4/26/2010

TONIGHT'S AGENDA

Portfolio Update

Goldman Sachs Sell

American Tower Buy

GFI Buy Pitch

RGA Buy Pitch

PORTFOLIO UPDATEAnthony Vitiello

RECENT TRANSACTIONS

Sell 300 Shares of ARD @ $36.93 on 4/13/2010

Buy 240 Shares of COP @ $56.32 on 4/13/2010

ALL-STARS

11.64%

11.63%

5.40%

5.87%

5.35%

DOGS

12.13

%

7.05%

6.74%

5.64%

5.61%

LARGEST HOLDINGS

Winn Dixie Stores: 6.01%

jetBlue Corporation: 5.61%

Constellation Brands : 4.85%

KBR Inc. 4.75%

Polo Ralph Lauren 4.71%

GOLDMAN SACHS: COMPANY

BACKGROUND

Global Diversified Financial Services Company

Until Credit Crisis was the largest US IB

Principal Activities Include:

Sales and Trading (FICC, Equities– Cash &

Derivatives),

Investment Banking (M&A, Advisory, ECM&DCM)

Asset Management & Security Services (GSAM, Prime

Brokerage, PWM)

BCIC GS: Approx $5,600 position, smallest

SELL THESIS

Litigation Overhang

Regulatory Overhang

Increasingly Difficult Comps

Fundamentally, the risks facing Goldman Sachs are

not priced into the stock thus not worth holding over

summer when we can not trade.

LITIGATION OVERHANG

Goldman Sachs is being sued by SEC for fraud

ABACUS : Mislead investors about hedge fund role

Goldman will not be found guilty: reputational

damage

Can governments/companies hire a company under

investigation?

This is not the beginning of the lawsuits

Headline risk: Stock sells off on news of new

investigations

Practice in CDO lawsuit was widespread

REGULATORY OVERHANG

Currently, Obama is aggressively pushing for

financial reform.

Speech last week at Cooper Union: He wants action

Considerable cross section of reforms offered

Range from the Volcker Plan to ISDA/Central Swap

clearinghouse

No one knows what final outcome will be

Healthcare as a proxy: considerable reform possible

While some measures will help BCIC can not react

over summer: Reconsider in fall?

INCREASINGLY DIFFICULT COMPS

2009: One of most robust trading markets for GS

Wider spreads from less liquidity: pricing power

Fewer players in derivative space: market share

Recent earnings announcement shows continuation

of good results

How much better can things get at Goldman?

Stock continues to trade poorly considering results

As we get later in year, 2009 hurdle gets higher and

higher.

SELL THESIS

Litigation Overhang

Regulatory Overhang

Increasingly Difficult Comps

Fundamentally, the risks facing Goldman Sachs are

not priced into the stock thus not worth holding over

summer when we can not trade.

AMERICAN TOWER: COMPANY

BACKGROUND

The largest tower company in the Americas

Company owns, manages and leases Cell, TV &

Microwave towers in US, LATAM & India

Based in Boston, MA Global footprint

Competes against Crown Castle International and

SBA

AMT: BUY THESIS

Attractive Industry Economics

Investing wisely in M&A abroad

Strong balance sheet, better then industry

iPhone Derivative Trade

BCIC Currently owns $10,500 worth of AMT;

Propose to add $3,000 more of shares to portfolio

ATTRACTIVE INDUSTRY ECONOMICS

The tower industry is very favorable for site owners:

1.8 customers per tower on new towers

Increasing prominence of smart phones pushes demand

for data/cell phone capacity.

High barriers to entry: need expertise, capital and

site locations to erect new towers

Reluctance of communities to add towers= supply

constrained.

Econ 101: Supply Down + Demand Up= Higher Prices

INVESTING WISELY IN M&A ABROAD

AMT is continuing to acquire cell towers throughout

India– big purchases from Essar

Different market then US: Growth stage, lower

prices, higher growth rate.

