon, Jr. has always been interested in studying business, and after watching the market crash in 2008, he decided to study finance in order to learn more about opportunities in the market. While studying at USF, he was the lead mechanic in North America for a cycling corporation, and is now interning as an analyst in the risk division of FIS Global. He is the marketing chair on the executive board of the Student Finance Association. He will graduate from the finance program in 2016.
University of South Florida Muma College of Business
10
Analyst Class Fall 2015 - Continued
Gino Jo - ginojo@mail.usf.edu Finance major Gino Jo studied abroad at the University of Exeter in the United Kingdom in 2014, where he concentrated on economics and participated in the university’s Student Managed Equity Fund through its Business & Finance Society. The first person in his family to pursue a college degree, Jo is also studying economics as a minor and is the vice president of the Student Finance Association. He is a healthcare mergers and acquisitions analyst at Crosstree Capital Partners. He previously interned with JPMorgan Chase in Tampa. A native of Peru, Jo is bilingual and during his free time enjoys traveling and digital photography.
Dylan Kesterson - dkesterson@mail.usf.edu Dylan Kesterson has several years of experience in retail and door-to-door sales, but an interest in real estate investing ignited his passion for learning about the financial markets and the operations of business. Kesterson loves the idea of competing with a team, and in his free time he is most likely watching sports. Kesterson is a member of the National Society of Leadership and Success, and he aspires to become an investment portfolio manager. He plans to earn an MBA and the CFA designation after gaining experience in the finance arena.
Zoe Knapke - zoeknapke@mail.usf.edu Honors College student Zoe Knapke will graduate in 2016 with a finance degree. Her passion for financial analysis led her to pursue an internship at Jabil Circuit where she assisted the financial planning and analysis team. Knapke is actively involved on campus, serving as an officer of the Student Finance Association, Alpha Delta Pi, and the Chinese Culture Festival Club. Her engagement has not come at the expense of academics: she has maintained a 3.9 GPA. When she is not following the markets, Knapke enjoys working as a marketing team member with Red Bull and playing tennis.
Brandon Moore - bnmoore2@mail.usf.edu Brandon Moore developed his passion for understanding the global economy during the Great Recession. Ethics and asset protection fueled his interest and led him to pursue a career in investment valuation. Few students can consider their mother a classmate, but Moore started his college career taking classes with his mother while she finished her associate degree at Hillsborough Community College. After graduating in 2016 with a degree in finance and a minor in economics, Moore will take the CFA exam.
University of South Florida Muma College of Business
11
Analyst Class Fall 2015 - Continued
Bridget Parsells - bparsells@mail.usf.edu Bridget Parsells is a self-motivated student originally from the New York City metropolitan area. The first person in her family to pursue a college degree, Parsells moved to Tampa on her own to study finance at USF. She values her education, independence, and ability to support herself through working while in school. Parsells aims to manage investments for a financial firm in Manhattan. She also aspires to open her own public art gallery.
Heriberto Ramos - heriberto1@mail.usf.edu A junior majoring in finance, Heriberto Ramos developed his interest in financial markets due to his admiration of his father, who is part of an investment company in Mexico. Born in Torreon, Mexico, Ramos came to the United States in 2010, moving to Jacksonville to prepare himself for an American collegiate experience. At USF, Ramos has been involved in Enactus as project leader for Suit-ABull, a suit-lending program for students of all majors. Ramos plans to work in equity research and, later, he aims to open his own investment company.
Brandon Reagan - btr@mail.usf.edu Before coming to USF, Brandon Reagan played as a goaltender in the North American Hockey League for the Topeka Roadrunners. Though he was offered opportunities to play hockey on a collegiate team, Reagan opted to pursue his education at USF. A native of Essex, Vt., he grew up watching the success of Green Mountain Coffee Roasters, which sparked an interest in financial markets as a career path. Reagan has developed his finance skills by serving as a chair of the Student Finance Association at USF and serving as an intern at Ballast Point Ventures this year. These experiences have helped shape his work ethic, camaraderie, and ability to work under pressure.
