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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.

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9 Responses so far

  1. eclecticvalue says:

    Did you get to pitch any of the advertising companies? I have been looking at them myself and I do find them cheap but they have a lot of debt. Interestingly Mason Hawkins has a position in LAMR.

    • asues says:

      We pitched LAMR and actually picked it as a short. I helped out in some of the research, but spent the majority of the time focused on GMCR. My notes are below.

      Our short thesis was driven by a few factors:
      – Continued weakness in small business sentiment, a core focus on LAMR
      – Management took on significant debt for acquisitions during the boom years which hasnt translated to revenue growth (meaning negative organic growth)
      – Translated into negative earnings for the past several years, and negative operating metrics such as ROE, ROA, and ROIC
      – Business does throw off lots of FCF, but management has spent it on acquisitions (FCF is negative after acquisitions)
      – Putting cash into digital billboard strategy and economics don’t seem that attractive (300k to build an electronic one vs. 25k for traditional)
      – Management compensation has increased from 700k per year to 2.5m per year despite the fact that the business is losing money

      Hope that helps.

      • eclecticvalue says:

        Thank you, definitely was useful. It helped me confirm that it isn’t a good company at the moment. Although I am looking at IPG and looks good and yes it is overlevered but they seem to pay off debt at a faster rate. The FCF is going towards that. It must have sucked to have presented GMCR I sure would not touch it at all.

  2. adib says:

    Which asset manager did you pick?

    • asues says:

      We ended up shorting Federated Investors (FII). Majority of their business/revenue is from money market accounts, which are basically costing the company money due to the low interest rate environment and fee waivers. So more customers = more fee waivers = more lost revenue. They also have a decent amount of exposure to Europe – increasing risk for a few measly basis points. In addition, their equity performance hasn’t been the best, so if the economy picks up and interest rates improve, investors will likely seek equity yields elsewhere.

      It was a tough pick – asset managers were hard in general. I didn’t do the research on FII, so I don’t have too much of the background.

  3. Ziv says:

    Hi Adam,

    Thanks for another wonderful post. I’ve become addicted to your blog over the last year.

    I just wanted to ask how did you do the forecasts for the DCF calculations. I haven’t checked, but it doesn’t look like a straight line forecast (or is it?). I just find it weird that you was able to find value even though the actual FCF was negative.

    By the way, didn’t your head scream: “Where is my margin of safety?!” while doing that excel sheet?

    • asues says:

      Ziv,

      Thanks for the vote of confidence!

      For the forecasts, I basically used analysts revenue projections for the next several years, then best guesses for the 4th and 5th years. It’s definitely a science, but the analyst projections were mainly based on growth in k-cup revenue as more and more keurig machines saturate the market. The FCF is negative for the first few years, but the model (and I think the company’s plan) is to be able to severely pullback capex and working capital needs once the big push is over…that’s certainly a big IF and obviously the latest earnings report shows how brittle the stock can be…as I mentioned in my post, it was a good exercise but I definitely could never bring myself to invest in such a stock, regardless of how the story ends up panning out..

      Marketfolly is the best place for HF manager investor presentations. Here is the link to GMCR:
      http://www.marketfolly.com/2011/10/david-einhorn-short-green-mountain.html

  4. Ziv says:

    Oh! I almost forgot.

    How did you find the David Einhorn presentation? just a regular Google search?

    Thanks,

    Ziv

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