Friday March 7 th 2014 Lafayette College Investment

Friday March 7 th, 2014 Lafayette College Investment Club

Meeting Agenda • 1) Announcements • • • BAT (Bloomberg) Rescheduled Market Madness SMC – Interviews and Night (Info session) • 2) Market Update • 3) Portfolio Overview • 4) SELL IBM (PARTIAL SHORT TERM GAIN) • 5) SELL EXPE (PARTIAL SHORT TERM GAIN) • 6) BUY ATVI (Activision Blizzard)

Market Update Othman Guennoun, Connor Steigerwald, Emily Evanko Friday, March 7 th, 2014

Crisis in UKRAINE • Russia sent troops into Ukraine to ensure their loyalty and the control over Ukraine's resources -Russia is the largest energy exporter • After troops were sent in: -Oil and natural gas prices rose -Price of gold spiked as tensions increased • Ukraine is 6 th largest wheat exporter, 4 th largest barley exporter -Wheat barley and corn--> price of grain spiked -Ukraine is the largest producer of Sunflower oil • U. S. dollar increased in value because it was looked at like gold

Financial Markets • Financial markets rattled, triggered a global stock selloff -Three major U. S. stock indexes had biggest one-day declines in a month • Ukraine allies threatened to retaliate against Russia with economic sanctions • Russia felt the most market pain • Yields on Ukraine bonds went up currency fell • Diplomatic push by Kerry and UK • Russia withdrew from Ukraine and stocks reached all time highs

CHEVRON (CVX) Chevron 1. 9% of the portfolio, 80 shares valued at $9188 following the close on Thursday. • • Chevron won a counter-suit blaming an Ecuadorian environmental group for obtaining evidence through racketeering. • The environment group - originally won $19 billion dollars from Chevron for human rights and environmental violations, which Chevron had refused to pay. • The company had been claiming the environmental group had obtained evidence illegally. • Because of the victory in the counter-suit, Chevron has restored confidence to investors, and analysts are predicting more steady growth.

Exxon. Mobil • Spending cuts and decrease in performance makes investors nervous • Return on Capital Employed (ROCE) for 2013 : 17%. Usually great for other companies but not for Exxon • Despite high prices – Exxon can’t have ROCE of 20% which what it usually has • On Wednesday, CEO announces spending cuts – 10% decrease in capital expenditures budget. • Stock goes down 3% after announcement

First Chinese Bond Default since the 90 s • Bond Default: failure to pay interest or principal when due • Shanghai Chaori Solar Energy Science and Technology Company announced that it can’t pay interests on its Chaori bond. • Can only pay 4 million yuan out of 89. 8 million yuan. • Scared investors who invest in China. • Might lead to contagion? • Some say it’s a good thing for the economy: “A normal economy needs defaults to better price bonds and other debt products”

Unemployment Rate for February PREDICTIONS ON FRIDAY’s Reports • Economists predict 152, 000 increase in nonfarm payrolls compared to 113, 000 in January • Unemployment rate expected to go down by one tenth to 6. 5% • If rate goes down, stock should rise

Stocks Close Mostly UP • S&P 500 rose 3. 22 point (0. 2%) Fourth all time high in six sessions • Dow Jones rose 61. 71 points (0. 4%) • Nasdaq Composite Index goes down by 5. 85 points (0. 1%) Because of weakness in biotechnology stocks

Portfolio Updates By: Peter Oberender and Angel Stoychev

Portfolio overview • Pfeizer – FDA approval on Lipitor sold over the counter • Clorox – UBS downgrade to sell; no organic growth, lower margins anticipated • Baidu – Quarter 4 earnings disappoint • Ebay – Proxy fights continue • Nuverra Environmental – Earnings

Gilead Science INC: GILD • 4. 86% • Up 9. 2% last 3 months • Positive fourth quarter earnings • Sold 3. 7 Billion in corporate bonds

Caterpillar INC: CAT • 4. 02% • Up 15. 63% In past 3 months • Sales of construction equipment rose despite weather conditions

General Electric Co: GE • 4. 72% • Down 1. 1% in past 3 months • $3 billions in bond sales • Signed one year agreement with NYPA

