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TRANSCRIPT
Investment Advisory Board Presentation
2016 Spring Real-Time Portfolio Management
“The past, the present, and the future are really one: they are today” - Harriet Beecher Stowe
Agenda
● Economic Overview ● Portfolio Allocation Summary ● Transactions YTD ● Portfolio Performance YTD ● Sector Updates● Proposal for Reducing Cash Allocation
Economic Overview
• US labor market indicators are strengthening– Unemployment, Labor Force Participation Rate, and initial jobless
claims are showing positive signs• Brent crude oil has increased 29% since the start of 2016• Corporate earnings are underperforming
– Thomson Reuters is projecting a 6.1% decline in Q1 earnings for S&P 500 companies
• FOMC concluded their third meeting of the year on April 27– Interest rates remained unchanged due to low GDP growth
expectations for US Economy1 Theo Francis and Kate Linebaugh, “U.S. Corporate Profits on Pace for Third Straight Decline,” The Wall Street Journal (2016).
1
Summary & ETF’s
Consumer Goods Current Holdings
Healthcare Current Holdings
Technology & Telecommunication Current Holdings
EMUIT Current Holdings
Financials Current Holdings
YTD Transactions
Portfolio Performance Dec 31/2015 - March 31/2016
*Return as of 3/31/2016
Dividends
*Return as of 3/31/2016
Top Best and Worst performing stocks
Gainers LosersMichael Kors (KORS) +42.19% Ambarella (AMBA) -19.81%
Royal Gold (RGLD) +40.46% CBRE Group Inc (CBG) -16.66%
Enbridge Inc (ENB) +17.23% Novartis AG (NVS) -15.81%
Walmart (WMT) +11.73% Biogen Inc (BIIB) -15.03%
3M Co (MMM) +10.61% PJT Partners Inc (PJT) -14.99%
*Return as of 3/31/2016
Risk/Volatility
• Portfolio Beta average: 1.0545
• Active Return Average: -210 basis points
*Return as of 3/31/2016
Portfolio S&P 500
Average annualized standard deviation
10.23% 17.60%
Sector Performance
South Hill Fund Excluding Cash
South Hill Fund Total
Market S&P
Consumer 70 39.6 302
Tech -24 -13.7 217
EMUIT 84 47.7 624
Healthcare -92 -51.8 -593
Financials -144 -81.6 -560
In Basis Points
*Return as of 3/31/2016
Consumer GoodsSteve Ashe | Suba Chakraborty | Alissa Cugliari | Clay Curran
Consumer Goods Transactions● Michael Kors: Purchased 42 shares at $56.27● Wal-Mart: Purchased 74 shares at $69.43● Ecolab: Sold 45 shares at $115.12
WMT Walmart
DIS Disney
IFF Int’l Fragrance
KO Coca Cola
KORS Michael Kors
SBUX Starbucks
Consumer Goods Market Conditions
Wal-Mart has the strongest sustainable growth
ROE x Plowback = Sustainable growth
WMT 20.88% .77 16.08%
TGT 18.05% .80 14.44%
COST 13.42% .74 9.93%
Wal-Mart Stores Inc. Valuation
Purchase Price: $69.50See Appendix
FCFE ValuationEstimate: $100.64
HealthcareStephanie O’Brien | Alex Leone | Anthony Skretny | Nick Vargas
AMGN Amgen
BIIB Biogen
GILD Gilead
JNJ Johnson & Johnson
MYL Mylan
NVS Novartis
UNH UnitedHealth Group
ZBH Zimmer Biomet
Current Holdings With UNH Trade
Opportunities● Aging global population● Longer life expectancy
● Increase in chronic diseases– Obesity, high cholesterol,
dementia● Emerging economies
– Increased access to healthcare
Risks● Political uncertainty● Potential drug pricing reform● Affordable Care Act
Healthcare Industry Outlook
Healthcare Recent Trades
● Purchased Amgen– Relatively low-risk investment within the biopharmaceutical sector– Recently invested heavily into R&D – 12 drugs currently in Phase 3 testing and 22 in the preliminary
stages– See Appendix B
● Placed limit order on UnitedHealth Group ($126.87)– Huge upside potential for international expansion – Opportunity to increase profit margins by exiting 34 states where
they’re currently making losses– Optum unit is a major competitive advantage
Inception:● March 28th● 35 shares of AMGN at $149.24
($5,223.40)
Performance:● Currently: $160.56 (4/28 closing price)● Forecasted dividends of $1.00 on June
8th (ex-dividend date of May 13th)● As of 4/29
– $5,619.60– Up 7.59% since purchase
Amgen Purchase
Technology and TelecommunicationChris Forrest | Taulant Gashi | Parin Kaba | Zamar Malik | Romano Meza Leal
Tech & Telecom HoldingsQCOM Qualcomm
AAPL Apple
AMBA Ambarella
AMT American Tower
EMCE EMC Corp.