India will flow through the maturation curve, pricing

power will come as growth slows; currently a good offset

for slower growth US.

AMT has the leasing expertise: transport execution

from US to other markets

STRONG BALANCE SHEET, BETTER

THEN INDUSTRY

Company currently funds its balance sheet with

fixed rate debt vs. competitors who use mortgage

debt

Credit much better then securitization now

Credit Markets: Currently very favorable for

refinancing

Opportunity to add value by savvy financing as firm

becomes a taxpayer

$300MM Share buyback– continue to return money

to shareholders; buying back 10% of company

IPHONE DERIVATIVE TRADE

iPhone is nearing end of exclusivity with AT&T

Uncertainty as to whether it will come to Verizon

If it does, will drive new users to smartphone, upping

need for data/capacity

To keep exclusivity, AT&T may build out wireless

capacity to counter its chief flaw

AMT: AT&T is one of most active customer this yr

Any other iPhone expansion will drive new

smartphone users on margin

Demand for data & capacity only goes up in any

scenario

AMT: BUY THESIS

Attractive Industry Economics

Investing wisely in M&A abroad

Strong balance sheet, better then industry

iPhone Derivative Trade

BCIC Currently owns $10,500 worth of AMT;

Propose to add $3,000 more of shares to portfolio

GFI GROUP (GFIG)

What is an interdealer broker?

Limited capital commitment – no conflict of interest, different

business model than other financials currently in our portfolio

Principal & Agency

Central importance of employees and technology

Management the crisis to add brokers from struggling

firms should drive revenue growth as trading volumes

increase

The stock has significant upside (50%+) as the operating

environment normalizes.

Insiders agree – own 44% of shares outstanding

RECENT NEWS

Bank of America, Citigroup and J.P. Morgan recently announced Q1 results – trading revenues were much improved, suggesting strong improvements in trade volumes: Citigroup: Equity trading revenues +66%, fixed income trading

revenues +77% vs. Q4

JP Morgan: Equity trading revenues +197%, fixed income trading revenues +101% vs. Q4

On April 12th GFI announced that it is establishing a new commodities division, Latium Capital, to trade ethanol and natural gas liquids – brought in four experienced traders (with a combined 75 years in experience) to run the business

On April 14th the company announced a modification to its credit agreement, allowing it to buyback stock or issue dividends at $50mn vs. $20mn a year.

BROKERAGE GROWTH

The financial crisis forced many smaller interdealer brokers out of business, allowing GFI to hire new brokers with prior relationships and experience.

Moreover, many salesmen and traders at larger sell-side institutions—for instance, Citigroup and Banc of America—decided to move to smaller firms like GFI in order to broker bonds between former co-workers and clients.

For these reasons, brokerage personnel increased by 16% between 2007 and 2009; the 10-K notes: ―Expense related to sign-on bonuses paid to brokerage personnel increased from $25.3 million for the year ended December 31, 2007 to $67.3 million for the year ended December 31, 2009.‖

HOW TO THINK ABOUT THE VALUATION

Three components to GFI:

1. Cash

2. Brokerage

3. Technology

―Excess cash‖ = $200 million

As a broker, GFI is sometimes forced to temporarily

post capital to complete trades between two parties.

The ‗free cash‘ on the balance sheet is excess cash

$200 million = $1.17 per share

THE BROKERAGE As mentioned earlier, the brokerage business utilizes its technology,

relationships, and knowledge of specific markets to help traders at large

firms, e.g. Citigroup, manage risk and access liquidity.

By adding brokers during the crisis, GFI has excess capacity—i.e.,

underperforming brokers—that will begin to drive revenue/profit growth as

trading volumes increase.

As the environment normalizes and brokers return to previous efficiency

levels ($900k + in revenue), I estimate that the brokerage business will

earn $50-60 million, or 40 to 50 cents per share.

