Peak Resources & Energy Strategy Presentation
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Peak Resources & Energy Portfolio
Contents
I. Firm Overview Page 3 Page 6 Page 7 Page 11 Page 18
II. Investment Philosophy
III. Portfolio Strategy Thesis
IV. Investment Process & Portfolio Construction V. Appendix
Page 2
Leeb Capital Management
• Recognized Thought Leadership: Identification of Critical Mega-‐‑Trends and Translation to Investment Performance – Dr. Leeb is the author of seven books, including multiple National Best Sellers. He also sits on various corporate boards where he shares his strategic perspectives on financial markets and natural resources. • Extensive Experience: Reputable Investment CommiXee and Established Methodologies – LCM’s talented Investment CommiXee employs a disciplined investment philosophy and process with the goal of outperforming appropriate benchmarks.
•
– The Investment CommiXee utilizes risk controls to improve the portfolio’s risk/reward profile as well as maintain diversification. Impressive Performance: Favorable Long-‐‑Term Returns Relative to Comparable Indices, Peers, and Risk* – LCM’s Peak Resources & Energy Portfolio is geared towards providing investors with positive inflation-‐‑adjusted returns – combating the forces of inflation, deflation, and the weakening of the US dollar while taking advantage of rising commodity prices – LCM’s performance track record, which is verified by an outside accounting firm, places it in the upper echelon of similar managers (Large-‐‑Cap Growth).
•
A?entive Customer Service: Comprehensive Portfolio Management, Investment Advice, and Service – Multiple strategies, including Large-‐‑Cap Growth, Peak Resources & Energy, and Income & Growth
* See Supplement for full performance information and important disclosures. Page 3
Thought Leadership in Natural Resources
Advisory:
• Head of Advisory Board for Leor Exploration & Production, LLC; Among transactions, sold energy business to Encana for $2.55 billion. • Advisory Board member of Electrum USA Ltd., one of the world’s largest privately held gold exploration companies, and Sunshine Silver Mines Corp., a privately held silver exploration company.
Author: “As we’ve stressed, because of its unique ability to thrive under any kind of economic turbulence, gold is the single most important investment to own in coming years.” Game Over: How You Can Prosper in a Sha?ered Economy (2009)
“In the coming energy crisis, the devastation will likely be worse than in the 1970s. Because the energy shortage will be more severe and permanent, inflation may rise much higher and faster.” The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel (2006)
“Prices will likely reach at least $100 a barrel before the decade is out.” – “In fact, there is good reason to think that within a fairly short time, gold, which in the 1990’s was one of the dismal investments around, will be soaring. It’s not far-‐‑fetched to think that within a few years gold may reach $1,000 an ounce.” The Oil Factor: Protect Yourself—And Profit—from the Coming Energy Crisis (2004)
“Nonetheless, we have no hesitancy in predicting that within the next few years oil shortages will develop, oil prices will rise sharply, and oil stocks will soar.” Defying the Market: Profiting in the Turbulent Post-‐‑Technology Market Boom (1999)
Page 4
Investment Commi?ee
• Discusses a variety of topics including the economy, monetary policy, the direction of interest rates, energy prices, industrial trends, and other macroeconomic events that could impact a sector or industry
Stephen Leeb, Ph.D.
Chief Investment Officer
Patrick DeSouza, J.D., Ph.D.
President
• Identifies mega-‐‑trends that represent opportunities in the global economy and sectors with high growth rates
Portfolio Manager/ Head Trader
David Sandell, CFA
Genia Turanova, CFA
Portfolio Manager
• Establishes view of relative value expectations for sectors that are likely to outperform the market
Roger Conrad, M.A.
Portfolio Manager
• Meets at least once per week
Gregory Dorsey
Portfolio Manager
• Low Investment CommiXee turnover; Most current members have been involved for majority of track record* Macro-‐‑economic analysis focuses fundamental research efforts and portfolio construction process; Industry/company earnings and growth estimates informed by top-‐‑down research
* See Appendix for full Investment CommiXee biographies.
Page 5
Established Philosophy & Methodology
Our investment methodology seeks to identify:
• Sectors with revenues growing faster than the economy • Companies in these sectors with consistent revenue and earnings growth • High-‐‑quality stocks with a: Dominant industry position Positive & visible growth profile (earnings and/or production) Superior operating record Balance sheet strength Reasonable price defined by a below-‐‑market Forward P/E to Earnings Growth (PEG) ratio
- - - - -
We believe superior long-‐‑term results are best achieved by selecting growth stocks whose investment value is not fully reflected in current market prices.
