Q Group Project – Investment Recommendation Financial ModeFalling and Valuation 2022 1 General Description The goal of the project is to recommend a buy or sell recommendation for a public company of your choice and to present your recommendation to the class at the third synchronous session in module 8. The instructor and the instructional technical specialist (ITS) will play the role of an investment committee. Your task is to deliver an effective presentation in 5-10 minutes and write an investment summary to persuade the “committee” to pursue your investment recommendations. The project is an important piece of the class. It will allow you to explore investment ideas and apply the knowledge that you acquire in the class in a practical way. 2 Deliverables The goal of the project at the end, is to present your investment thesis for the company that picked in the second synchronous session. You might pick a company to buy to sell short depending upon your forecast. However, because it is riskier to find shorts, picking a valid candidate to short and being able to defend the investment thesis being the short position will be rewarded. The presentation should be short and concise, approximately about five minutes. It should follow a real-life investment committee format: each group presents its investment portfolio and leaves a two-page summary explaining the investment idea, the rationale and, investment recommendation. The deliverables are therefore: All written reports for this project should be single-spaced and completed using appropriate report formatting. For additional direction on formatting, we refer you to the APA Style Manual available in the “Getting Started” section of Blackboard. All reports are limited to the length stated. Your summaries must include all necessary tables and charts in the body of the report, additional appendices that go beyond the length maximum are not allowed. The deliverables for this project are: M3 - A half-page summary introducing your investment recommendation and the rationale for your choice. This is an opportunity for you to receive feedback early in the development of your group project. M4 - A half-page summary analyzing an event that could impact the value of your investment in the future. M8 - A two-page summary that contains all the information that is necessary to make a decision on the investment proposal. This is what the group leaves behind for the investment committee after making their pitch for the investment committee to remember all the details of the investment idea. M8 - A presentation that each group will use to defend their stock proposal (long or short). This presentation is not a summary of your project. Rather, it is your opportunity to pitch your recommendation. You have one shot with a potential client, this is your opportunity to “sell” your work. Students do not need to submit the presentation slides since they will be used and viewed only during the live presentation. 3 Investment Strategy 3.1 Investment universe Each group will choose a public company with at least three years of existence so that there are three years of data available. The company can be a large cap or small cap. So, the market capitalization of the company is not an important factor. However, it is not recommended to work on a penny stock company because realistically it is difficult to bet institutional size capital on penny stocks. 3.2 Investment timeframe The investment timeframe would be for nine to 12 months. This is representative of the holding period for many pension funds and endowments. It is therefore a timeframe that is reasonable for which there is some practical rational. This timeframe also allows to keep the transaction costs low because in most cases we want to keep the turnover of the investment portfolio low. 3.3 Data There is public data available for all public companies. At Carey Business school, we have access to three Bloomberg terminals that will allow students to access all the public information on all US and international public companies. If students are not at Carey, they can use one of the databases available to students through the library’s databases. There is a video demonstrating on how to access public companies’ data in module two of the class. Gathering and cleaning data is an important part of the project. Students are expected to search and gather data from various sources and cross check the validity of the data that they use to produce investment proposals 4 Company Fundamental Analysis 4.1 Macroeconomic analysis In this section, we want to examine the macro environment for the stock. For example, if the rates are low, probably growth stocks will do better or, if we are in recession period, value stocks will probably do better. Understanding and incorporating these macro views are what the industry calls a top view. 4.2 Five-year cash flow model Each group needs to gather five-year’s worth of financial data on the company that they pick. The data includes income statements from which you can extract the earnings and create a cash model similar to the one that we build in the class. The model is essentially a valuation model that will tell you to buy or sell short the company depending upon your valuation compared to the stock price at the time of your analysis. Using the five-year cash flow, you will make a forecast on the coming year’s stock price. This could be a simple extrapolation or any combination of qualitative and valuation analysis. 5 Management 5.1 Top management vision Is the top management of the company solid enough to execute on the promises of the company? These are the type of questions that we want to be able to answer when looking at the top management. 