Undergraduate Student Managed Fund Fall 2017 Portfolio Report Team Gilson SMF Team Gilson UConn Student Managed Fund Team Gilson 1
Introduction Co-Lead Managers: Jack Leyland & Alex Barriga Portfolio Manager: Shawn McAuley Communications Manager: Anthony Mottolese Digital Media Manager: Ana Walas Max Janik Michael Pehota Jonathan Stryjek Bartosz Walas Joshua Weist SMF Team Gilson UConn Student Managed Fund Team Gilson 2
Agenda Investment Strategy and Risk Management Economic Overview Portfolio Overview & Performance Individual Holdings Future Outlook SMF Team Gilson UConn Student Managed Fund Team Gilson 3
Investment Strategy Objective Our objective is to construct a portfolio that will deliver the foundation returns in excess of the S&P 500 Index over a 10-year investment horizon, while maintaining a conservative risk profile. Philosophy As value investors, we seek to identify securities priced at a discount to their intrinsic value in the market. We pay special attention to taking our position at a cost basis that provides us with the most favorable margin of safety. Approach Our managers employ a bottom-up style approach to identifying investment opportunities, with a focus on rigorous fundamental analysis of company financials, industry trends, macroeconomic conditions and risk factors. We make use of a variety of valuation methodologies in our process, including the DCF, DDM, and market multiples approaches, among others. SMF Team Gilson UConn Student Managed Fund Team Gilson 4
What do we look for? Characteristics In addition to those characteristics, our most critical evaluation factors are meaningful competitive advantages such as: Return on Invested Capital Portfolio Average: 18.86% High Barriers to Entry Innovation Free Cash Flow Yield Portfolio Average: 6.19% Dividend Yield & Safety Portfolio Average: 2.39% Margin of Safety Brand Leadership Market Share Strength Portfolio Average: 18.33% Responsible Debt Levels Debt/Cash: 3.3x , Debt/EBITDA: 1.93x SMF Team Gilson UConn Student Managed Fund Team Gilson 5
Investment Process Highlights & Risk Management Allocation Strategy Purchasing Strategy We decide on allocations for each position based on the Limit Orders Market Orders following factors: • High point of 52-week range • Low volatility names • Potential Upside • Historically volatile securities • Low perceived downside • Safety • Significant short term price • Large Market Cap • Team Consensus increases Our allocations range from 4% to 6% Risk Management Strategy Diversification Loss Protection Invest across the major sectors. 15% stop loss orders for all positions. Due Diligence Margin of Safety Perform rigorous analysis of all proposed Pay close attention to cost basis, and invest investments. only in positions with a margin of safety. SMF Team Gilson UConn Student Managed Fund Team Gilson 6
ECONOMIC OVERVIEW SMF Team Gilson UConn Student Managed Fund Team Gilson 7
Economic Overview - U.S. Economy • Real GDP Growth Real GDP: Percent change from preceding – 3.1% annual growth yoy quarter 5.0% • Low Unemployment – 4.1% unemployment rate 4.0% 3.0% • Inflation – 2.0% core PCE YoY 2.0% 1.0% • Consumer Confidence 129.5 – highest since Nov. 2000 0.0% Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Q3 '17 • Rising Interest Rates SMF Team Gilson UConn Student Managed Fund Team Gilson 8
Economic Overview - Global Economy China • Steady GDP growth 6.8% YoY – Defying signs of a slowing economy – Growth target is 6.5% • Rebalancing economy to more consumption based Europe • On track for fastest GDP Growth since 2007 – 2.2% • Political Instability • Brexit Negotiations SMF Team Gilson UConn Student Managed Fund Team Gilson 9
PORTFOLIO PERFORMANCE SMF Team Gilson UConn Student Managed Fund Team Gilson 10
Sector Allocation SMF Team Gilson UConn Student Managed Fund Team Gilson 11
Total Portfolio Unrealized Gains Leader : T with a gain of 9.06% Laggard : KLAC with total weighted loss of -3.77% WBA with a gain of 7.89% SMF Team Gilson UConn Student Managed Fund Team Gilson 12
Portfolio Performance Portfolio Allocation • 36.2% of the portfolio invested • 5% remaining in cash (due to outstanding limit orders) • 59.29% remaining in the SPY ETF • Information Ratio: 0.18 SMF Team Gilson UConn Student Managed Fund Team Gilson 13
INDIVIDUAL HOLDINGS – HIGHLIGHTS SMF Team Gilson UConn Student Managed Fund Team Gilson 14