FDS FactSet Research
GOOG Alphabet Class C
GOOGL Alphabet Class A
IRBT iRobot
Recent Trades
Purchased Apple on April 20:● Increased holding by 30 shares to 85 total● Market value of $9,031.38 (4/27)
Rationale: ● Beta of 0.95 (Valueline April 1, 2016)● Conservative Growth
– g: 10%, stable growth: 5%● Undervalued 47.11% at $108 (April 17, 2016)
– See Appendix C● Focused in reducing cash drag
Performance
Apple Statement on Tuesday (4/26)● 2nd quarter sales declined 13%
– $50.6 billion, $58 billion in previous year– Analysts estimated $52 billion (Bloomberg survey)
● Net income declined to $10.5 billion● 3rd quarter sales will be $41 to $43 billion
– Analysts estimated $47.4 billion (Bloomberg survey)
Performance
At Tuesday’s Close in New York (4/26)● Market Capitalization $519.4 billion● Growth opportunities in services● Expanding Apple Pay into China, Singapore, Australia
(CNET.com, Apple.com)
EMUIT(Energy, Materials, Utilities, Industrials, Transportation)
Alek Peters | Brian Krakower | Matthew Corcoran | Michael Maddahi
HON Honeywell
CBI Chicago Bridge & Iron
ENB Enbridge
LYB Lyondellbasell
MMM 3M
OXY Occidental Petroleum
RGLD Royal Gold
UNP Union Pacific
WY Weyerhaeuser
VLO Valero
Position Changes● Occidental Petroleum
– Sold 38 shares at $69.39● Valero Energy Corporation
– Purchased 42 shares at $63.16● Honeywell International
– Purchased 27 shares at $114.41
Occidental Petroleum• 72% of revenues from oil exploration and production• More geopolitical and volatility risk than refiners• Depressed oil prices forcing producers to take on debt• 30.28% overvaluation (03/07)
– See Appendix J
Rationale
Valero Energy Corporation● Maintaining oil exposure
– Refining vs. production● Reduce Middle East exposure
– Decreases overall risk– USA, UK, Canada
● Largest independent petroleum refiner in US
● 16% Undervaluation (03/07)– See Appendix J
Honeywell International Inc.● Highly diversified company● Operating in various business
segments● Historically higher returns than
competitors
● Higher growth potential● 32.35% Undervaluation (04/14)
– See Appendix K
Rationale
Recent Activity
● 1Q 2016 Earnings: May 3● Current Price: $60.91● Down 3.58% since purchase
*As of 04/28 close
Valero Energy Corporation Honeywell International Inc
● Beat earnings estimate by $0.03 per share and revenue estimate by $150 million
● $5 Billion Stock Buyback plan● Current Price: $114.62● Up 0.17% since purchase
FinancialsBrandon Stern | Brennan D’Angelo | JB Allred | Tamal Rahman
FINANCIALS
Interest RatesShort: 0.27%Mid: 0.59%Long: 0.39%
Rationale:● Confidence in leadership● Successful restructuring
– Large consumer banking segment
● Undervalued sector– DDM: 12.50% undervalued– Tgt. Price: $66.58– See Appendix Q
● Net Interest Margin: 2.03%
Performance:● Up 3.75% from proposal on April
13th● Up 8.15% from before earnings
*As of 04/27 close
J.P. Morgan Chase
Rationale:● New exposure of a growth
stock– Expanding consumer
credit services– Projected dividend
issuance● 3.91% Undervalued● Innovative business
platforms● Net Interest Margin 19.04%
Performance:● Up 11.56% since purchase
(3/9/2016)● See Appendix L
*As of 04/27 close
Synchrony Financial
Synchrony FinancialRevenue Breakdown:
2015 Actual 2015 Percentage 2012-2015 Growth
Retail Card $7,425 68.5% 24.04%
Care Credit $1,717 15.8% 25.70%
Payment Solutions
$1,691 15.6% 16.94%
*Bloomberg Data (In millions of USD) as of 4/27/16
The 2020 Real-Time Plan
● Step 1: Weight positions based on macroeconomic approach– Sectors should hold approximately 6 companies
● Step 2: Sell off the weakest companies on a valuation basis in order to reach this requirement
● Step 3: Divide the remaining cash into remaining holdings proportionally over the course of about 4 years
Quasi Dollar-Cost AveragingWe propose to increase our equity exposure by 15% per year until we
reach a more desireable structure with less cash exposure.