United. Health Group Inc: UNH • 3. 96% • Up 6. 72% last 3 months • In Feb online bill payment grows to more than 50, 000

IBM Short-term Gains 50 Shares

Thesis • IBM currently 4. 75% of portfolio • Already have substantial positions in tech • Free up cash – continued diversification

Why IBM? • Hardware business is eroding • Composed of servers, chips, storage gear • Cannot keep pace with Cloud computing • Lowest quarterly revenue in 4 years

Inorganic Growth • Unable to grow business internally • Sold computer server piece to Lenovo • J. P. Morgan: “IBM model not nimble enough to jumpstart revenue and growth. ” • Consulting services largest part of business

Conclusion • IBM still has value in services and tech • Our position is too large in portfolio • Undergoing transformation process • Short-term gains allows for diversification

EXPE Sell half position (short term gains)

Expedia Background • Expedia is the number 2 brand player in the online travel industry. – Hotels. com, Trivago (Europe), E-Long (China) are a few of their online search engines. – Currently a majority market share owner domestically roughly 14. 23% of the market vs. PCLN – Currently a minority market share owner internationally • With a goal of growing its user base, Expedia aims to continue investing in developing its technology and content to improve its product offerings and expand its presence across geographical segments. – While it remains positive about its long-term growth potential, it is wary of increasing competition in international as well as domestic markets.

Thesis for Sept Buy • If you recall back in September I bought Expedia for a back half of the year story. • Q 3 and Q 4 because business is easier in that period for Expedia drives higher revenue and sales. • It traded at a steep discount for no fundamental reason besides management misguidance. • Management set achievable targets that they hit and the stock reverted back to its mean June 2013 price of 75 a share. • Essentially it was a mean reversion trade

What has changed? • Management has set achievable targets going forward and did apparently learn there lesson. • However, in the short term owning this stock could be troublesome. • 1) Much of Expedias growth reported in Q 3 and Q 4 was due to Trivago and E-long • 2) There is still incremental technology-related spend being directed toward the Expedia Traveler Preference Program (ETP) as new hotels come onto the platform. • 3) Is an improved European macro outlook driving higher growth in travel bookings? • We have a large position, we are looking to trim to take some gains and allocate elsewhere. • Still long thesis intact as growth across the board is solid.

Activision Blizzard (ATVI) Buy 2000 shares at Market Price 4% of Portfolio By: George Rakic and Benjamin Tschan

Company Overview • Activision Blizzard Inc. (July 9 th, 2008) is a world wide mobile, online and video-game publisher • Sector: Technology • Industry: Software

Segmentation (Geo) • US: 53% of revenues • Europe: 40% of revenues • Asia Pacific: 7% of revenues

Segmentation (Business) • Activision Publishing Inc. (67%) • Call of Duty, Skylander • Blizzard Entertainment Inc. (26%) • Diablo, Starcraft, Wo. W • Activision Blizzard Distribution (7%) • Sales distribution in Europe, manufacturers of interactive entertainment hardware

Revenue Stream and Growth • 3 main Revenue Channels: • Software Purchases • Monthly Subscriptions • “In-Game” Purchases • Revenue: • • • $4. 755 B (2011) $4. 856 B (2012) $4. 583 B (2013)

This Year’s Revenue • Revenues fell by 5. 6% due to a loss in Wo. W subscriptions • However, expected to rise due to the new expansions coming up later this year

10 Year Preformance

Competitors ATVI TTWO ZYNG EA Average Revenue 4. 58 B 2. 45 B 873 M 3. 66 B 2. 89 B EBITDA 1. 48 B 526 M 74 M 223 M 575 M Net Income 987 M 371. 15 M -37 M -36 M 321 M Profit Margin 67% 63% 72% 41% 61% EPS . 95 3. 73 -. 05 -. 12 1. 13 P/E 21. 23 5. 56 N/A N/A

Why a Good Investment? • Strong value inside a company • Really cheap (the street not happy with revenues) • Pays dividends • Coming up with new game Heroes of the Storm • New Expansions for released games

Catalysts • Candy Crush (Kings) IPO • Report another dip in revenues • Game coming out will not be a success

Buy 2000 shares at Market Price 4% of Portfolio