University of South Florida Muma College of Business
12
STUDENTS’ TAKEAWAYS The Applied Securities & Analysis course is regarded as one of the toughest courses at the University. We all fill the role of a professional financial analyst and the quality of our work is expected to be nothing less than that of a professional Wall Street analyst. With many of us taking several additional courses, working a job or internship and participating in extracurricular activities, the intensity of the workload can become almost overwhelming. However, taking this course at the undergraduate level is a once-in-a-lifetime opportunity that allows us to gain hands-on experience in the investment industry. It changes the way we look at the markets and the economy and transforms our minds from thinking like students into thinking like analysts. A great investment idea is nothing if we cannot sell it and that is where our presentation skills come into play. Being able to present our idea effectively as well as answer difficult questions during the Q&A session only happens when we have done one thing: prepare. This course, more than any other course, has taught us about the importance of preparation. Being the most knowledgeable person about our investment idea is crucial. Being a part of the Student Managed Investment Fund has given us the necessary skills to succeed in the investment industry with a head start on the rest of the competition.
The following are some memorable statements made by this school year’s student analysts:
“ASA is an exceptional program that provides motivated students a premier opportunity to immerse themselves in Equity Research and Portfolio Management.” -- Bridget Parsells
“Fast-paced environment that is great for motivated and advanced finance students looking for a more applied learning style.” -- Dylan Kesterson
“Thankful for the opportunities that came my way as a result of participating in the ASA program.” -- Zoe Knapke
“ASA transforms students into professionals - and before leaving college.” -- Isabella Duarte
“ASA is a great opportunity to stop thinking like a student and begin thinking like a professional.” -- Heriberto Ramos
“The ASA program allows selected students the priveledge to push themselves beyond mental and physical boundaries they once thought could never be attained.” -- Brandon Reagan
University of South Florida Muma College of Business
13
ARM HOLDINGS (ARMH) ARM designs and licenses low-power microprocessors predominantly for use in mobile devices such as phones. ARM does not manufacture its chip technology but merely develops and licenses it. The company has been able to able to build significant market share, with around 95% of all mobile phones currently using ARM cores. A total of 12 billion ARM processor-based devices were shipped in 2014.
Key Statistics
Since Purchase
(As of April 2015) P/E (TTM)
43.98
Fwd P/E
26.75
P/S 15.45 P/B 8.44 Dividend Yield
0.67%
Market Cap
B
Beta
Performance Since Purchase (4/1/2015 – 5/1/2015) Arm Holdings (ARMH)
-11%
S&P 500 -8%
2015 Current Performance Arm Holdings (ARMH)
-12%
ORIGINAL THESIS
RISKS
Increasing smartphone shipments and increasing smartphone share within all phones shipped will drive royalty growth
Global recession in the next five years leads to declines in sales
Increasingly complex chips within each device increases royalties per device
High multiple stock (for serial reason: big moat, big margins, big potential) Intel’s investments in mobile and IoT catch-on
Increasing penetration of newest technology within all segments raises royalties per device Increasing market share within enterprise and embedded computing increases licensing and royalty revenue Total addressable market growth, through the Internet of Things, will increase both licensing and royalty revenue
University of South Florida Muma College of Business
14
BANK OF NEW YORK MELLON CORP (BK) The Bank of New York Mellon Corporation is a global financial services company that provides various financial products and services worldwide. It operates through Investment Management, Investment Services, and other segments.