KLA-Tencor (NASDAQ: KLAC) Basic Metrics KLAC Share Price Purchase Price 10/31 $109.45 110 108 Purchase Price 11/15 $102.09 106 $103.87 Current Price 104 102 $110.01 52 Week High 100 98 $74.66 52 Week Low 96 $16.5B Market Capitalization Dividend Yield 2.18% SMF Team Gilson UConn Student Managed Fund Team Gilson 15
KLA-Tencor – Thesis & Risks Thesis Risks • • Continuing demand for increasingly Highly concentrated customer base (Two complex semiconductors customers of over 10%) – – IoT, VR, AI, autonomous vehicles Both customers have comprised over 10% of revenues for over 3 years • Substantial investment in Research & • Development Risk of competition offering a product – Has averaged 16% of revenues in bundle (Lam Research or Applied each of the past three fiscal years Materials) – Regulatory Issues • – Market leader Lower specialization – Over 50% market share – Strongest margins amongst peers • Fast-growing business in China SMF Team Gilson UConn Student Managed Fund Team Gilson 16
Walgreens Boots Alliance (NASDAQ: WBA) Basic Metrics WBA Share Price 74 $66.23 Purchase Price 72 $71.45 Current Price 70 68 $89.69 52 Week High 66 64 52 Week Low $63.82 62 Market Capitalization $72.93B 60 2.16% Dividend Yield SMF Team Gilson UConn Student Managed Fund Team Gilson 17
Walgreens Boots Alliance – Thesis & Risk Thesis Risks • Strong buying opportunity created by • Amazon disruption remains salient risk market overreaction to “Amazon effect.” factor • Cash acquisition of 1,932 Rite Aid stores • Uncertain US healthcare legislative creates significant market share advantage environment in the US. • Continuing pharmaceutical pricing pressure • Retail portion of business has remained • Potential for adverse changes in resilient in the face of brick and mortar reimbursement policy headwinds. • Increased competition CVS, Walmart and • Significant hidden assets in the form of 23% Costco stake in supplier AmerisourceBergen • Favorable macroeconomic trends SMF Team Gilson UConn Student Managed Fund Team Gilson 18
Looking Forward SMF Team Gilson UConn Student Managed Fund Team Gilson 19
Future Outlook Current Investments Future Investments • Reassess outstanding limit orders • Improve stock selection process • Monitor investment performance by • Look for attractive investments in reassessing each holding’s thesis unallocated sectors • Sell out of positions if the market • Identify changing industry trends price hits the target price without a that will provide value opportunities change in the investment thesis • Track domestic and global macroeconomic indicators and industry trends SMF Team Gilson UConn Student Managed Fund Team Gilson 20
Lessons Learned Higher-level Thinking Investing Discipline Identifying Tangible Catalysts Market are not Efficient Analyzing Investment Risk SMF Team Gilson UConn Student Managed Fund Team Gilson 21
Questions? SMF Team Gilson UConn Student Managed Fund Team Gilson 22
Appendix SMF Team Gilson UConn Student Managed Fund Team Gilson 23
Activision Blizzard (NASDAQ: ATVI) Activision Blizzard will create long run value due to: • Strong franchise portfolio • Industry leader in rapidly growing E-Sports industry Close Price 11/28: $65.97 • Omnichannel presence Target Price: $76 • Consistent ability to create innovative content Margin of Safety: 23% SMF Team Gilson UConn Student Managed Fund Team Gilson 24
Valero Energy Corporation (NYSE: VLO) Valero Energy will provide long run value due to: ▪ Financial strength Demand for petroleum products ▪ Leadership in input flexibility ▪ Close Price 11/28: $83.24 Target Price: $96 Margin of Safety: 15% SMF Team Gilson UConn Student Managed Fund Team Gilson 25
The Home Depot (NYSE: HD) The Home Depot will provide long run value due to: ▪ Favorable tailwinds in the housing remodeling sector Technological adaptation and innovation ▪ Growing professional customer base ▪ Close Price 11/28: $176.61 Target Price: $185.77 Margin of Safety: 12.4% SMF Team Gilson UConn Student Managed Fund Team Gilson 26
Lockheed Martin Corporation (NYSE: LMT) Lockheed Martin Corporation will provide long run value due to: ▪ Strong economic moat ▪ International growth Close Price 11/28: $319.02 ▪ Well positioned against new entrants and Target Price: $349.11 competition Margin of Safety: 11.4% SMF Team Gilson UConn Student Managed Fund Team Gilson 27
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