5.2 Management trading How the top management has skin in the game. Are they holding on to their own company stocks? Or are they selling them? You also need to find who owns the stock. You can find the top 10 largest equity holders as a public information. 5.3 Incentive for employees and management We all respond to incentives. In this section, we want to examine whether employees and management are well compensated for their performance. Does the company compensate on merit? Does the company have a clear process to set the expectations of the employee and management and follow that process. 6 Competitive Landscape 6.1 Industry overview In this part of analysis, you will compare your company to its sector or industry. You want to find out whether your company has an edge compared to its competitors in the industry and whether the company is maintaining its edge if any. 6.2 Disruption analysis We know that technology is very fast to disrupt many established companies. In this section, we want to examine, on a forward-looking basis, whether there is a danger that the company that you have picked is in danger of being disrupted by a new technology. It is important to think about how long it would take to disrupt an established business. Sometimes, even the best ideas and technologies take time to displace an old technology. There are many examples that show this trend. 6.3 Research and development The R&D of the company is an important piece in the context of staying competitive and be to able to forecast and adopt new disruptive technologies. It is however not very clear how much weight one should assign to R&D in the valuation models. It all depends on the sector and the specifics of the company. It is up to you to determine how R&D contributes to the valuation and how much weight you want to give to it. 7 Risk management For each investment proposal, students are required to elaborate on the risk characteristics of the proposal. Important metrics that should be considered include the volatility and the maximum loss that your position can withstand. 8 Forward looking design Students are required to defend and provide a solid rationale that the investment proposal will perform according to their expectations going forward. This step is probably the most important piece of the project. 9 Conclusion In summary, you will be able to build and practically design an investment case to buy or sell short a company with a valuation model of your own that institutional-quality investors would consider for their own investments. The closer one gets to an investment proposal that is forward looking and has a solid economic rationale to perform, the better are the chances of getting an allocation and being funded from an institution. 10 Indicative Rubrics M3 – Investment Recommendation Introduction and Overview – This assignment will be graded on a complete/incomplete scale and is worth 5% of your overall grade. M4 – Event Analysis Report - This assignment will be graded on a complete/incomplete scale and is worth 5% of your overall grade. M8 Investment Summary – Your group will be evaluated on a scale of 1 to 5 for each of the following components of your written investment summary for a total point value of 20 points. This assignment is worth 10% of your overall grade. ? Format – Assignment parameters (length, subject, objectives) observed, clear and coherent focus (good sense of audience); orderly development of ideas; sentence fluency coherent, unified, varied; correct spelling, punctuation, capitalization; appropriate word choice. ? Investment alpha and risk management – provide substantive rational for the investment proposal and its merit comparing to other options that have been considered. Provide a clear explanation of what makes this investment different and how it adds value. Determine the risk measures that are the most relevant for the investment proposal and estimate clearly all the downside risk measures associated with the investment. ? Analytics – Clearly identify the source of data and the relevance of the data in the context of the investment proposal. Provide a clear explanation, relevance and justification of the analytical models. ? Recommendation and Forecasting time horizon – provide clear recommendation and defend that view in a rational way. Provide a clear time-horizon for the investment proposal. M8 Presentation – Your group will be evaluated on a scale of 1 to 5 for each of the following components of your live presentation for a total point value of 20 points. This assignment is worth 10% of your overall grade. ? Presentation – Speaker captures attention of audience, speaking appears extemporaneous, professional appearance, effective lighting, smooth flow of presentation, speakers exhibit passion about their work, strong closing, slides are clear, concise and appropriate for the format of the presentation. Presentation does not go over 5 minutes. ? Investment alpha and risk management – provide substantive rational for the investment proposal and its merit comparing to other options that have been considered. Provide a clear explanation of what makes this investment different and how it adds value. Determine the risk measures that are the most relevant for the investment proposal and estimate clearly all the downside risk measures associated with the investment. ? Analytics – Clearly identify the source of data and the relevance of the data in the context of the investment proposal. Provide a clear explanation, relevance and justification of the analytical models. ? Q/A – Speaker displays confidence in the work, superior knowledge of the project, responds immediately to questions in a clear and concise