In a no-growth portfolio, this process would take about four years to complete.
SPY Limit Order Proposal
Outlay: Spring 2016
Wrap-Up● Highlighted Key Economic Drivers● Summarized Portfolio● YTD Performance● Recent Trades● Sector Breakdowns● Proposal for Reducing Cash
Appendix A -Amgen Major Drugs● Enbrel is the #1 prescribed rheumatoid arthritis injection. Makes
up 24.8% of AMGN sales
● Neulasta/Neupogen prevent infections in patients undergoing chemotherapy. Makes up 21.8% of sales
● Aranesp and Epogen treat anemia in patients who are HIV+ and undergoing chemotherapy. Make up 17.6% of sales
Appendix B - Amgen Valuation
Based on our valuation, AMGN was undervalued by 15.45% at the time of purchase.
Appendix C - APPLE
Appendix D- APPLE
Appendix E - APPLE
April 17 2016
Appendix F - APPLE
April 17 2016
Appendix G - APPLE
April 28 2016
Appendix H - APPLE
April 28 2016
Appendix I - Comparable Analysis
Apple Microsoft
Current Price 94.83 (4/28/2016) 51.02 (4/27/2016)
Beta 1.44 1.23
Required Return Used 17.81% 15.5%
Debt/Asset 22.2% 20%
Undervaluation % -3.48% -41.72%
Growth Assumption Used 10% for 3 years, 5% stable 10% for 3 years, 5% stable
Forward P/E 9.5 17
EV/EBITDA 4.99 9.94
Appendix J - EMUIT Valuation Valero (VLO) Occidental Petroleum (OXY)
Current Price (03/07 Open) 63.15 70.07
Beta 1.35 1.25
Required Return Used 9.98% 9.46%
Debt/Asset 16.35 15.85
Undervaluation % 16.03% undervalued 30.28% overvalued
Growth Assumption used Valueline 3Yr Proj Earnings Valueline 3Yr Proj Earnings
Forward P/E 8.43 (12/31/17) 52.03 (12/31/17)
EV/EBITDA 4.06 11.62
Appendix K - EMUIT Valution Honeywell (HON)
Current Price (4/14 Closing) $114.52
Beta .92
Required Return Used 10.83%
Debt/Asset 24.7
Undervaluation % 32.25%
Growth Assumption Used Valueline/Bloomberg
Forward P/E (12/31/17) 15.82
EV/EBITDA 12.04
Appendix L - Synchrony Financial
Appendix M - Synchrony Financial
Appendix N - Synchrony Financial
Appendix O - Comparables Analysis Synchrony Discover (Benchmark)
Beta (2yr adj.-Bloomberg) 1.156 1.042
Required Return 9.95% 9.25%
Debt/Asset 28.9% 28.4%
Undervaluation Pct (DDM) 3.91% 35.02%
Forward PE 10.8 9.81
EV/EBITA 6.98 6.08
*Bloomberg as of 4/28/2016
Appendix P - Synchrony Valuation
Appendix Q - J.P. Morgan Chase Valuation
SPY- 6 Mo.
SPY- 1 Yr.
SPY- 3 Yr.