Security Analysis (Luh) SU2016

Columbia University
Graduate School of Business

B-8368-01
Security Analysis
Below information is subject to change
URI 141
Tues: 5:00-9:15pm
Office hours: by appointment
Professor Keith Luh, CFA

Tel: 973-912-2043
kluh@msfi.com
Teaching Asst: Chris Brigham
cjb2193@caa.columbia.edu
Course Description
The objective of the course is to present a rational disciplined investment philosophy
and process for security analysis. The seminar will focus on melding theory and practice
using investment examples across industries and geographies. Investing is as much art
as it is science, and therefore, particular attention will be paid to both quantitative and
qualitative aspects- including financial statement analysis, valuation methodologies, and
competitive strategy and behavioral finance, respectively.
Current and past situations will be discussed in order to encompass a broad set of
investment cases across varying economic environments and cycles. In addition,
analysis of capital structure and capital markets dynamics will be introduced as a
valuable tool that informs the mosaic of investing and can help when allocating capital
and managing risk.
While the course material and lectures will review some concepts those enrolled should
have a strong familiarity with accounting, corporate finance, and ability to analyze and
interpret financial statements in addition to modelling- refer to example appended. The
course material will be cumulative and build upon the accounting, finance, and
modelling skills needed to complete this exercise. Students should be prepared to
commit 15-20 hours per week, with some periods exceeding this amount depending on
the lecture material and assignments due.
Course Structure
60%- lecture- professor and practitioners (portfolio managers/analysts)
25%- student participation (Socratic method)
15%- student presentation
Grades
Factors used to determine grades:
1. Group Investment Thesis/Final Project (in lieu of a final exam, Type A): 25%
o Length of report should be 8 12 pages, excluding exhibits.
o Format/content will be discussed in more detail in class.
o Final project submissions due
2. Presentation of Group Investment Thesis/Recommendation (Type A): 20%
o Everyone will be required to participate in the presentation.
3. Assignments (Type C): 35%
o Assignments associated with the investment case studies will be
due in advance
o Modeling Assignment: integrating income statement, cash flow
statement, and balance sheet
o More details will be provided in class
4. Class Participation: 20%
o Attendance is mandatory and the cumulative attendance record will
be taken into consideration when determining grades.
o Socratic method- interaction is encouraged and expected. Dialogue
and debate will enhance the learning environment and students
should feel free to challenge and/or share alternate views.
Reading List
Required readings will be selected from the following:
Graham and Doddsville Spring 2011 newsletter: Michael Price Interview
http://www4.gsb.columbia.edu/filemgr?file_id=738505
Cialdini, Robert B., Influence
Graham, Benjamin and David Dodd, Security Analysis 6th Edition
Greenblatt, Joel, You Can Be a Stock Market Genius
Greenwald, Bruce, Judd Kahn, Paul Sonkin and Michael Van Biema, Value Investing:
From Graham to Buffett and Beyond

Greenwald, Bruce and Judd Kahn, Competition Demystified: A Radically Simplified
Approach to Business Strategy
Mehta, Ravee, The Emotionally Intelligent Investor
Schilit,Howard, Financial Shenanigans
Schiller, Robert, Irrational Exuberance
Other highly recommended readings:

Berkshire Hathaway Inc. Shareholder Letters
Cain, Susan, Quiet
Einhorn, David, Fooling Some of the People All of the Time
Fisher, Philip A., Common Stocks and Uncommon Profits
Graham, Benjamin, The Intelligent Investor
Houston, Philip, Spy the Lie
Kahneman, Daniel, Thinking, Fast and Slow
Klarman, Seth, Margin of Safety
Lefevre, Edwin, Reminiscences of a Stock Operator
Marks, Howard, The Most Important Thing
Moore, Keith, Risk Arbitrage
Natenberg, Sheldon: Option Volatility and Pricing
Rosenberg, Hilary, The Vulture Investors
Soros, George, The Crash of 2008 and What it Means: The New Paradigm for Financial
Markets
Detailed Class Schedule and Material (subject to change)
Representative Case Study and Modelling Assignment

Exercises are meant to serve as an opportunity to incorporate lessons learned, review
accounting and corporate finance concepts as well as practice integrating the financial
statements in an excel model.
Models are used to incorporate assumptions, analyze their impacts to valuation further
refining the range of possible outcomes ultimately leading to buy/sell recommendations.
WatchCo Inc.
The Company designs, manufactures, and repairs watches. It operates exclusively in
the US. The watch repair business is a cyclical one and can be expected to perform
poorly in a recession/stagnating economy. During the last recession, the company saw
sales decline 25% from its peak sales and operating margins dip below 10%. The
company is forecasting a recession in 2013 with a rebound to 2012 levels in 2014,
partially driven by a strategic shift by the management and board whove decided to
broaden the existing luxury line into the marketing and sale of new moderately-priced
watches. Management forecasts that the company will grow the top line 20% in 2015
and then should moderate to grow at the industry growth rate of 5%. However,
management has a mediocre track record of managing operating expenses especially
during times of economic uncertainty, and the additional advertising, sales, and
marketing costs associated with the new product launches have hampered near-term
margins. As such, Wall Street estimates are all over the map. Most assume that by
2016, WatchCo Inc. should reach 15% operating margins.
The company depreciates its PP&E over 10 years and expects to spend about 5.0% of
sales each year on capital expenditures. Minimum cash is $5mm. The company also
would like to pay down its term loan after it pays its revolver down, rather than build
cash. Wall Street estimates for working capital as well as historical financials can be
found in the excel file.
Assignment
Complete an integrated financial projections model using the assumptions given above
and in the excel file. Calculate the appropriate weighted average cost of capital (wacc).
Calculate a per share value by (1) using a discounted cash flow analysis and (2) using a
multiple approach for terminal value. Explain your choice of multiple.
Formatting has deliberately been removed from the projected years in order to
encourage you to practice formatting as well (e.g. blue cells for inputs/assumptions,
uniformity, detail where confidence is greatest, etc).

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Columbia University

Graduate School of Business

Professor Keith Luh, CFA

From Graham to Buffett and Beyond

Other highly recommended readings:

Detailed Class Schedule and Material (subject to change)

Representative Case Study and Modelling Assignment

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