Since Purchase
Key Statistics (As of April 2015) P/E (TTM) 13.37 Fwd P/E 10.45 P/S 32.57 P/B 1.09 Dividend Yield
1.90%
Market Cap
B
Beta
Performance Since Purchase (2/21/2013 – 5/1/2015) Bank of N.Y. Mellon (BK)
29%
S&P 500 26%
2015 Current Performance Bank of N.Y. Mellon (BK)
-0.6%
S&P 500 -5.4%
ORIGINAL THESIS
RISK
BK’s stock has experienced difficulties. Weakness can be traced back to 2008 and 2009 when losses plagued their investment portfolio and provisions for loan losses rose. Revenues fell as lower market volatility reduced securities lending and foreign exchange revenues. The anticipation of persistent low-interest rates, concerns in Europe, and litigation have compounded the negativity reflected in the current stock price. Although we realize these are serious and legitimate concerns in the near term, we feel that the market is overly pessimistic on BK’s medium to long-term potential. We think that the stock is undervalued today and that BK possesses important drivers of growth and a favorable market sentiment. Given our long-term outlook, we believe BK provides reasonable growth at a depressed price.
Risks to our thesis include economic conditions leading to a continued low interest rate environment, slower fee growth, depressed equity values and transaction volumes, a lack of volatility in foreign exchange, higher than expected expenses, harsh regulatory environments, litigation, as well as credit deterioration.
University of South Florida Muma College of Business
15
COMERICA, INC. (CMA) Comerica Incorporated, through its subsidiaries, provides financial products and services primarily in three major U.S. markets. The company operates in three segments: Business Bank, Retail Bank, and Wealth Management.
Key Statistics (As of April 2015) P/E (TTM) 15 Fwd P/E 13.9 P/S 3.4
Since Purchase
P/B 1.1 Dividend Yield
1.69%
Market Cap
8.66 B
Beta 1.27
Performance Since Purchase (3/3/2014 – 4/30/2015) Comerica (CMA)
-0.4%
S&P 500 (Benchmark)
12.3%
2015 Current Performance
ORIGINAL THESIS
Comerica (CMA)
2.3%
S&P 500 (Benchmark)
2.5%
RISKS
•
CMA’s loan structure, 85% floating, allows them to take advantage of rising short-term rates, which the Federal Reserve could begin in 2015, as stated in the December FOMC minutes
•
Rates continue to stay low for a longer period of time from a stagnant economy, thus keeping CMA’s net interest margin lower than peers
•
CMA loan quality restrictions over the past few years have helped increase the quality of its balance sheet and sensitivity to changes in short-term rates
•
Exposure to the automotive and energy industry in an economic downturn could affect CMA’s credit quality
•
CMA should see an improvement in total loan growth as the environment for middle market businesses continues to improve
University of South Florida Muma College of Business
16
CSX CORP. (CSX) CSX Corporation, together with its subsidiaries, provides rail-based transportation services. It offers traditional rail services and transports intermodal containers and trailers.
Since Purchase
Key Statistics (As of April 2015) P/E (TTM) 19 Fwd P/E 16.5 P/S 2.9 P/B 3.3 Dividend Yield
1.71%
Market Cap
35.04 B
Beta 1.26
Performance Since Purchase (4/9/2012 – 4/30/2015) CSX Corp (CSX)
78.2%
S&P 500 52.2%
2015 Current Performance CSX Corp (CSX)
4.5%
S&P 500 2.5%
ORIGINAL THESIS
RISK
Continued expansion of fracking operations in the U.S. will drive demand for sand shipments
New regulations could affect the railroad industry’s ability to negotiate prices and could negatively affect earnings
Higher diesel prices will cause manufacturers and distributors to shift from trucking to railroads to transport goods
Failure to complete collective bargaining negotiations would result in strikes or work stoppages
An improving U.S. economy will drive demand for durable goods which will drive continued earnings growth
The transportation of hazardous materials could subject CSX to significant costs and claims
Strong cash flows will benefit shareholders in the form of stock buy backs and dividend increases
A severe recession would negatively affect railcar volumes and in turn earnings
University of South Florida Muma College of Business
17
EMC CORPORATION (EMC) EMC Corporation, together with its subsidiaries, develops, delivers, and supports information infrastructure and virtual infrastructure technologies, solutions, and services.
