Guide to Pitching a Stock Joseph S. Burkhart David M. Khtikian

1. Guide to Pitching a Stock Joseph S. Burkhart David M. Khtikian This tutorial was prepared as a final project for Advanced MC on 12/6/04

2. Overview Get in the Game! If you see something in this presentation underlined in blue text, please click on it for further information and links • Generating an Idea • Gathering Research • Developing a Thesis • Pitching your Idea

3. Idea Generation Ways to find a stock/company to analyze: • Articles, media, search engines, or a company/product that sparks your interest • For links to sources, see Appendix A • A company that you are familiar with • Previous employer, client, etc. • Keep it simple! • Choose an easily understandable business with a simple product line • I.E. if you pick a tech company, you should understand what they do, why it is useful, and how they do it. This isn’t always easy • Two Approaches: Top Down v. Bottom Up Generating an Idea

4. Company Filings/Releases • Preparation Tips • Read SEC filings (10-K, 10-Q and Proxy) • Read the most recent Annual Report • Focus on the letter from the CEO and future goals • Does this company appear to be moving in the right direction? • Read through recent press releases • Read/Listen to recent earning’s call • GOAL: Try to gain an understanding of the main drivers of the company’s business model • Focus on revenue stability, real cash flow, operational risks, customer risks, supplier issues, corporate governance and accounting assumptions Gathering Research

5. How to Find Company Filings Company filings can be found on most company websites or also through the Darden Library Link Gathering Research

6. How to Find Company Filings • Available ResourcesThrough Darden Library • EdgarScan: pulls filings from the SEC's servers and parses them automatically to find key financial tables and normalize financials to a common format that is comparable across companies. Using hyperlinks, users can go directly to specific sections of the filing, including the financial statements, footnotes, extracted financial data and computed ratios. • SEC Info: allows users to search the SEC's EDGAR and the CSA's (Canadian Securities Administrators) SEDAR databases. Filings can be searched by company name, industry, topic, SIC code, zip code, area code, and more. Users can also browse filings by tape and by type. • 10K Wizard: boasts expanded coverage and advanced search capabilities of the SEC database with real-time access and the unique ability to perform keyword searches on up-to-the-minute SEC filings. Gathering Research

7. Sell-Side Research • Where to find it: • Darden Library Online has access to Investext Plus • See Appendix Bfor a “How to” on accessing Investext • What to use it for: • What are Wall Street Analyststhinking about this stock? • What is common across all analysts and where is there disparity? • Pro-Forma Financial Projections • Industry Information • Growth rates, market share, organic growth v. growth through acquisition • What NOT to use it for: • Buy/Sell Recommendation or Price Targets • You need to form your OWN opinion on the stock Gathering Research

8. Industry Analysis Apply Porter’s 5 Forcesto your company • Rivalry • Threat of Substitutes • Buyer Power • Supplier Power • Barriers to Entry Other Questions to Ask: • What has transpired in the industry over the years? • Has this industry been growing/shrinking? • Who are the key players in the industry? • Has there been consolidation in recent years? Use 10-K/10-Qs and Sell-Side research to find this information Gathering Research

9. Competitors Within Industry Comparing the market valuations for a company’s competitors is an important step in understanding the market’s valuation of the stock being pitched Start with Yahoo! Finance Click on “Competitors” Gathering Research

10. Competitors Within Industry • Concepts • Figure out the set of “best” competitors • When looking at competitors, why are the multiples “rich” or “cheap” compared to others? • Is there a good reason for the disconnect? • Look at key metrics for comparison • Sales growth, gross margin, debt ratios, ROE, ROA, ROIC, CapEx spending, earnings multiple, dividend yield • Compare Multiples versus the comps • Which are most applicable for the industry/company? • Forward Multiples are more useful • Price/Earnings, Price/EBITDA, Price/Sales • Refer to . . . http://www.cityu.edu.hk/lib/instruct/guides/tutorial/cpstat.htm for Compustat Tutorial Gathering Research

11. Developing a Strong Thesis • Once you have compiled all of the research, develop your thesis by answering some of the following questions: • Is there value or growth potential in the sector? • How does the company compare to its competitors? • Keep the story simple and understandable as to why the fund should BUY, HOLD, or SELL the security • Does it pass the “grandmother test”? • You should be able to explain the story of the investment to anyone in a short amount of time and have it make sense • Things to include: • Why is it a good company/story and why is NOW the time to BUY or SELL it? • What is the disconnect between your valuation and where the market is currently pricing it? • What catalysts or events need to occur for this stock to be re-priced by the market? Developing a Thesis

