Stock Pitches 101 September 2016 Presented by: Blake Klasios

McMaster Investment Council Agenda What is a Stock Pitch? Types of Analysis Stock Selection Formulating an Investment Thesis Industry and Company Overview Valuation Risks and Catalysts Tuesday, September 27, 2016 McMaster Investment Council

I What is a Stock Pitch?

What is a Stock Pitch? – Five Components Investment Thesis Industry Overview Company Overview Valuation Risks and Catalysts Questions “Pitching a Stock” A stock pitch is a buy or sell recommendation on the stock of a market listed company The five components of a stock recommendation are based around the investment thesis The end goal of a stock pitch is to convince an audience that the company you are pitching is a strong buy/sell Tuesday, September 27, 2016 McMaster Investment Council

II Types of Analysis

Types of Analysis – Fundamental vs Technical Fundamental Analysis Technical Analysis Method of evaluating a security in an attempt to measure intrinsic value Studying everything which can have an effect on a security’s value: industry conditions, company financial conditions, and qualitative factors such as management performance. Study of historical stock prices and market behaviour to identify patterns. Technical analysts study: price movements, trading volumes, and # of rising and falling stocks over time looking for patterns. Fundamental Analysis is the method that will be used by the MacIC Tuesday, September 27, 2016 McMaster Investment Council

III Stock Selection

Selecting a Stock – Top-down Analysis General Focused Specific Keep up to date with the news (WSJ, NYT, Economist, Financial Post, Globe and Mail) Read industry reports (Thompson One, Discount Broker) Identify a upcoming event that may effect the Economy (eg. Donald Trump becoming president) Create list of companies (use Stock Screener to filter sector) Read research reports on individual companies (Thompson One, Discount Broker) Watch BNN interviews on chosen stocks Understand how company and industry generates revenue Restraints Listed on TSX Mkt Cap > $100M Must be a “Buy” recommendation Read company Financial Reports (10-K, 10-Q, analyst calls, investor presentation) Look for desirable factors (growing sales revenues and earnings, no performance swings, strong FCF and P/E ratio) Formulate an investment thesis Tuesday, September 27, 2016 McMaster Investment Council

Formulating an Investment Thesis IV Formulating an Investment Thesis

Formulating and Investment Thesis – Idea Generation Foundation “Beliefs that investors decide to use when determining what investments to purchase or sell, when to take an action and why.” (Investopedia) A multi-part statement encompassing the concrete reasoning for investing in a company Rigorous due diligence at the Micro (company) level Aligning that view with the Macro environment Understanding overall trade setup Investment Thesis Eg. TransAlta Renewables (RNW) The market has incorrectly over-emphasized RNWs relationship with the parent company, TA There is significant upside due to the global shift towards renewable energy and the strong and sustainable growth of RNW through project dropdowns from TA. Additionally, new liberal government and announced phase out of coal power generation will provide opportunity for RNW to acquire further drop-down assets from TA. Micro Macro Setup Source: Street of Walls Tuesday, September 27, 2016 McMaster Investment Council

Formulating and Investment Thesis – Idea Generation Micro Macro Setup Strong Company Qualities Revenue growth and earnings potential Barriers to entry in industry (competition) Growing/Mature industry Attractive comps Good Management High insider ownership Strong track record Well respected Monetary Policy Impact Interest Rate Changes Fiscal Policy Impact Government spending Spending on goods, services, and capital programs Tax Changes Sales tax, income/corporate tax Economic Indicators Leading: Stock Market, Manufacturing Activity, Housing Starts Lagging: GDP, Income/Wages, Unemployment, Inflation, Currency Strength, Interest Rates The Trade – “State of Play” How has the company performed leading up to catalyst? (before making trade) How crowded is the trade? Liquidity, volume, analyst coverage Is the general public bullish or bearish on this stock? How much of the portfolio do you recommend allocating to this trade? At what price? Source: Street of Walls, Canadian Securities Course Tuesday, September 27, 2016 McMaster Investment Council

Industry & Company Overview

Industry & Company Overview – Components Industry Overview Company Overview Key industry terms Industry snapshot Revenue Annual revenue growth Market size Industry trends Competitive positioning Porters 5 Forces Supply chain analysis Explanation of revenue generating activities Company historical share price performance 1 year, 3 years, 5 years, since inception Highlight major events Company summary Business model Business segments Management Company snapshot Ticker and Stock Price Market Cap Revenue Geographic breakdown Tuesday, September 27, 2016 McMaster Investment Council

VI Valuation

Valuation – DCF Analysis Discounted Cash Flow (DCF) Analysis Concept: The value of a company is the present value of its future cash flows Project a company’s Free Cash Flow over a 5-10 year period (Optimistic, Neutral, and Conservative) Calculate the discount value (WACC) Discount and sum up the companies FCF Calculate the company’s terminal value (“far in future value”) Add the discounted FCF to discounted terminal value to give us Enterprise Value (includes debt) then determine Equity Value WACC=WERE+WDRDat WE=E/V, RE=Rf + Beta * (RM-Rf) WD=E/V, RDat= (Interest on Debt/Total Debt) * (1- TC) Discount and Sum Forecasted FCF year 1/(1+WACC) + Forecasted FCF year 2/(1+WACC)… Equity Value Add the discounted FCF to discounted terminal value to give us Enterprise Value (includes debt) then determine Equity Value Terminal Value Assume the company operates indefinitely and FCF continue to grow (a conservative number would be 2% as that shadows the average annual Canadian GDP Growth rate Terminal Value = Final Year FCF * (1+2%)/ (WACC – 2%) Equity Value = Enterprise Value – Debt – Preferred Stock – Non controlling interest + Cash and Cash Equivalents Tuesday, September 27, 2016 McMaster Investment Council

Valuation – Comps Analysis Comparable Company Analysis Canadian Renewable Power Industry (Target peer group) Canadian Power Industry (Broader Industry) Tuesday, September 27, 2016 McMaster Investment Council

VII Risks & Catalysts

Industry & Company Overview – Components Risks Catalysts Potential reasons why the investment thesis may not take shape Select three or four realistic risks (one for each part of the investment thesis: Micro, Macro, Set-up) Include a Mitigant for each risk Things that alleviate the concern for the risk affecting the overall investment thesis Events expected to materialize in the near future that support the investment thesis Select three or four realistic catalysts (one for each part of the investment thesis: Micro, Macro, Set-up) that support the investment thesis Eg. TransAlta Renewables (RNW) R: Contractual (PPA) risk with third parties M: Majority of PPAs are with parent company and other reputable companies R: Risk of inconsistent income M: Operates in areas with consistent wind data, diversifies energy mix R: Highly regulated industry M: Able to adapt to new regulations and will benefit from shift to renewables Eg. TransAlta Renewables (RNW) C: Additional drop-down projects from patent company that will enable company to generate additional revenue C: New liberal government support of renewable energy generation will provide RNW with cash incentives and consistent project flow C: Upcoming earnings release expected to show TA commitment for grow RNW in the future Tuesday, September 27, 2016 McMaster Investment Council

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