Presented by: David Anderson December 2007 CSU – Sacramento Institutional Investment Society...

Presented by: David Anderson

December 2007

CSU – SacramentoCSU – Sacramento

Institutional Investment SocietyInstitutional Investment Society

““Picking Stocks for the Picking Stocks for the CSUS Portfolio Challenge”CSUS Portfolio Challenge”

CSUSInstitutional Investment Society

Tonight’s Discussion

Discuss the upcoming portfolio challenge Discuss “stock picking” vs. portfolio management Provide some ideas for where you might start


BS, 1985, Accounting, CSU – Sacramento MBA, 1995, U.C. Berkeley Haas School of Business

Introduction: David J. Anderson

Chevron: 1985-1993 Accounting & FinanceWertheim Schroder: 1994 Equity Research

BofA Securities: 1996-1999 Investment Banking, Debt/LBOOffRoad Capital: 1999-2001 Venture Capital – I Banking

Coopers &Lybrand: 1995-1996 Consulting: Mergers

Palo Alto Investors

•Energy Analyst

•Partner

•Portfolio Manager: Energy Fund

•Director of Research


~$1.5 billion hedge fund Specializes in micro and small cap stocks, and

other inefficient areas of the market Fundamental (vs. technical) research Some venture investing Strategy includes some shorting -

opportunistically, not strategically Buy and Hold: Average holding is two years Concentrated portfolio

Palo Alto Investors


Our Purpose

To make money for our clients by investing for the long-term based on fundamental research


Palo Alto Investors: Investment Team


Energy Team

David Anderson, CFA David Horning, Ph.D., CFA

Michael Enachescu, Ph.D.Peter Hill, Ph.D.Grant Fox


Investment Research Process


Picking stocks for the CSUS Portfolio Challenge

Warning: This is not portfolio management Traditional portfolio management vs. what I do vs. CSUS

Challenge Trying to pick a stock for short term Looking for catalysts What you get out of this process

Not just a portfolio win Able to use your analysis as a basis for discussion with others

Your goal: to learn and internalize what it is like to analyze and understand a company

What you need to be able to do…speak to why you like it: Products, markets, competitors, growth, margins, returns


Picking stocks

Start with something you know or have a passion for Read 10-Q, 10-K, research papers, commentaries Consider creating your own format “1-pager” Understand upside and downside


Picking stocks – A few resources

Company Websites CSUS Library (Standard & Poors, Hoovers, etc.) Edgar database (www.sec.gov) Financial websites (Yahoo, Google,

Moneycentral.msn, Marketwatch, Bloomberg) Statistical Research (Government and Private) Brokerages (Schwab, AG Edwards, Fidelity, and many

boutiques) Blogs Call the company


Understand the “Fundamentals”

Revenue Drivers Try to find something you can “break down” Not necessarily just “growth of x%”

Cost structure (operating leverage) Opportunities for growth Cash flow vs. earnings (need for capital) Return on capital Balance sheet Trading multiples Long-term vs. short term perspective


Revenues Drivers – An Example

Online financial websites only give you the “top line” 10-Q may break down the revenue further Company press releases may give more detail to

understand lines of business Company conference calls give more information Use a spreadsheet to capture what you know Now you have a basis for a forecast


Look at competitors Look at market

conditions Customer

references Meet with

management team

Understand competitivestrategy in light of 5 competitive forces:1) entry of new competitors2) threat of substitutes3) bargaining power of buyers4) bargaining power of suppliers5) rivalry among existing competitors

Qualitative Research


Added 350,000 shares

Built initial position 900,000 shares

Discovery and research

Sold 1.1MM shares


Final Points

Pick your stocks - use any methodology you prefer Put weight behind your best ideas Assess through time whether your thesis is correct Be honest with yourself Good luck!

Presented by: David Anderson December 2007 CSU – Sacramento Institutional Investment Society...

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