Key Statistics (As of April 2015 ) P/E (TTM) 21.3
Since Purchase
Fwd P/E 12.6 P/S 2.1
EMC
S&P 500
P/B 2.5
20%
Dividend Yield
1.7%
Market Cap
52.12 B
Beta 1.47
10%
Performance Since Purchase (3/3/2014 – 4/30/2015)
0%
-‐10% Mar-‐14
EMC Corporation (EMC)
1.4%
S&P 500 (Benchmark)
12.3%
2015 Current Performance Jul-‐14
Nov-‐14
Mar-‐15
EMC Corporation (EMC) S&P 500 (Benchmark)
-10.9% 2.5%
ORIGINAL THESIS
RISK
As companies harness more data, EMC’s ability to offer value added and scalable products make EMC a key player in the secular change to cloud computing and Big Data management.
Soft expenditures that are experienced in enterprise information technologies due to macroeconomic and industry specific events.
Fifty-fold growth in data from 2010 to 2020 to 40 zettabytes will drive growth for EMC Prolific inorganic acquisitions funded by $5.5 billion in FCF allow EMC to efficiently expand and capitalize on new technologies.
University of South Florida Muma College of Business
Cybersecurity breaches that may lead to adverse litigation and unforeseen costs. Product obsoleteness that may cause both increasing costs and decreasing revenues.
18
HERSHEY (HSY) The Hershey Company manufactures, markets, distributes, and sells chocolate and sugar confectionery products, pantry items, gum, and mint refreshment products.
Key Statistics
Since Purchase
(As of April 2015) P/E (TTM) 24.8 Fwd P/E 19.8 P/S 2.8 P/B 14.2 Dividend Yield
2.23%
Market Cap
20.49 B
Beta 0.76
Performance Since Purchase (04/25/2014 – 4/30/2015) Hershey
-6.5%
S&P 500
13.2%
2015 Current Performance Hershey
-9.7%
S&P 500
2.5%
ORIGINAL THESIS
RISK
The Hershey Company (HSY) has shown the most consistent growth amongst large cap food companies in the U.S. in recent years, a trend that is likely to continue over our investment holding period. Emerging countries are the top drivers of growth in chocolate sales and HSY is capitalizing on the tremendous growth opportunities in this area as evidenced by the successful market penetration of its products. Also, domestically, HSY is adding value through acquisitions and new product innovations.
Weaker sales of confectionery products would lead to a lower growth rate than the one assumed in our analysis.
Given its current price and our valuation, we consider HSY to be undervalued and an attractive investment opportunity to add positive alpha to the SMIF Fund.
The main raw materials that are a direct input cost in HSY’s products are sugar, cocoa and corn sweeteners. Volatility in these commodities would negatively impact margins.
University of South Florida Muma College of Business
The Hershey Trust Company is the controlling shareholder with approximately 80% of the voting power. Unsuccessful company innovations would hinder growth and place downward pressure on sales.
19
INDEPENDENCE REALTY TRUST (IRT) Independence Realty Trust (IRT) is a real estate investment trust (REIT) that invests in multi-family properties located in secondary markets. Some key property locations include Oklahoma, Arizona, Kentucky, and Tennessee. The firm acquires properties in areas with rental and occupancy growth potential. The firm has seen strong growth in funds from operations (FFO), net operating income (NOI), and net asset value (NAV). Year to Date
Key Statistics (As of April 2015)
IRT
P/E (TTM) 63.9
S&P 500
Fwd P/E 13.4 P/S 3.8
5%
P/B 1.1
3%
Dividend Yield
8.26%
Market Cap
280.43 MM
Beta .65
0%
Performance Since Purchase (5/1/2015) Independence Realty Trust (IRT) N/A
-‐3%
S&P 500
N/A
2015 Current Performance -‐5% Jan-‐15
Independence Realty Trust (IRT) -.06%
Feb-‐15
Mar-‐15
Apr-‐15
S&P 500
2.5%
ORIGINAL THESIS
MULTI-FAMILY INDUSTRY DRIVERS
There is a fundamental shift in the real estate industry as more consumers are seeking multi-family properties over purchasing a new home.
