2020-2021 INVESTMENT COMMITTEE - WORKSHOP 3 - THESIS DEVELOPMENT - MCGILL INVESTMENT CLUB
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2020-2021 Investment Committee Workshop 3 – Thesis Development mcgillinvestment.club
Agenda I. What Is An Investment Thesis? II. How To Come Up With A Thesis III. Investment Thesis Example IV. Thesis Development Exercise V. Due Diligence VI. To-Do For Next Session McGill Investment Club 2
What Is An Investment Thesis? Section I
Investment Thesis Introduction
What is an Investment Thesis?
“A reasoned argument for a particular investment strategy, backed up by
research and analysis”
Intrinsic value based What do we think the company is worth?
on our view
Stock price
What is the market missing?
Current price based on
market view
What is the company’s commonly perceived worth?
A strong investment thesis answers the question:
“Why do we think the share price should be trading at a higher price than it is now?
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Risks & Catalysts of an Investment Thesis
What are Risks?
▪ Factors that would bring down the common perception of the value of
the company
Intrinsic value based ▪ Are crucial to investment theses because:
on our view − They can be the cause of the current differential between
perceived and intrinsic value.
− Risk factors can prevent the stock price from reaching its
intrinsic value.
Stock price
Catalysts
Risks
What are Catalysts?
▪ Factors and events that would increase the common perception of the
value of the company.
▪ Are crucial to investment theses because:
− Misunderstanding and/or underestimation of catalysts can be
central to strong theses.
Current price based on − Without a strong catalyst, a stock’s price may not move towards
market view its intrinsic value.
Stock prices move due to news related to the company, these can either be risk or catalysts
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How To Come Up With A Thesis Section II
Universe of Investing Strategies
Expensive
Bad Company, Expensive Price Good Company, Expensive Price
▪ “Pump and dump” stocks ▪ Well-know ‘safe’ companies
▪ Companies that are overhyped ▪ Popular companies with good business models
Most likely a ‘get rich quick’ scheme A safer bet but with limited upside
Share Price
Bad Company, Cheap Price Good Company, Cheap Price
▪ Distressed companies ▪ Overlooked companies with strong fundamentals
▪ Companies in their declining stage ▪ “Not-so-sexy” businesses with good financials
Cheap
A gamble with high payoffs and losses High potential investment with limited risk
Low Company Quality High
A good business does not equate a good investment!
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How to Earn Outsized Returns
Consensus (Agree with Crowd) Non-Consensus (Against the Crowd)
Right
You don’t make money You make money
Wrong
You don’t make money You don’t make money
If making money was so easy, everybody would do it right?
McGill Investment Club 8Common Ways to Develop an Investment Thesis
Exploiting Alpha-Generating Strategies
Source of Mispricing Exploiting Strategy Examples
Value Investing Bombardier (BBD) traded at a discount after funding
Over & Under Invest in companies that appear to be overly punished due issues pushed back the debut of its flagship C-Series
Reactions to: recent negative headlines, slowing growth, or poor aircraft. Shares bounced back after the provincial
execution government purchased a stake in the program
Growth Investing Boingo (WIFI), a company specializing in mobile internet
Over & Under Invest in companies experiencing a period of high growth technology, saw 20-30% revenue growth in the past 4
Reactions due to: initial under-reaction to a catalyst materializing, quarters, but it jumped to 50% once the company became
disruptive technologies, increased profitability profitable
Apple (AAPL) was trading at similar multiples to other
Quality Investing
technology companies at the start of the decade while
Timing Invest in companies that are higher quality than their peers,
offering a more sticky customer base that was ready to
but trade at similar multiples
purchase products at a brand-based premium
Special Situations
Invest in companies going through structural changes PayPal (PYPL) was famously spun-off by eBay in 2015,
Timing (spin-offs, M&A, restructuring, etc.) or any event that may only to reach ~3x its spin-off value today
affect short-term prospects (shareholder activism)
Markets are not always fully rationale and can exaggerate or ignore news
McGill Investment Club 9Thesis Development
Steps to Developing an Investment Thesis
Step 1: Sourcing
A Have A Clear Idea Of Your Industry’s Subsector
Learn about your
industry
B Understand Value Drivers of Each Subsector (industry overview
presentation)
C Map Out Potential Business Model Differences, Competitors
Step 2: Market Analysis
A Analyze Street’s Thoughts
Form your opinion on
B Look At Recent Industry Trends and Stock Price Movements certain stocks /
industry trends
C Compare Valuations of Different Companies
Step 3: Thesis Structure
Present your
A Compare Valuations of Different Companies investment idea in a
thesis
McGill Investment Club 10Investment Thesis Example Section III
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Thesis Development Exercise Section IV
Are These Investment Theses Good or Bad?
G Good O Okay B Bad
? 1 Emerging markets will drive growth of revenue
? 2 Earnings are expected to double this next quarter
? 3 The market overestimates the company’s debt load and underestimates its ability to repay it
? 4 Statistical analyses show …. (r-sqrd larger than 0.9)
? 5 Profit margins of company X are much higher than its competitors
? 6 A friend who works for the company told me….
? 7 The market is clumping in the company with the wrong subsegment leading to a lower multiple
? 8 Capital structure is not optimal
? 9 Investors underestimate the company’s total addressable market in the near future
? 10 The market is mispricing the effect of a loss in a lawsuit
? 11 Investment into a new product line with higher margins will lead to margin expansion
? 12 Future regulatory change will help the company
McGill Investment Club 18Are These Investment Theses Good or Bad?
G Good O Okay B Bad
B 1 Emerging markets will drive growth of revenue
B 2 Earnings are expected to double this next quarter
G 3 The market overestimates the company’s debt load and underestimates its ability to repay it
O 4 Statistical analyses show …. (r-sqrd larger than 0.9)
B 5 Profit margins of company X are much higher than its competitors
I 6 A friend who works for the company told me…. ILLEGAL! You will go to prison!
G 7 The market is clumping in the company with the wrong subsegment leading to a lower multiple
O 8 Capital structure is not optimal
G 9 Investors underestimate the company’s total addressable market in the near future
G 10 The market is mispricing the effect of a loss in a lawsuit
O 11 Investment into a new product line with higher margins will lead to margin expansion
B 12 Future regulatory change will help the company
McGill Investment Club 19Due Diligence Section V
Some Questions To Ask Yourself…
Key Questions to Test Your Investment Thesis
▪ What is the market missing?
▪ Why does the market not agree with my point of view right now?
▪ What will make the market change its views to realize my investment thesis?
▪ What are the downside scenarios if my investment thesis is not right?
▪ What are some counter-arguments towards my investment thesis?
− Every argument has 2 sides to debate from
− Ask your friends why your investment thesis might not make sense
How to Back Up Your Investment Thesis Argument
▪ Use numbers to back up your arguments
− Discounted Cash Flow analysis
− Comparables analysis
− Market projections (EPS, growth rate, margin) vs. Your own projections
▪ Precedent examples or case studies
− Examples where something similar happened in the past
− Use company-specific history to show patterns that the market is missing
Investment theses should be challenged, or else they wouldn’t be a thesis
McGill Investment Club 21To-Do For Next Session Section VI
Homework!
1. Finish working on your industry overviews
2. Submit your industry overview slides before next session
3. Start thinking about what kind of investment theses can be interesting for
companies in your industry
McGill Investment Club 23Q&A
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