Page 6
Strategy: Combining Top-‐‑Down and Bo?om-‐‑Up
• • • • • Top-‐‑down macroeconomic overlay concentrates fundamental analytical efforts into outperforming economic sectors and focuses the portfolio construction process Disciplined security selection process based on boXom-‐‑up fundamental research with both qualitative and quantitative techniques Invests in dominant companies in rapidly growing industries that demonstrate sustainable growth rates and are undervalued relative to their growth prospects Focused portfolio containing 30 to 40 positions Portfolio constructed in an effort to maximize reward while minimizing risk in leveraging major trends in resource markets
* See Supplement for full performance information and important disclosures. Page 7
Strategy Thesis: Energy and Materials
• The Developing World has overtaken Developed World in terms of combined GDP • The continued growth of China, India, Brazil, and others is straining resource markets
• The Developed World is furthering the strain as new initiatives to combat higher energy prices affect other resource markets
– Solar energy technology requires vast quantities of silver – Hybrid cars require far more copper than their conventional counterparts – Wind energy technology requires rare earth elements
– Economic growth (esp. industrialization) is energy intensive – driving global oil demand. LiXle meaningful production increase to meet rising energy needs. – Major infrastructure projects taking place around the world are causing demand for base metals to outstrip supply. This includes copper, iron ore, zinc, and many minerals. – Growing populations and rising income levels in developing nations are straining global food supplies, hastening demand for fertilizer.
Page 8
Strategy Thesis: Precious Metals
• Accommodative Monetary and Fiscal policy from governments and central banks around the developed world debase the value of paper currencies
– Specifically, record debt and spending levels by the US Government (and its proxies) have raised questions about the US dollar’s standing as the world reserve currency (will likely transition to a basket of currencies, including gold) – Central banks have added to gold positions as real value hedge
• Gold, and other precious metals thrive in times of economic turbulence, whether it be inflation, stagflation, or deflation • Rising material prices will find their way to finished goods, stoking inflationary forces, further adding to devaluation of paper currencies, and hastening the rise in precious metal prices
Page 9
History Repeated: A Decade of Turbulence
1970s 2000s
• In the 1970s, sharply rising energy costs led to stagflation: high unemployment, high inflation, and economic recession. Both oil and gold dramatically outperformed U.S. large-‐‑cap stocks. • In the 2000s, we saw a similar phenomenon. Today, the economy appears destined to continue in a boom to bust cycle, with resources as one of the last true wealth creators remaining.
Data Source: Bloomberg Page 10
Investment Process
Investment Universe 500 Stocks Bo?om-‐‑Up Fundamental Research Watch List: 100 Stocks Portfolio: 30-‐‑40 Stocks Portfolio Construction Top-‐‑Down Macro-‐‑Economic Analysis
Page 11
Investment Process
Investment Universe:
• Our stock universe begins with the components of S&P 500 GICS Energy Sector Index and the Philadelphia Gold & Silver Index • Additional stocks outside of these indices can be included if they satisfy our fundamental criteria. These stocks could be identified in energy and natural resource ETFs or through our boXom-‐‑up research, discussions with Wall Street analysts, industry reports, the press, and other publications
Top-‐‑Down Macroeconomic Analysis:
• Macro-‐‑economic analysis focuses fundamental research efforts to core sectors of energy and materials, as well as related sector groups including alternative energy; Industry and company growth estimates informed by top-‐‑down research
BoXom-‐‑Up Fundamental Research:
• Companies within core sectors are evaluated to identify candidates that meet the following characteristics: -‐‑ Addressable market that ties in with Peak Resources theme -‐‑ Market/Industry dominance -‐‑ Projected growth rate greater the market -‐‑ Market capitalization greater than $250 million
The resulting Watch List of approximately 100 stocks is further analyzed in the portfolio construction process
Page 12
Portfolio Construction
LCM Portfolio Managers utilize established fundamental research processes to delve deeper into the Watch List and construct an investment portfolio. This Bo>om-‐‑Up research incorporates:
• Dominance & Competitive Analysis – LCM places an emphasis on identifying companies with strong franchises that have: Growth Analysis – Informed by Top-‐‑Down Macroeconomic analysis, portfolio companies should exhibit positive growth prospects, including:
• • • • Visible growth profile (earnings and/or production) Expectations for sector Expectations relative to peers Sales growth by market segments • Dominant position and market share in industry or niche • Market position largely immune to competitive threats (high barriers to entry)
•
•
Quality Analysis – LCM concentrates its efforts on finding sound investments that can withstand market turmoil. This quality comes in the form of: Management Analysis – LCM concentrates its efforts on finding companies with proven leaders. We consider a company’s management in regards to:
• • • • Operational track record Reputation and experience Strategic vision Stability • Balance sheet and financial strength • Profitability (when applicable)
•
•
Valuation Analysis – Portfolio inclusion requires aXractive valuation in addition to the above.
