Stock Pitches 101

1. Stock Pitches 101 September 2016 Presented by: Blake Klasios

2. Agenda • What is a Stock Pitch? • Types of Analysis • Stock Selection • Formulating an Investment Thesis • Industry and Company Overview • Valuation • Risks and Catalysts McMaster Investment Council

3. I What is a Stock Pitch?

4. What is a Stock Pitch? – Five Components “Pitching a Stock” • A stock pitch is a buy or sell recommendation on the stock of a market listed company • The five components of a stock recommendation are based around the investment thesis • The end goal of a stock pitch is to convince an audience that the company you are pitching is a strong buy/sell McMaster Investment Council

5. II Types of Analysis

6. Types of Analysis – Fundamental vs Technical Fundamental Analysis Technical Analysis • Method of evaluating a security in an attempt to measure intrinsic value • Studying everything which can have an effect on a security’s value: • industry conditions, company financial conditions, and qualitative factors such as management performance. • Study of historical stock prices and market behaviour to identify patterns. • Technical analysts study: • price movements, trading volumes, and # of rising and falling stocks over time looking for patterns. Fundamental Analysis is the method that will be used by the MacIC McMaster Investment Council

7. III Stock Selection

8. Selecting a Stock – Top-down Analysis • Keep up to date with the news (WSJ, NYT, Economist, Financial Post, Globe and Mail) • Read industry reports (Thompson One, Discount Broker) • Identify a upcoming event that may effect the Economy (eg. Donald Trump becoming president) • Create list of companies (use Stock Screener to filter sector) • Read research reports on individual companies (Thompson One, Discount Broker) • Watch BNN interviews on chosen stocks • Understand how company and industry generates revenue • Restraints • Listed on TSX • Mkt Cap > $100M • Must be a “Buy” recommendation • Read company Financial Reports (10-K, 10-Q, analyst calls, investor presentation) • Look for desirable factors (growing sales revenues and earnings, no performance swings, strong FCF and P/E ratio) • Formulate an investment thesis McMaster Investment Council

9. IV Formulating an Investment Thesis

10. Formulating and Investment Thesis – Idea Generation Investment Thesis Foundation • “Beliefs that investors decide to use when determining what investments to purchase or sell, when to take an action and why.” (Investopedia) • A multi-part statement encompassing the concrete reasoning for investing in a company • Rigorous due diligence at the Micro (company) level • Aligning that view with the Macro environment • Understanding overall trade setup Investment Thesis Eg. TransAlta Renewables (RNW) • The market has incorrectly over-emphasized RNWs relationship with the parent company, TA • There is significant upside due to the global shift towards renewable energy and the strong and sustainable growth of RNW through project dropdowns from TA. • Additionally, new liberal government and announced phase out of coal power generation will provide opportunity for RNW to acquire further drop-down assets from TA. Setup Macro Micro Source: Street of Walls McMaster Investment Council

11. Formulating and Investment Thesis – Idea Generation Strong Company Qualities • Revenue growth and earnings potential • Barriers to entry in industry (competition) • Growing/Mature industry • Attractive comps Good Management • High insider ownership • Strong track record • Well respected Setup Macro Micro Monetary Policy Impact • Interest Rate Changes Fiscal Policy Impact • Governmentspending • Spending on goods, services, and capital programs • Tax Changes • Sales tax, income/corporate tax Economic Indicators • Leading: Stock Market, Manufacturing Activity, Housing Starts • Lagging: GDP, Income/Wages, Unemployment, Inflation, Currency Strength, Interest Rates The Trade – “State of Play” • How has the company performed leading up to catalyst? (before making trade) • How crowded is the trade? • Liquidity, volume, analyst coverage • Is the general public bullish or bearish on this stock? • How much of the portfolio do you recommend allocating to this trade? • At what price? Source: Street of Walls, Canadian Securities Course McMaster Investment Council

12. V Industry & Company Overview

13. Industry & Company Overview – Components Industry Overview Company Overview • Key industry terms • Industry snapshot • Revenue • Annual revenue growth • Market size • Industry trends • Competitive positioning • Porters 5 Forces • Supply chain analysis • Explanation of revenue generating activities • Company historical share price performance • 1 year, 3 years, 5 years, since inception • Highlight major events • Company summary • Business model • Business segments • Management • Company snapshot • Ticker and Stock Price • Market Cap • Revenue • Geographic breakdown McMaster Investment Council

14. VI Valuation

15. Valuation – DCF Analysis Discounted Cash Flow (DCF) Analysis Concept: The value of a company is the present value of its future cash flows Discount and Sum Forecasted FCF year 1/(1+WACC) + Forecasted FCF year 2/(1+WACC)… Equity Value Add the discounted FCF to discounted terminal value to give us Enterprise Value (includes debt) then determine Equity Value • WACC=WERE+WDRDat • WE=E/V, RE=Rf + Beta * (RM-Rf) • WD=E/V,RDat= (Interest on Debt/Total Debt) * (1- TC) Terminal Value = Final Year FCF * (1+2%)/ (WACC – 2%) • Terminal Value • Assume the company operates indefinitely and FCF continue to grow (a conservative number would be 2% as that shadows the average annual Canadian GDP Growth rate Equity Value = Enterprise Value – Debt – Preferred Stock – Non controlling interest + Cash and Cash Equivalents McMaster Investment Council

16. Valuation – Comps Analysis Comparable Company Analysis Canadian Renewable Power Industry (Target peer group) Canadian Power Industry (Broader Industry) McMaster Investment Council

17. VII Risks & Catalysts

18. Industry & Company Overview – Components Risks Catalysts • Potential reasons why the investment thesis may not take shape • Select three or four realistic risks (one for each part of the investment thesis: Micro, Macro, Set-up) • Include a Mitigant for each risk • Things that alleviate the concern for the risk affecting the overall investment thesis • Events expected to materialize in the near future that support the investment thesis • Select three or four realistic catalysts (one for each part of the investment thesis: Micro, Macro, Set-up) that support the investment thesis Eg. TransAlta Renewables (RNW) C: Additional drop-down projects from patent company that will enable company to generate additional revenue C: New liberal government support of renewable energy generationwill provide RNW with cash incentives and consistent project flow C: Upcoming earnings release expected to show TA commitment for grow RNW in the future Eg. TransAlta Renewables (RNW) R: Contractual (PPA) risk with third parties M: Majority of PPAs are with parent company and other reputable companies R: Risk of inconsistent income M: Operates in areas with consistent wind data, diversifies energy mix R: Highly regulated industry M: Able to adapt to new regulations and will benefit from shift to renewables McMaster Investment Council

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