Business school is an all-consuming endeavor, and I’ve been involved in a number of stock pitch competitions that have required a significant portion of my free time. After winning our internal competition, my team represented UNC at the Alpha Challenge on November 18.

Each team develops two pitches for the event – both a long and short investment idea – out of the provided list of companies (40 names in total). The teams then give a fifteen minute presentation on both ideas, followed by a ten minute Q & A session with the judges. You can check out the event rules here.

Although we didn’t make the finals this time, it was a great experience.

A Few Notes

  • The industry chosen for this year’s event was residential home construction, which was an extremely difficult industry for me. It is very cyclical, and I think everyone is aware of what happened in the real estate markets in the U.S. and around the world over the past several years…
  • Macro trends have a huge impact: unemployment figures, mortgage lending rates, population growth, regulatory environment, etc. – all areas that are outside of my normal circle of competence.
  • The industry is also complex: there are a ton of variables that separate the various homebuilders: country (big difference between the U.S. and Brazil real estate markets for example), size of their land bank, type of dwelling, location, inventory make-up, etc. It took a ton of research to even understand how these companies make money.
  • Standard valuation methods are challenging: Homebuilders have enormous working capital requirements (see this data set for perspective), as they are constantly investing in new land for the next round of building. This means that homebuilders in growth mode report negative FCF numbers – but the companies can decide at basically any point to reduce this investment and swing to a huge positive figure (as existing inventory is converted into cash). Forecasting these trends is difficult.

Our Presentation

 

On the Cyrela short:

  • Brazil’s recent growth is pretty amazing, as the economy has come roaring back from the recession. There is still a huge housing shortage, and the government seems committed to the housing program (assuming that they can actual build homes cheap enough to qualify – not as easy as it seems with construction costs rising so rapidly).
  • Total debt as a percentage of GDP is still low, but consumers are showing signs of being overextended: for the average Brazilian consumer, debt payments consume 26% of household income vs. only 17% in the U.S. right before the recession.
  • Although a massive crash is unlikely, even a small correction in the over-heated market would affect the Brazilian homebuilders, and we felt that Cyrela was the most exposed.
On the TW long:
  • Taylor Wimpey’s merger in 2007 was probably a decent idea, but was absolutely horrendous timing. Since then, the company has made a ton of improvements and re-focused their business strategy.
  • The UK market will likely be flat over the near future, and Taylor is one of the cheapest homebuilders over there.
  • The valuation gap between TW and its peers should close as the stigma from the merger and recapitalization fade – if housing recovers sooner, there is significantly more upside.

Conclusion

Two more weeks until the first semester ends – it has been insanely busy, but it’s supposed to slow down soon (although my internship search is in full swing!). I hope to get back to more investing and writing after the holidays.

And finally, a big shout-out to my team for putting in a ton of hours and long nights on the presentation.

Disclosure

No positions.

As a student in UNC’s full-time MBA program, I was recently selected to participate in the Cornell MBA Stock Pitch Competition, one of the premier business school investment management events.

I’m happy to announce that our team was voted as a finalist in the competition (a great showing for UNC!), although we ended up losing out to NYU and Wharton in the finals. Some background on the event:

Cornell MBA Stock Pitch Competition

Teams from each school are provided a list of stocks at 11am on Thursday, and 3 powerpoint stock pitches are due by midnight – trust me when I say that it’s a wild 12 hours.

The pitches are then presented on Friday morning in front of portfolio managers at buy-side institutions like Fidelity (the lead sponsor), American Century, and Putnam Investments.

Each pitch is 10 minutes long, with a 5 min Q/A afterwards, and teams can recommend a long, short, or hold on each individual stock.

Our choices:

Every team was required to pitch the same stock in the first round, and then could pick one stock out of the lists for each of the two subsequent rounds.

Round 1: Required – GMCR

Round 2: Advertising – LAMR, CCO, IPG

Round 3: Asset Managers – FII, TROW, LM, WDR

Can anyone guess the stock I ended up pitching?

Although my investment philosophy has been refined over time, my process has always centered on finding businesses that are mispriced in some capacity.

I’ve had the most success among the deep value stocks found in the microcap realm, but I can also appreciate buying great businesses at fair prices – even if those businesses are outside of the normal ‘value investing’ metrics.

Even with this open mindset, I find that some businesses are trading at such high prices that I couldn’t even imagine the possibility of investing there…

Enter Green Mountain Coffee Roasters (GMCR)

GMCR is probably the ultimate anti-value investing stock – the company is selling at a P/E of 70x, has negative free cash flow, heavy insider selling – the list goes on.

At the same time, it is expected to grow 100% in the next year and has been one of the fastest growing companies over the past five. Due to these and many other factors, it is probably one of the most controversial stocks anywhere (outside of maybe NFLX).

To make it even harder, David Einhorn of Greenlight Capital fame just unveiled a scathing 110-page powerpoint presentation on the stock at the recent Value Investing Congress, causing a 40% sell-off in the last month or so.

As a team we decided that we wouldn’t be able to add anything unique or original to Einhorn’s presentation in such a short period of time, and therefore decided to go long GMCR  (I know, I know).

We ended up splitting up the responsibilities so each team member worked on an individual stock, and the GMCR assignment fell to me – which is ironic since the stock is pretty much on the complete opposite end of my normal investment universe.

Anyways, here is what I was able to put together in 12 hours:

Lessons Learned

Although it was very difficult to put myself in the mindset of someone who could be long GMCR, I think it was a great exercise that will improve my overall investing approach. A few lessons from the experience:

  • Buying behavior – how does it apply to a company’s products?
  • Growth dynamics – what combination of factors leads to such explosive growth?
  • Acquisition strategy – can buying up competitors ever be strategic enough to ignore fundamentals?
  • Identifying the opposing rationale – are all alternative viewpoints explained by the investment thesis?
  • Valuation – how to value high-growth companies with little or no cash flow?
  • Investment Thesis – how to synthesize vast amounts of information into the key points within a tight time window?

The greatest investors not only have the fortitude to follow a strategy during difficult times, but the ability to incorporate divergent viewpoints. I want to make sure that I stay open to other investing styles as I develop in my investing career.

Analyzing a stock – especially an extreme case like GMCR – from such an uncomfortable viewpoint provided a great deal of perspective. I hope to carry these lessons into future investment decisions.

Even so, I won’t be buying GMCR anytime soon. :)

Disclosure

No positions.