• Forward PEG less than that of the market and/or peers
Page 13
Buy Example
• Macro-‐‑Economic Analysis ü Themes: Currency Debasement & Growth of Emerging Economies
ü Core Sectors: Precious & Base Metals
Investment Investment Universe Universe 500500 300 -‐‑ Stocks Stocks
• Security Characteristics at purchase ü Capitalization: $600 million
BoXom -‐‑-‐‑Up BoXom Up Fundamental Fundamental Research Research
Top -‐‑Down Top -‐‑Down Macro-‐‑-‐‑Economic Macro Economic Analysis Analysis
ü 29.3 million oz. proven and probable gold reserves ü 8.9 billion lbs. of measured and indicated copper reserves ü Highly leveraged to rising metals prices
Watch List: Watch List 100 Stocks 150 Stocks
Portfolio: Portfolio 30 -‐‑-‐‑ 45 35 40 Stocks Stocks
Portfolio Portfolio Construction Construction
• Fundamental Research
• Portfolio Construction ü Initial Position Size: 2%
ü Stock undervalued due to remoteness of mines and lack of infrastructure ü Potential for substantial upward revision in reserve estimates ü Assets located in politically stable countries ü Partnered with two of the world’s largest mining companies
All information is provided for informational purposes only and should not be deemed as an investment recommendation. Page 14
Sell Discipline
LCM Portfolio Managers adhere to strict sell discipline to protect client portfolios. Positions are sold if any of the following occur:
• Stock becomes overpriced – LCM does not use explicit price targets, but rather relies on relative valuation metrics such as the Forward PEG ratio. Stock can be replaced with a be?er risk/reward opportunity – Portfolio managers are constantly researching for more aXractive stocks. Current holdings may be replaced with other securities that demonstrate beXer upside potential, a more favorable PEG, or a lower risk profile. Company undergoes changes in its business fundamentals – LCM continues to monitor and evaluate a company’s competitive edge; a stock is sold should this be compromised or an event occur that threatens a company’s likelihood of meeting expectations. Such an event may be either macro-‐‑economic or company-‐‑specific in nature. Position weight reaches 8% – Individual positions will not exceed 8%. Upon reaching this level, a stock will either be scaled back or sold entirely (depending on valuation and other factors). Price decline of 20% – Any discrepancy in performance relative to a company’s sector and/or the market is reviewed by the Investment CommiXee. If the cause is fundamental in nature, the stock will be sold from the portfolio.
•
•
•
•
Page 15
Sell Example
• Original Thesis
ü Theme: Peak Energy ü Core Sector: Oil Exploration & Production ü Projected Earnings Growth: 10%, Production Growth: 9% ü Forward PEG: 1.3 < S&P 500 = 2.0 • Sell Rationale ü Company still holds tremendous deep-‐‑water reserves, but lower oil prices cloud investment return equation for hard-‐‑to-‐‑reach deposits. • Rising prices for iron ore and steel raise price to drill for ultra-‐‑deepwater deposits • Other non-‐‑conventional, easier-‐‑to-‐‑reach oil coming on market in short-‐‑term • Concerns over deepwater safety (personal and environmental) raise costs ü Government’s majority ownership stake may compromise company priorities ü Lowered our production growth estimates • Stock no longer aXractive relative to other exploration & production companies
All information is provided for informational purposes only and should not be deemed as an investment recommendation. Page 16
Portfolio Composition & Risk Controls
Weighting Guidelines
Capitalization • Up to 15% of portfolio may be invested in securities with market-‐‑cap below $250 million Sector Allocations • LCM aims to maintain a balance between energy and materials (incl. precious metals), though the actual portfolio distribution will be determined by market conditions • The portfolio may also include investments in other sectors that could be beneficiaries of resource scarcity (e.g. defense, technology, etc.) • LCM aims to diversify across sub-‐‑industries within targeted sectors
Security Level Risk Controls
Capitalization • Seek market-‐‑cap greater than $250 million • • Initial Position Size 2% -‐‑ 4% based on the risk of the underlying position Investments with market cap less than $250 million have an initial position size of 2% or less • • Position Limits 8% maximum weighting Typically not larger than 5%
Page 17
Appendix
Page 18
Investment Commi?ee
