We hope you have a fun time learning and working through the case studies and problems. Note that we’ve taken your feedback into account from last semester so please continue to leave comments! Without further ado, let’s start!
* Note: All of the content published on this platform is to be used for educational and informational purposes only and without any sort of advice or warranty insinuated. The materials provided are not, and should not be construed as advice or recommendations regarding the securities outlined. Trading of securities may not be suitable for everyone. In conducting such an act, there is potential for large risks including substantial monetary losses. As a student, you are solely responsible for any losses incurred from stock trading and Investing for Charity is in no way liable whatsoever for any risks incurred by you when making financial decisions or undertaking trading or associated activities.
Expectations for this Semester: What do you want to achieve?
- What are your goals?
- Why are you learning about equities?
- How can this program help you?
This semester will be much harder work than last semester.
Given the complexity of the concepts, you will need to commit to the program and learning experience. We will work together with more workshops but note that you get out what you put in. Give everything a go – it doesn’t matter if you make mistakes but it does matter if you have not given your best attempt. We encourage you to explore, discuss and try in this environment. It’s a learning experience for everyone.
We suggest that you write down your goals for this semester before starting the module.
What will we be doing?
A. A stock pitch deck: including your recommendation
You want to tell a story about whether or not it’s worth buying in the current market. Don’t feel compelled to make a buy recommendation.
We have provided a list of 10 listed companies which you can select from in your groups. Note that this selection is on a first in first serve basis. If you have another company you would like, please message a director from the Education Team.
- Telecommunications – Telstra (ASX: TLS)
- Media – Nine Entertainment Company (ASX: NEC)
- Online – Seek Limited (ASX: SEK)
- Online – REA Group (ASX: REA)
- Airlines – Qantas (ASX: QAN)
- Consumer Retail – JB Hi-Fi (ASX: JBH)
- Consumer Retail – Woolworths (ASX: WOW)
- Healthcare – Cochlear (ASX: COH)
- Healthcare – Primary Health Care Limited (ASX: PRY)
- Property – Lendlease Group (ASX: LLC)
B. In-depth initiation report
There are many different types of research reports. When an analyst launches coverage on a stock, they will write an in-depth 101 analysis on everything and anything related to that topic. This is called an initiation report and will be the main focus of this semester’s topic.
As an analogy, it’s the “birth certificate” of the stock under their universe of stock coverage. You will write a similar document that has industry research and data and guides people on this. Watch the video below and check out the examples:
How can you be on top of new information + explore this interest for your career?
A. Read the news EVERY DAY (AFR, SMH, Wall Street Journal) and follow stocks
UNSW Library also has a subscription to AFR. Just search for the Australian Financial Review on UNSW Library and login with your UNSW ID. Link: https://www.library.unsw.edu.au/study/information-resources/newspapers
B. Practice, practice, practice!
Why are we doing this? What do we need to consider before launching?
Overview of professions and finance in the equity market
Introductory video on how to identify a good stock
How the stock market works
The CFA has a Code of Conduct that aim to ‘lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society’.
The code can be found through the link below:
B. Integrity of capital markets
Integrity requires that capital markets are transparent, and
security prices accurately reflect the forces of genuine demand and supply
Information is material if the price of a security would most likely be affected if this information was disclosed publically e.g. earnings and/or revenues, changes in assets or asset quality, legal disputes etc.
D. Duties to clients (see diagram below)
Loyalty, prudence and care- investment actions should be executed for the sole benefit of the client and in a manner that is in the best interest of the client.
Fair dealing- one should deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or
engaging in other professional activities.
Suitability- make a reasonable inquiry into a client’s investment experience, risk and return objectives, and financial constraints prior to making investment recommendations. Determine suitability of an investment based on the client’s objectives and consistency with their existing portfolio.
Performance presentation- in communicating with clients, one must ensure the information they convey is fair and accurate.
Preservation of confidentiality- one must keep current and former client information confidential at all times unless disclosure is required by law.
E. Conflicts of interest
Identify if a conflict exists, disclose all matters that reasonably could be expected to impair your objectivity.
F. Regulation and trends
There is increasing regulatory pressure on the industry as you can see in the news. A recent example can be outlined below and in the following link: http://www.afr.com/business/banking-and-finance/asic-puts-bankers-analysts-on-notice-with-new-guidelines-20170630-gx1wzo
Building the toolkit: Where can we find information?
While you may not understand all of these now or know how to use it in depth, it’s always worth having a quick Google and seeing what it’s used for. Please send some time looking through the list:
- IBISWorld (UNSW subscription) for industry trends
- Mergent online (UNSW subscription)
- Merger Market (no UNSW subscription)
- Factiva (UNSW Subscription)
- Surveys, third party reports
- ABS data
- Consulting reports
- ACCC papers
- Credit rating agencies – also product reports
- Investor relation sections of the website
- Sector specific industry bodies (Eg. SMI = Media specific)
- Bloomberg (UNSW Terminal)
Different information sources also have pros and cons:
Now that we have this information, what do we do with it? How does this relate to company valuations?
SWOT examines the strength, weaknesses, opportunities and threats of a project/business venture. The purpose is to analyse a business venture and break it down in a logical matrix. Ultimately, it aims to answer the question: Should we proceed with this project or not?
With macro, we must answer two key questions:
- What are the major trends affecting the future growth of the industry?
- Will this industry grow faster or slower than average industry growth rates?
