Friday October 18th, 2013

Lafayette College Investment Club

Meeting Agenda

• Important Events Coming Up

• Daniel Kilmurray 75’ – UBS Managing Director Institutional Equity Sales (speaking next Friday October 25th)

• 1) Market Update

• 2) BUY/SELL (Continuing Allocation)

• 3) How to follow up post-finance night

Market UpdateMarket Update10/18/2013 10/18/2013

Chris BusuttilChris Busuttil

Debt Deal Debt Deal

• Senate voted 81-18 to reopen the government Senate voted 81-18 to reopen the government through January 15, suspending debt ceiling to through January 15, suspending debt ceiling to February 7 (House followed suit) February 7 (House followed suit)

• Over the past six presidential administrations Over the past six presidential administrations the debt ceiling has been raised 45 times, 37 of the debt ceiling has been raised 45 times, 37 of which occurred when debt levels reached 98% which occurred when debt levels reached 98% or higheror higher

• Viewed as Republican loss in regard to Viewed as Republican loss in regard to curbing Affordable Healthcare Act curbing Affordable Healthcare Act

Debt Deal Debt Deal • ““To the conservative rebels who brought on a government crisis their To the conservative rebels who brought on a government crisis their

party’s elders never wanted the point is simple: They wanted to demonstrate party’s elders never wanted the point is simple: They wanted to demonstrate that they don’t simply oppose President Barack Obama’s signature health-that they don’t simply oppose President Barack Obama’s signature health-care program, but find it so philosophically objectionable that they will fight care program, but find it so philosophically objectionable that they will fight it at every turn.” -Gerald F. Seithit at every turn.” -Gerald F. Seith

SAC Insider TradingSAC Insider Trading• Have agreed in principle on a penalty exceeding $1 billion in a Have agreed in principle on a penalty exceeding $1 billion in a

potential criminal settlement that would be the largest ever for potential criminal settlement that would be the largest ever for an insider-trading casean insider-trading case

• On top of $616 million penalty the firm agreed to in a civil On top of $616 million penalty the firm agreed to in a civil insider-trading settlement with the Securities and Exchange insider-trading settlement with the Securities and Exchange Commission in March.Commission in March.

• Total payments hovering around $2 billion in total paymentsTotal payments hovering around $2 billion in total payments

• To be clear, this is the company is at fault, there are no specific To be clear, this is the company is at fault, there are no specific employees that are being accused in this particular case employees that are being accused in this particular case

No Pay day at GoldmanNo Pay day at Goldman• The New York bank reported a steep drop in fixed-income trading The New York bank reported a steep drop in fixed-income trading

revenue for the third quarter, leading to a 20% tumble in overall revenue revenue for the third quarter, leading to a 20% tumble in overall revenue from a year earlier.from a year earlier.

• Goldman helped counter those shortfalls by reducing the amount it set Goldman helped counter those shortfalls by reducing the amount it set aside for compensation. That left Goldman's employee pay and benefits aside for compensation. That left Goldman's employee pay and benefits costs at 41% of revenue, its lowest compensation ratio through the first costs at 41% of revenue, its lowest compensation ratio through the first nine months of a calendar since the company went public in 1999.nine months of a calendar since the company went public in 1999.

• All told, Goldman has allocated about $320,000 in compensation and All told, Goldman has allocated about $320,000 in compensation and benefits per employee for the first nine months of the year, down from benefits per employee for the first nine months of the year, down from $336,000 in the same period a year earlier.$336,000 in the same period a year earlier.

• Goldman isn't the only bank to suffer from the fixed-income slump, Goldman isn't the only bank to suffer from the fixed-income slump, though its decline was steeper than rivals, such as, J.P. Morgan, though its decline was steeper than rivals, such as, J.P. Morgan, CitigroupCitigroup and Bank of America. and Bank of America.