Millennials have flocked to secondary cities such as Houston, Louisville, Oklahoma, Austin, and Phoenix among others.
The firm invests in properties located in secondary markets that have the potential for rental and occupancy growth.
The shift away from the 5 largest cities is driven by price levels at all time highs that eat away at earnings for people in the early stages of their career.
It can continue to acquire new properties that fit its current property portfolio.
Apartments located in secondary markets allow consumers to enjoy the benefits of a big city atmosphere while also paying a reasonable price.
Rental vacancy and available units for rent has decreased, which enables rent per unit price growth
Increasing student loan debt, percentage of 25-34 year olds who are married gradually decreasing since the 1980’s, and average age of mothers giving birth increasing from 28 to 31-32 all point towards new home purchases being put off till later in life.
University of South Florida Muma College of Business
20
OMEGA PROTEIN (OME) Omega Protein Corporation manufactures Omega-3 fish oil, specialty fish products, and nutritional supplements for sale to various feed manufactures and wholesale organic distributors. The company operates in two segments: Animal Nutrition and Human Nutrition.
Since Purchase
Key Statistics (As of April 2015)
OME
S&P 500
P/E (TTM) 14.6 Fwd P/E 13.9
30%
P/S 0.9 P/B 1.0
20%
Dividend Yield
0%
Market Cap
278.21 MM
Beta 1.34
10%
Performance Since Purchase (3/1/2015 – 4/30/2015) Omega Protein (OME)
0%
23.1%
S&P 500 0.2%
-‐10% Mar-‐15
2015 Current Performance Mar-‐15
Mar-‐15
Apr-‐15
Apr-‐15
Omega Protein (OME)
26.7%
S&P 500
2.5%
ORIGINAL THESIS
RISK
Growing demand from consumers becoming more conscious about their health
New entrants into menhaden fishing market
Increased product offerings in Human Segment will drive revenue growth Acquisitions of Cyvex (12/10) and InCon (9/11) enable vertical integration and differentiate its fish oil from substitutes
Government/FDA regulations adversely affect the firm’s ability to catch menhaden Energy swap adjustments and seasonality of the business could dilute earnings more than anticipated Reliance on menhaden
Acquisition of Bioriginal (9/14) creates steady revenue stream for Human Segment to hedge against seasonality in the Animal Segment Fish oil from menhaden is the only oil approved by FDA Consistent catch of menhaden will provide Omega with consistent revenue as demand for fish meal and fish oil grow University of South Florida Muma College of Business
21
PRECISION CASTPARTS CORPORATION (PCP) Precision Castparts (PCP) is a world leader in structural investment castings, forged components, and airfoil castings for aircraft engines and industrial gas turbines. Airbus, Boeing, GE, RollsRoyce, and many other leading manufacturers depend on PCP for critical airframe, engine, power generation and general industrial components.
Key Statistics
Since Purchase
(As of April 2015) P/E (TTM) 16.1 Fwd P/E 15.4 P/S 3.0 P/B 2.5 Dividend Yield
0.6%
Market Cap
31.14 B
Beta 1.05
Performance Since Purchase (4/9/2013 – 4/30/2015) Precision Castparts (PCP)
13.4%
S&P 500 (Benchmark)
32.7%
2015 Current Performance Precision Castparts (PCP)
-12.4%
S&P 500 (Benchmark)
2.5%
ORIGINAL THESIS
RISK
PCP mitigates risks of certain airline companies outperforming the industry by offering low costs for all jet craft engines. Strong competitive moat by being one of the few large metal casting producers as well as producing components that demand a high level of expertise in addition to high manufacturing capacity. Transparent growth with backlogged work orders that will drive revenue.
