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Presented by: David Anderson December 2007

CSU – Sacramento Institutional Investment Society “Picking Stocks for the CSUS Portfolio Challenge”. Presented by: David Anderson December 2007. Tonight’s Discussion. Discuss the upcoming portfolio challenge Discuss “stock picking” vs. portfolio management

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Presented by: David Anderson December 2007

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  1. CSU – Sacramento Institutional Investment Society “Picking Stocks for the CSUS Portfolio Challenge” Presented by: David Anderson December 2007

  2. Tonight’s Discussion • Discuss the upcoming portfolio challenge • Discuss “stock picking” vs. portfolio management • Provide some ideas for where you might start

  3. BS, 1985, Accounting, CSU – Sacramento MBA, 1995, U.C. Berkeley Haas School of Business Introduction: David J. Anderson Chevron: 1985-1993 Accounting & Finance • Palo Alto Investors • Energy Analyst • Partner • Portfolio Manager: Energy Fund • Director of Research Wertheim Schroder: 1994 Equity Research Coopers &Lybrand: 1995-1996 Consulting: Mergers BofA Securities: 1996-1999 Investment Banking, Debt/LBO OffRoad Capital: 1999-2001 Venture Capital – I Banking

  4. ~$1.5 billion hedge fund Specializes in micro and small cap stocks, and other inefficient areas of the market Fundamental (vs. technical) research Some venture investing Strategy includes some shorting - opportunistically, not strategically Buy and Hold: Average holding is two years Concentrated portfolio Palo Alto Investors

  5. Our Purpose To make money for our clients by investing for the long-term based on fundamental research

  6. Our Team Palo Alto Investors: Investment Team

  7. Energy Team David Horning, Ph.D., CFA David Anderson, CFA Michael Enachescu, Ph.D. Peter Hill, Ph.D. Grant Fox

  8. Investment Research Process

  9. Picking stocks for the CSUS Portfolio Challenge • Warning: This is not portfolio management • Traditional portfolio management vs. what I do vs. CSUS Challenge • Trying to pick a stock for short term • Looking for catalysts • What you get out of this process • Not just a portfolio win • Able to use your analysis as a basis for discussion with others • Your goal: to learn and internalize what it is like to analyze and understand a company • What you need to be able to do…speak to why you like it: Products, markets, competitors, growth, margins, returns

  10. Picking stocks • Start with something you know or have a passion for • Read 10-Q, 10-K, research papers, commentaries • Consider creating your own format “1-pager” • Understand upside and downside

  11. Picking stocks – A few resources • Company Websites • CSUS Library (Standard & Poors, Hoovers, etc.) • Edgar database (www.sec.gov) • Financial websites (Yahoo, Google, Moneycentral.msn, Marketwatch, Bloomberg) • Statistical Research (Government and Private) • Brokerages (Schwab, AG Edwards, Fidelity, and many boutiques) • Blogs • Call the company

  12. Understand the “Fundamentals” • Revenue Drivers • Try to find something you can “break down” • Not necessarily just “growth of x%” • Cost structure (operating leverage) • Opportunities for growth • Cash flow vs. earnings (need for capital) • Return on capital • Balance sheet • Trading multiples • Long-term vs. short term perspective

  13. Revenues Drivers – An Example • Online financial websites only give you the “top line” • 10-Q may break down the revenue further • Company press releases may give more detail to understand lines of business • Company conference calls give more information • Use a spreadsheet to capture what you know • Now you have a basis for a forecast

  14. Look at competitors Look at market conditions Customer references Meet with management team Qualitative Research Understand competitive strategy in light of 5 competitive forces: 1) entry of new competitors 2) threat of substitutes 3) bargaining power of buyers 4) bargaining power of suppliers 5) rivalry among existing competitors

  15. Sold 1.1MM shares Built initial position 900,000 shares Added 350,000 shares Discovery and research

  16. Final Points • Pick your stocks - use any methodology you prefer • Put weight behind your best ideas • Assess through time whether your thesis is correct • Be honest with yourself • Good luck!

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