Earnings CallsEarnings Calls

• Blackrock rose 14% as its assets under management Blackrock rose 14% as its assets under management climbed above $4 trillion dollars climbed above $4 trillion dollars

• Bank of America posted solid third quarter earnings on a Bank of America posted solid third quarter earnings on a pickup in loan demandpickup in loan demand

• IBM reported its sixth straight quarterly revenue decline IBM reported its sixth straight quarterly revenue decline but earnings rose 6% but earnings rose 6%

• UnitedHealth GroupUnitedHealth Group, dropped after matching , dropped after matching forecasts on earnings but falling shy on revenue.forecasts on earnings but falling shy on revenue.

• Verizon gained on subscription growth and Ebay Verizon gained on subscription growth and Ebay missed targets and painted a negative outlook going missed targets and painted a negative outlook going forwardforward

Economy Economy

• The S&P 500 pushed to a record high of 1733.15, as investors turned their The S&P 500 pushed to a record high of 1733.15, as investors turned their focus away from the averted government-funding crisis and began wrestling focus away from the averted government-funding crisis and began wrestling with corporate-earnings reports with corporate-earnings reports

• Among developed countries, the proportion of the unemployed who have Among developed countries, the proportion of the unemployed who have been without work for 12 months or longer continued to rise in the second been without work for 12 months or longer continued to rise in the second quarter to reach the highest rate since 2008, 8%. Comprising 35.3% of the quarter to reach the highest rate since 2008, 8%. Comprising 35.3% of the total number of unemployed workers. total number of unemployed workers.

• The U.S. economy expanded at a “modest to moderate” pace in recent The U.S. economy expanded at a “modest to moderate” pace in recent months, through uncertainty from fiscal deadlock was felt throughout the months, through uncertainty from fiscal deadlock was felt throughout the country, according to the Fed’s survey of regional economic conditions country, according to the Fed’s survey of regional economic conditions

– Central bank’s “beige book” report, released Wednesday, found eight of Central bank’s “beige book” report, released Wednesday, found eight of twelve districts reporting steady growth rates from the summer and four twelve districts reporting steady growth rates from the summer and four districts indicated slower expansiondistricts indicated slower expansion

Restructuring Initiative Restructuring Initiative

UnitedHealth Group (UNH)• Currently trading at $75.19 and we have 100 shares• We have made money on this stock (bought at mid-50s) but there is a lot of room for it to grow• Why will this stock continue to grow?

•For two straight quarters they have predicted low numbers and crushed them out of the ballpark, raising their price. They have predicted low earnings again for this quarter• UNH is going to out price the Obamacare exchanges.

• This means that any person buying insurance that has government subsidized pricing will receive coverage from a smaller carrier, not UNH (or Cigna, BlueCross BlueShield etc.)• UNH has the largest share of the insurance market, and will continue to cater toward mid-to-large sized corporations, they don’t need Obamacare to continue to turn profit (which they have predicted to be small…)

• Downsides• The average investor does not trust this stock because of healthcare uncertainty in the U.S.• In the next 10 years, they may lose some of their market share due to Obamacare exchange companies increasing revenue

• RECOMMENDATION: Buy 150 shares at current price

Sell: Hewlett Packard

• PC business revenues are slowing down

• Printing is only 20% of revenues

• Thin margins (-1.13%) against competitors (11%)

• Debt/Equity 99 – insolvency issue

Baidu, Inc. (BIDU)

Buy 30 more shares (~1%)

Have 30 shares (~1%)

Total: 60 shares ~ 2%

George Rakic

What is Baidu?

Chinese Google

Sector/ Industry

• Sector: Tech

• Industry: Internet Information Providers

How is it actually doing against competitors?

• In China, it is dominant (~60% market share)

• Baidu’s search algorithm works well with Chinese language, Google’s doesn’t

• Google’s play with NSA isn’t too good in East Asia

Baidu Vs Google

Baidu Google

Trailing P/E 31.41 25.98

Forward P/E 23.96 17.59

PEG 1.42 1.36

EPS 4.78 34.57

Valuation metrics

CYS

• SELL all CYS• CYS Investments, Inc., a specialty finance company, invests in residential

mortgage pass-through certificates in the United States.