12. Reaching a Price Target • Two most common types of valuation for price target: • Relative Valuation - multiple analysis • Discounted Cash Flow Analysis (DCF) • Link to examples and explanations of both types of valuation • Multiple Analysis • Apply an estimated forward multiple to the current share price • Idea is that either the EPS will grow more than the market expects or that the market will realize the value of the company and pay a higher price for the stock • DCF • Discounting the projected free-cash flows that the company will generate in the future • This requires preparation of a Pro-Forma income statement and balance sheet for the company • Learned in FY Finance and in link above Developing a Thesis

13. The Written Pitch • Purpose of written pitch is to summarize analysis and to provide a framework to support your investment thesis • Three important elements to consider when preparing your written stock pitch • Knowing your purpose • Using the “Motivated Sequence” to effectively persuade • Standardizing the approach Source: Darden Technical Note – Persuasive Correspondence (The Motivated Sequence) Pitching Your Idea

14. The Written Pitch Knowing Your Purpose • Goal is convince and persuade the fund managers to BUY or SELL the stock that you are pitching • Questions to think about: • What is your level of credibility and how will the written pitch enhance it? • How can the information and analysis you performed be presented to best convince the fund managers to concur with your thesis? Pitching Your Idea

15. The Written Pitch Using the Motivated Sequence • Attention Step – Capture interest by summarizing recommendation and stating investment thesis • Need Step – Outline the specifics of the investment thesis and support with data • Satisfaction Step – Counter any investment concerns with mitigants • Visualization Step – How will the fund benefit from the investment • Action Step – Summarize final investment recommendation for the reader Source: Darden Technical Note – Persuasive Correspondence (The Motivated Sequence) Pitching Your Idea

16. The Written Pitch Standardizing the Approach • Use previous DCM pitches as an outline for your pitch Pitching Your Idea

17. The Oral Pitch • Do not underestimate the importance of the oral presentation • Hard work and a detailed analysis will not be impactful without a clear and well thought out presentation • Three important elements to consider when preparing to present your oral stock pitch • Knowing your purpose • Understanding your audience • Selecting an appropriate message structure strategy Source: Darden Technical Note – Thinking Strategically About Communication Pitching Your Idea

18. The Oral Pitch Knowing Your Purpose • Goal is convince and persuade the fund managers to BUY or SELL the stock that you are pitching Source: Darden Technical Note – Thinking Strategically About Communication Pitching Your Idea

19. The Oral Pitch Understanding Your Audience • Your audience is the fund managers who you are trying to persuade • Tailor your pitch toward your audience’s needs and interests • How does this security fit into the overall portfolio and the investment approach • Do not try to pitch a large cap stock to a small cap fund or a value stock to a growth fund • Accentuate the factors of the company that are most important to the managers • Think about the manager’s concerns - this will help you to prepare for questions that will arise during and after your pitch Source: Darden Technical Note – Thinking Strategically About Communication Pitching Your Idea

20. The Oral Pitch Selecting an Appropriate Message Structure Strategy • Direct Approach: State the recommendation (BUY/SELL) first and then support that recommendation throughout the pitch • Preferred approach because it emphasizes the result • Indirect Approach: Provide the support first and build to the recommendation • This is NOT effective in this forum as the audience needs to know your position on the security • Communicate to PERSUADE, Not to Inform: Realize that you are convincing the managers to purchase your security. Do not just give them the information regarding the company. Persuade them to buy it by showing them the potential benefits. Source: Darden Technical Note – Thinking Strategically About Communication Pitching Your Idea

21. Appendix A – Idea Sources • Wall Street Journal • Bloomberg Columnists -www.bloomberg.com/news/commentary/columnists.html • Barron’s Online – www.barrons.com • Bloomberg’s Equity Search Function • Login to Terminal in the Library’s Capital Markets Room • Type in {QSRC} and hit the GO key • Create a new search based on your own constraints • Search by industry, size, multiples, etc. • Industry Specific Magazines or Websites Return to Idea Generation

22. Appendix B – Investext 1) Select “Company/Industry Information” from the Darden Library Homepage

23. Appendix B – Investext 2) Select “Analysts’ / Market Research Reports”

24. Appendix B – Investext 3) Select “Investext Plus”

25. Appendix B – Investext 4) Select “Access Investext Plus Now”

26. Appendix B – Investext 5) Click “Proceed” and then enter ticker of Security Return to Sell Side Research Slide