U.S. economy’s growth becomes stagnant, and consumer spending decreases Heavy reliance on a few customers: Boeing, Airbus and GE Price fluctuations in raw materials Seasonal markets of aerospace and power generation markets
Improved profit margins on next generation aircrafts, which are set to start being manufactured in 2016 by Boeing and Airbus Management’s acquisitions of Aerospace Dynamic International can expand their reach to next-gen aircrafts
Emerging markets’ demand for small sized aircrafts decrease
Acquisitions of Permaswage and Airdome strengthened the company’s permanent and separable fittings segment. Strong cash and financial position provides liquidity for organic growth and the ability to acquire other firms to increase manufacturing capacity
University of South Florida Muma College of Business
22
PACKAGING CORPORATION OF AMERICA (PKG) Packaging Corporation of America manufactures and sells container board and corrugated packaging products globally.
Key Statistics
Since Purchase
(As of April 2015) P/E (TTM) 17.5 Fwd P/E 13.5 P/S 1.2 P/B 4.5 Dividend Yield
2.5%
Market Cap
6.94 B
Beta 1.45
Performance Since Purchase (04/25/2014 – 4/30/2015) Packaging Corp of America
4.2%
S&P 500
13.2%
2015 Current Performance Packaging Corp of America
-10.8%
S&P 500
2.5%
ORIGINAL THESIS
RISK
Packaging Corporation of America (PCA) has propelled itself into the fourth spot for container board manufacturing in the U.S. with the acquisition of Boise Inc. From the new position, the company also is a leader in the production of white papers in the U.S. PCA operates 8 mills and 98 corrugated products manufacturing plants that provide a wide variety of packaging solutions. The container board industry is highly correlated with the economy and therefore creates the basis for this investment as we see the macro economic environment recovering, although at steady rates. The demand for corrugated packaging will grow from this trend and companies such as PCA will experience growth and ultimately lead to positive alpha for the SMIF Fund.
A macroeconomic downturn would create oversupply and reduction in prices in the industry.
University of South Florida Muma College of Business
High competition in the market for container board products may crimp profits. Increased usage of substitute products within the white paper and packaging industries.
23
RESTORATION HARDWARE (RH) Restoration Hardware is a luxury home furnishing retailer that intends to offer the finest and most desirable designs at unmatched value. Its expanding merchandise offerings include: furniture, lighting, textiles, bathware, decor, outdoor and garden, as well as baby & child products. RH curates this home furnishing merchandise in its stand-alone galleries and sells directly through catalogs that it calls source books. Since Purchase
Key Statistics RH
(As of April 2015)
S&P 500
P/E (TTM) 40
12%
Fwd P/E 29.5 P/S 2.0 P/B 5.0
8% 4%
Dividend Yield
0%
Market Cap
3.67 B
Beta 0.64
0%
Performance Since Purchase (3/1/2015 – 4/30/2015)
-‐4%
Restoration Hardware (RH) 1.4% S&P 500
-‐8% Mar-‐15
Mar-‐15
Mar-‐15
Apr-‐15
Apr-‐15
0.2%
2015 Current Performance Restoration Hardware (RH) -3.7% S&P 500
ORIGINAL THESIS
RISK
Brand Transformation: RH has the ability to scale its unique lifestyle brand via expanding product offerings, growing square footage, and continuing superior sales growth. We see this allowing RH to propel its market share gains and market beating shareholder returns over our three to five year investment horizon
High comparison against prior growth
Strong Competitive Advantage: From a competition standpoint, RH’s combination of shopping experience, storefront appeal, and transforming economies of scale is unparalleled by any brand in its industry.
