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CHAPTER 10
THE PRACTICE OF FUNDAMENTAL INVESTING
10.1 Initial Public Offerings
10.1.1 Why Go Public
▪ Advantages:
– More capital to finance growth
– Original investors and the management team would like liquidity.
▪ Disadvantages:
– Management has to answer to outside shareholders.
10.1.2 The IPO Process
▪ The investment bank can do the offering as a firm commitment or a best efforts offering
▪ Registration statement ( SEC Form S-1 or S-1)
10.1.4 Market Stabilization
10.1.5 Reasons for Underpricing
▪ Theories:
– A way to compensate institutional investors for providing pricing information
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10.1.6 Bookbuilt Offering versus Auction
▪ Underwriters “building a book” of offers to buy the stock
▪ An offering could be run as an auction in which investors can bid for shares at particular
10.1.7 Longer-Term Performance of IPOs (Exhibit 10.3)
10.2 Buy-Side Analysts and Sell-Side Analysts
10.2.1 Sell-Side Analysts
1. How Does the Sell-Side Make Forecasts?
2. What Companies Does the Sell-Side Cover?
10.2.2 Buy-Side Analysts
1. Does the Buy-Side Use Sell-Side Research?
2. In General, Does a Sell-Side Analyst or a Buy-Side Analyst Cover More Stocks?
10.2.3 Financial Analyst Forecasting Literature
1. Sell-Side Research Clearly Matters
2. Analysts Obtain Much Value from Segment Reports
5. As an Investor, It Is Particularly Interesting When There Is a Wide Dispersion of Analyst
Forecasts
10.3 Capital Allocation
10.3.1 The Seven Places That Capital Can Be Allocated (Exhibit 10.4)
▪ Seven primary ways to allocate capital:
1. Mergers and Acquisitions
2. Capital Expenditures
10.3.2 Dividends versus Repurchases
▪ Management should repurchase shares when they are trading below intrinsic value and pay a
10.3.3 What Do Investors Want to See?
10.4 Corporate Governance
▪ Corporate governance refers to the rules, policies, and procedures that are used to direct and
10.4.1 The Board of Directors
1. CEO/Chair of the Board
2. Board Size
10.4.2 Anti-Takeover Provisions
▪ Corporations can use many tools in order to prevent takeovers, including:
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10.4.3 Compensation (Exhibits 10.5, 10.6)
1. Level of Compensation
3. Where to Find Compensation Information
10.5 Creating a Stock Pitch
▪ Pitching stocks is a crucial skill in both asset management and investment banking
▪ Normally includes:
10.5.1 Air Lease Pitch
▪ Background Information
10.5.2 A Few Closing Points Concerning Stock Pitches
▪ When doing a stock pitch, always remember that you are making an argument