Major government trends and issues:
Impacts multiple industries where govt-owned authorities have been major competitors of purchases. Influence can be through legislation, government agencies and administrative regulation. e.g. ACCC
E.G. The demand for international airline travel is highly affected by growth in personal disposable income – ie. As individual’s disposable income increase, their demand for international airline travel increases even faster
Social & Cultural
Demand for more convenience foods, longer shopping hours / online shopping, smaller houses, increased child care and online dating. E.G. Supermarket product ranges offer a range of cultural food choices
Reductions of trade barriers, changing foreign exchange rates, differential labour rates and increased speed, availability and low cost of international communication of new ideas and good practice
- Political trend – Donald Trump’s assumption as the President of the United States impacts the world as America is a political leader for many countries and affects many sectors in global markets. In the trade industry, his leadership is a threat to import/export relationships e.g. US/Mexico and US/China
- Tech – increased mobilisation of all applications (home, video, payments etc). In the banking sector, increasing mobile payment serves an opportunity for many and provides opportunities to draw in greater customer attraction e.g. ANZ’s recent mobile payment has attracted a greater stream of customers which has resulted in greater demand for their products.
Micro trends: Industry trends, risks, pressures (upside / downside)
Threat of New Entrants
Bargaining Power of Suppliers
Power of Substitutes
Intensity of Industry Rivalry
Bargaining Power of Buyers
Total addressable market and market sizing
- How many trucks are there in Sydney?
- How large is the land transportation market in Australia?
- What is the opportunity of a company if they acquire a company in the Australian transportation market?
There are 2 key manners to tackle these types of questions:
A. Top Down Analysis
Captures the economy, broad sector trends and industry conditions. The starting point is to analyse this by population sor by household (ie. large overall numbers) and then work our way down from there. Ideally, the market analysis needs to determine the total addressable, serviceable and obtainable opportunity.
- Understand the total pie of your industry – what is the size?
- Determine which slice of the pie you can access – what is the segment and how much can you access?
B. Bottom Up Analysis
Analyses company specifics rather than from a bird’s eye overview. We start by identifying an individual element of a larger population and roll up the numbers until the appropriate scale is reached. E.g. To find out the sizing of bags lost in an airport, we can conduct market research to determine how many times this happens in one day, multiply by the number of days the airport is open, adjust for weekends and holidays, etc etc.
Market Size = (What one customer will pay) x (How many customers you expect to obtain)
Example: How many iPhones are currently being used in China
- ‘Being used’ likely means ‘in operation’
Step 2: Identify the variables that apply to the problem
- Population of China: ~1.4 billion people
Step 3: Select an approach to use
- Make assumptions regarding the population that could afford iPhones:
- Despite high rates of economic growth in recent years, the majority of the population is low-income and would unlikely be able to afford iPhones
- Given this, perhaps ~20% of the population could afford an iPhone
- Total potential market size = 0.2 x 1.4 billion = 280 million iPhones
- The percentage of the total market that is penetrated:
- Despite several competitive products produced by other brands, China appears to be heavily brand-oriented and brand loyal to Apple
- Therefore, it is reasonable to assume ~20% of this segment is currently using an iPhone
- 0.2 x 280 million = 56 million iPhones currently being used in China
Step 4: follow-up questions
- E.g. are there are more iPhones in operation in the US or in China?
- Google’s advertising revenues over the total online advertising market expenditure
- Facebook’s clicks per month over the total clicks per month of all online social media platforms
- Instagram sign ups over the total social media sign ups per month
Porter’s Value Chain Framework
- Determines activities that we need to be efficient and effective in
- Determines capabilities and gives rise to strength and weaknesses (both tangible and intangible)
- Identifies activities of a company turning raw materials into customer deliverables to help implement and devise business-level strategies (Identifies cost position)
Things to start thinking about
- Company overview- ticker, sector, business description, locations of operations, key financials, key drivers of revenues and expenses
- Industry overview/trends – federal budget, demographic trends, peers/comparables and competitive positioning, distribution and stability of market share
- Investment recommendation– share price performance over time relative to a benchmark/index, current stock price, market capitalisation, target price
- Valuation – multiples, trends over time (historical share price performance) relative to benchmark, gearing, capex (expansionary vs. maintenance), DCF (alternatively P/E or EV/EBITDA or a blended valuation depending on the industry), comparables
- Absolute valuation: derive an asset’s intrinsic value, and generally take the form of discounted cash flow models
- Relative valuation: the value of an asset is compared to the values assessed by the market for similar or comparable assets
- Comparables: although traditional analysis is built on the premise that firms in the same sector are comparable firms, valuation theory would suggest that a comparable firm is one that is similar to the one being analysed in terms of fundamentals.
- Multiples: standardised estimates of price.
- Net income: P/E and variants e.g. PEG
- Operating income and cash flow: EV/EBIT, EV/EBITDA
- Book value:
- Enterprise value/invested capital, firm value/book value of capital
- Selecting a multiple to use? Sector dependant
- Retail: focused on same store sales (turnover) and profit margins. The revenue multiple is most common in this sector.
- Financial services: focus on return on equity. Book equity is often
viewed as a scarce resource, because capital ratios are based upon it. Price-to-book ratios dominate.
- Technology: growth is usually the dominant theme.
- Catalyst arguments– legislative risks, interest rate environment and gearing, revenue growth prospects
- Risks to your view/position
- Potentially negative industry and company developments
- Risks can be operational or financial in nature, or related to regulatory issues or legal proceedings
- Broader market behaviour e.g. flight to quality
- Possible hedging strategies- e.g. short another stock in the same industry if you are recommending going long
- What does the street say? I.e. other broker reports, the media (AFR etc.)
- Risks to your view/position