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.
- 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.