Lower square footage growth
2.5%
Market expectations/valuations Economic slowdown
Changing consumer preferences Loss of key personnel
Favorable Macro and Industry Environment: We see significant topdown tailwinds for RH’s developing business: the strength of the luxury consumer, the accelerating positive trend in housing and renovation, and the fragmented and stale competitive environment in the retail and the home furnishing business. Strategic Execution: RH’s strategic focus, ambitious brand vision, economies of scale, and impeccable record of executing its growth strategies make RH’s growth sustainable and the value creation goals feasible University of South Florida Muma College of Business
24
INVENTURE FOODS, INC. (SNAK) Inventure Foods, Inc. is one of the market leaders in distributing, processing, and marketing both healthy/natural and indulgent foods. The company operates in two segments: frozen products (63%) and snack products (37%). The majority of its sales come from healthy/natural products (81%), while the rest consists of indulgent specialty foods (19%).
Year to Date
Key Statistics (As of April 2015)
SNAK
P/E (TTM) 19.5
S&P 500
Fwd P/E 17.5
15%
P/S 0.7
0%
P/B Dividend Yield
2.8 0%
Market Cap
173.60 MM
Beta 0.17
-‐15%
Performance Since Purchase (5/1/2015 – 4/30/2015) Inventure Foods, Inc. (SNAK) N/A
-‐30% -‐45% Jan-‐15
S&P 500
N/A
2015 Current Performance Feb-‐15
Mar-‐15
Apr-‐15
Inventure Foods, Inc. (SNAK) -25.9% S&P 500
ORIGINAL THESIS
RISK
Management’s priority on growing healthy/natural food segment
Increasing commodity prices
Strong portfolio of brand name foods
Costco accounted for 26% of total revenues
Diverse distribution network with large customer base
Operates in a highly competitive market
Continued product innovation will keep its brands at the forefront of the industry
New products could lose consumers’ appeal
2.5%
Frozen vegetables market will improve top line growth and decrease seasonality of revenues Growing demand for healthy snack alternatives Increasing demand for smoothies and frozen fruit products
University of South Florida Muma College of Business
25
UNDER ARMOUR (UA) Under Armour designs, distributes and markets its brand of performance apparel, footwear and accessories. Headquartered in Baltimore, Maryland, Under Armour offers unique and high quality products geared towards men, women and youth. The firm operates in the clothing and apparel sector.
Since Purchase
Key Statistics (As of April 2015)
UA
P/E (TTM) 82.3
S&P 500
Fwd P/E 54.1 P/S 5.2
20%
P/B 12.0
15%
Dividend Yield
0%
Market Cap
16.91 B
Beta -0.03
10%
Performance Since Purchase
5%
(2/10/2015 – 4/30/2015) Under Armour (UA)
0%
11.1%
S&P 500 1.9%
2015 Current Performance -‐5% Feb-‐15
Mar-‐15
Mar-‐15
Apr-‐15
Under Armour (UA)
21.8%
S&P 500
2.5%
ORIGINAL THESIS
RISK
Major opportunity for international expansion. Sales from overseas currently account for ~8% of total revenue. Under Armour will continue to establish brand recognition globally in Asia, EMEA and the Middle East. In the long term, international sales have the potential to account for close to half of total revenues.
Economic downturn in the economy would decrease consumer purchases of discretionary items, which could hurt Under Armour’s earning potential.
Ability to establish brand loyalty by targeting consumers at a young age. Under Armour penetrated the sports and youth markets first before expanding to men and women’s apparel. The firm’s strong foothold in the youth market will continue to benefit Under Armour by establishing brand loyalty for their products. These consumers ,along with the ability to continue to expand and make innovative clothing and footwear, will enable Under Armour to become the next Nike.
A loss of one or more key customers could adversely affect growth strategy. Rapid growth that Under Armour will see in the future will lead to operating deficiencies. The large size and abundance of resources of Nike and Adidas could be difficult for Under Armour to compete with.