BROKERAGE VALUATION In a normal environment, the market has valued interdealer

brokers at 20-30x earnings:

Thus, the brokerage business could be worth $8 per share

(20x earnings * 40 cents in earnings per share = $8) to $15

per share (30x earnings * 50 cents in earnings per share)

TECHNOLOGY GROWTH

• Fueled by rapid growth in the derivatives markets and in GFI-executed trades, the technology/data/analytics business has grown rapidly in recent years.

• Additional benefit of the technology business: broadens client base, as hedge funds, corporations, and financial advisors are clients

Technology Product Offerings

• Trayport: European OTC Energy markets, e.g. electric power, coal, and emissions; software is sold on a subscription basis and customized versions are available

• GFI FENICS: lets traders control/monitor the lifecycle of their foreign exchange trades – price discovery on exotic options, risk management, etc.; sold on a subscription basis to banks, corporations, and hedge funds

• Licensing of market data: collects pricing on currency options, credit derivatives, interest rate swaps, etc. and sells it to data vendors such as Thomson Reuters and Bloomberg

TECHNOLOGY VALUATION

• Since the brokerage business is so undervalued by the market presently,

we are getting this highly profitable, rapidly growing business for free at the

current price

• Other financial data providers such as EDGAR Online and Thomson

Reuters trade for 2-3x sales

• By rough estimates GFI‘s technology business could be worth $110 million

(2x sales) to $165 million (3x sales) $110 million = 93 cents per share

$165 million = $1.40 per share

ADD IT ALL UP

Current stock price: ~$6 per share

Minus: Excess cash: $1.17 per share

Minus: Technology valuation: $1 per share (conservative

– low-end)

Thus, the stock is currently valuing the brokerage

business at less than $4 per share; this is a

business worth $8 to $15 per share as the

operating environment normalizes.

The company reports earnings on Friday

Earnings are difficult to predict; however, the recent

reports from the major investment banks suggest that

trading volumes improved during the quarter

NOTES/APPENDIX

Operate in four product segments: credit, financial,

equity, and commodity

Competitive advantage:

Pre-trade technology: data, pricing, analytics

Hybrid platform: Automated trade reporting/settlement;

customized offerings for large customers

Post-trade technology

REINSURANCE GROUP OF AMERICA

Life Reinsurance (#2 in US, #3 Worldwide)

What is Life Reinsurance?

Customer is Primary ―Cedent‖ Insurer

Transfers Risk, Frees Up Capital

More Specialized, Niche Business

$20 Trillion Life Insurance in Force in US

$8.1 Trillion of Life Reinsurance in Force

5 Largest Reinsurers Have 71% of Market

INDUSTRY DYNAMIC

Heavily concentrated

in top players

Consolidation over

last decade continues

Scottish Re (#5) now

in run-off

RGA is high-quality

pure play on life re

HOW (RE-)INSURANCE WORKS

Companies Make Money (in theory):

Premium Income Less Claims Expense

Life reinsurance spread mainly driven by mortality

RGA has particular expertise in this area

Investment Income

―Float‖ comes from the time delay between collecting

premiums and paying out claims

Investment income is turning up after sub-par/poor

performances in 2007 and 2008, but low yields are dampening

current returns

WHY BUY?

Favorable Industry Economics

Primary Life Insurers Face Capital Constraints

Reinsurance Consolidation = Pricing Power

Stable Double-Digit ROE

Diversifies Financial Sector Exposure

Inexpensive Stock

Midpoint EPS = $6.60 (8x Earnings)

Over-Capitalized ($500 Million), 1x BV

WHAT RGA ―SHOULD‖ BE WORTH

Good insurers typically trade at ~1.5x book

RGA trades at 1.0x book

…or ~12x trailing earnings

RGA trades at 10x trailing earnings

Book value should grow at ~11-12% annually over the next few years

Cheaper to buy existing reinsurance business than to write new business?

ANNOUNCEMENTS &

HOUSEKEEPING

Market Game– Keep Trading!!!

Officer Elections-Details have been sent out

Tee Shirt Ideas– Email vitiella@bc.edu

We will be order very soon!