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

CSUS Institutional Investment Society Tonight’s Discussion  Discuss the upcoming portfolio challenge  Discuss “stock picking” vs. portfolio management  Provide some ideas for where you might start

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

CSUS Institutional Investment Society  ~$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

CSUS Institutional Investment Society Our Purpose To make money for our clients by investing for the long-term based on fundamental research

CSUS Institutional Investment Society Palo Alto Investors: Investment Team

CSUS Institutional Investment Society Energy Team David Anderson, CFA David Horning, Ph.D., CFA Michael Enachescu, Ph.D. Peter Hill, Ph.D. Grant Fox

CSUS Institutional Investment Society Investment Research Process

CSUS Institutional Investment Society 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

CSUS Institutional Investment Society 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

CSUS Institutional Investment Society Picking stocks – A few resources  Company Websites  CSUS Library (Standard & Poors, Hoovers, etc.)  Edgar database (  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

CSUS Institutional Investment Society 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

CSUS Institutional Investment Society 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

CSUS Institutional Investment Society  Look at competitors  Look at market conditions  Customer references  Meet with management team 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 Qualitative Research

CSUS Institutional Investment Society Added 350,000 shares Built initial position 900,000 shares Discovery and research Sold 1.1MM shares

CSUS Institutional Investment Society 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!