Capturing market share from Nike and Adidas as it grows into the leading athletic brand. Successful investments in athletes and universities will increase brand popularity and demand. The success of Under Armour endorsees will continue to increase brand recognition and install loyalty and a recurring revenue stream.
University of South Florida Muma College of Business
26
VASCO DATA SECURITY (VDSI) VASCO Data Security International Incorporated, together with its subsidiaries, designs, develops, and markets security systems to protect and manage access to digital assets worldwide. The firm is headquartered in Delaware but operates worldwide. The company operates in two segments: banking and financial services market (83% of sales) and the enterprise and application security market (17% of sales). Since Purchase
Key Statistics (As of April 2015)
VDSI
P/E (TTM) 31.4
S&P 500
Fwd P/E 26.1
25%
P/S 5.1
20%
Dividend Yield
0%
Market Cap
1.07 B
P/B 5.0
15%
Beta 1.58
10%
Performance Since Purchase (4/1/2015 – 5/1/2015)
5%
Vasco Data Security (VDSI) 13.1% S&P 500 2.4%
0% -‐5% Apr-‐15
2015 Current Performance Vasco Data Security (VDSI) -10.0%
Apr-‐15
Apr-‐15
Apr-‐15
Apr-‐15
S&P 500
2.5%
ORIGINAL THESIS
RISK
Growing demand for firms to have secure networks because of the increasing number of data breaches
Ability to penetrate non-financial firm markets
Solid customer base creates reliance on Vasco solutions
Vasco systems or customers experience a hack from authentication system
Growing demand for cloud and mobile based security solutions will enable Vasco to earn recurring revenues
Reliance on small number of customers attributing 46% of revenue
Cloud solutions improve scalability and improve top and bottom line growth
Foreign currency fluctuations
Increasing demand for two-step user authentication systems will drive demand for Digipass Vasco will see increasing demand from other markets besides financial firms as it will leverage its expertise in user authentication across all industries Increasing regulation of governments requiring corporations to increase IT security spending will drive growth
University of South Florida Muma College of Business
27
VULCAN MATERIALS COMPANY (VMC) Vulcan Materials Company is the nation’s largest producer of construction aggregates and a major producer of aggregates-based construction materials including asphalt and ready-mixed concrete. VMC’s products are used in nearly all forms of construction and are particularly important in the building and repair of infrastructure. Its business segments are aggregates, asphalt mix, concrete, and Calcium. Year to Date
Key Statistics (As of April 2015)
VMC
P/E (TTM) 56.5
S&P 500
Fwd P/E 28.7 P/S 3.9
30%
P/B 2.8
15%
Dividend Yield
0.31%
Market Cap
12.15 B
Beta 1.47
Performance Since Purchase (5/1/2015)
0%
Vulcan Materials Company (VMC) N/A S&P 500
N/A
2015 Current Performance -‐15% Jan-‐15
Vulcan Materials Company (VMC) 24.1%
Feb-‐15
Mar-‐15
Apr-‐15
S&P 500
2.5%
ORIGINAL THESIS
RISK
Infrastructure deterioration: VMC’s products are necessary in the repair of everything from bridges and roads to waterworks and ports. As a manufacturer of these required products, VMC will capitalize on ongoing and future infrastructure repairs.
Revenue sensitivity: Revenues are sensitive to government and private construction spending conditions. Seasonal conditions: Construction activity is impacted by weather conditions on both the local and national level.
Pricing power: VMC is the largest supplier of aggregates in the nation, enabling significant pricing power. VMC’s materials have a long history of price appreciation. Strategic geographic positioning: VMC operates from coast to coast, serving approximately 40% of the U.S. including 7 of the 10 fastest growing states.
University of South Florida Muma College of Business
28
Prepared by: 2015 Analyst Group For more information please visit: http://www.usf.edu/ business/departments/finance/smif/ Disclosures:
University of South Florida Muma College of Business