• Not sure if investing in REITs is the best thing at this time (mortgage market slow, people aren’t buying first time houses)

• Large amount of debt

• Total Cash: 376.37M, Total Debt: 13.86B, Total Debt/Equity: 680.70

• Operating Cash Flow: -4.67B

• Bottom Line: Bad fundamentals and bad market timing

CSCO (currently trading at $22.66)

• Cisco Systems, Inc. designs, manufactures, and sells Internet protocol (IP) based networking and other products related to the communications and information technology industries worldwide

• Market cap: 121.39B

• PEG ratio: 1.20, Price/Sale: 2.54, Price/Book: 2.10

• Revenue: 48.61B, Revenue per share: 9.12, Diluted EPS: 1.86

• Total Cash: 50.61B, Total Debt: 16.21B, Current Ratio: 2.95

• Operating Cash Flow: 12.89B, Forward Annual Dividend Yield: 2.90%

• Competitors: ALU, HPQ, JNPR

• Largest market cap, highest gross margin, EBITDA, Net income, EPS of competitors

• Suggest buying until 2% portfolio allocation is met

• BUY 83 shares @ $22.66 (around $1,890.62).

• Bottom Line: strong market share in industry and solid fundamentals

MDT- Medtronic

• Medtronic, Inc. manufactures and sells device-based medical therapies worldwide.

• Stock is still fundamentally cheap to its competitors

• 14 times Earnings (P/E)

• 10 times EBITDA (EV/EBITDA)

• Comps trade at a much higher premium

• High return on equity and strong margins

• 10 percent revenue growth, guidance forward is strong

• Currently entering new markets and stealing market share

• Unique and diverse portfolio unlike any other company in the industry, positions well to pricing wars

• History of rewarding shareholders with dividends (strong management)

Following up after Finance Night

How to effectively stay in front of people

Being Thoughtful

• The time frame in which you follow up with alumni should be as soon as possible

• Three Things To Remember when following up:

• 1) Be polite obviously but don’t sound robotic

• 2) Mention something you talked about i.e. golf or football, so they actually know who you are (believe me they don’t)

• 3) Thank them for their time be assertive with what you want (advice, help with an internship), but know what you want before you ask for help

What happens when you receive no answer?

• The honest truth, the average guy in finance probably receives over 400 emails a day, don’t be offended if they don’t answer within a day or two.

• There's a realistic time frame in which a second follow-up email should be written but that should be a week or longer.

• They want to help you so don’t annoy them, fastest track to the trash bin.

Be Prepared To Call

• Everyone respects a good communicator, strong communication skills are required to be successful in any financial services role.

• Be prepared to schedule a phone call, have a few notes on what you want to say, but show the person that you are a normal guy.

• No one likes a robot

• This may sound simple, but an email takes 15 seconds, a phone call is meaningful.

LEVERAGE, LEVERAGE, LEVERAGE

• USE YOUR CONNECTIONS

• If you build a connection with someone, use it as leverage to get an in.

• Don’t be afraid to use your relationships and connections, also people are more likely to trust you and give you a shot if they are familiar with you.

• Relationship development is huge on the street, it is an essential skill.

KEY MISTAKES MADE

• 1) Sending the same email just changing the name

• 2) Being annoying and rude

• 3) Not knowing what you actually want (Which is normal however, make sure you know what you are talking about)

• 4) RESUME BOMBING DOESN’T WORK

Conclusion

• Be thoughtful with your approach, mention your conversation that you had, something unique.

• Make sure you have a plan or objective behind the email, just saying hello (this is someone you want to hire you not your buddy).

• Finally, be aggressive, don’t give up, don’t get too discouraged, remain calm and continue to seek out options.