Stephen Leeb, Ph.D., Founder and Chief Investment Officer As Leeb Capital Management, Inc.’s Investment CommiXee Chairman, Dr. Leeb uses a systematic approach in evaluating market trends. His team of investment professionals combines knowledge of macro-‐‑economic trends, current market conditions and detailed fundamental research about specific companies. They apply this knowledge to guide decisions regarding which stocks are placed in portfolios under the Firm’s management. Dr. Leeb is responsible for coordinating the macro-‐‑economic analysis and his fundamental research focuses on the energy, materials, and industrial sectors. Stephen Leeb is the author of seven books. His latest book: Game Over: How You Can Prosper in a Sha?ered Economy (Business Plus, 2009), offers a wealth of prudent and potentially profitable strategies for surviving what he predicts will be an extended downturn and a sobering look at the options available to solving the crisis. Dr. Leeb currently sits on the board of both public and private companies, including the advisory board to two sizeable precious metal exploration companies. He is also a recurring guest on Fox News, Bloomberg, CNN, and other media outlets. Dr. Leeb received his bachelor’s degree in Economics from the University of Pennsylvania’s Wharton School of Business. He then earned his master’s degree in Mathematics and Ph.D. in Psychology from the University of Illinois. Patrick DeSouza, J.D., Ph.D., President Joining Leeb Capital Management, Inc. as President in 2008, Dr. DeSouza brings leadership experience that will reinforce our capabilities to deliver first-‐‑tier performance long-‐‑term. Dr. DeSouza is also CEO of the Plain Sight Group, a technology holding company centered at Yale University with various investments in private companies. Plain Sight and its team of Yale scientists have been working with Leeb Capital to develop next generation quantitative tools with the goal of providing Leeb Capital with an analytic edge. In addition to Plain Sight, Pat has twenty years of experience in investment banking and practicing securities law. Over the course of his career, Pat has significant experience with respect to billions of dollars of M&A and corporate finance transactions both in the United States and internationally. Dr. DeSouza has also served at the White House as Director for Inter-‐‑American Affairs on the National Security Council. In addition to several articles on economic policy, he is the author of Economic Strategy and National Security (Westview 2000) which includes contributions from former senior members of the Bush and Clinton Administrations. He is currently a visiting lecturer at the Yale Law School where he teaches a course on global wealth management. Dr. DeSouza is a graduate of Columbia College, Yale Law School and Stanford Graduate School where he wrote his doctoral dissertation on foreign investment in the United States. He is a member of the Council on Foreign Relations.
Page 19
Investment Commi?ee
David A. Sandell, CFA, Portfolio Manager and Head Trader David Sandell began his career with Leeb Capital Management in 2004. He currently serves in the capacity of Portfolio Manager, Head Trader, and member of the Investment CommiXee. David provides fundamental research in multiple sectors. As Head Trader, David is responsible for trade allocations and trade execution. He is also responsible for maintaining the firm’s GIPS compliant composites. David’s market observations have been quoted in the media including Wall Street Journal Radio, Reuters and Bloomberg TV and Radio. Mr. Sandell graduated with honors from Washington University in St. Louis in 2004 with a degree in finance and psychology. David is a CFA charterholder. Genia Turanova, CFA, Portfolio Manager Genia Turanova joined Leeb Capital Management in 2001, and currently serves as a Portfolio Manager and member of the Investment CommiXee. She provides fundamental research in multiple sectors. Prior to joining the LCM team, Genia was a research analyst with Independence Asset Management LLC in New York. She received her BS degree in Economics from Kharkiv National University (Ukraine), where she later taught for more than nine years. Ms. Turanova earned an MBA in Finance and Investments from the Honors MBA Program at Baruch College, CUNY in 2000. Genia is a CFA charterholder. Gregory Dorsey, Portfolio Manager Greg Dorsey joined the Leeb Group in 2004, and currently serves in the capacity of Portfolio Manager and member of the Investment CommiXee. Greg brings to the table 24 years of experience as a securities analyst and portfolio manager. He has wriXen for and served as editor of several award-‐‑winning investment publications over the years and currently contributes to several Leeb Group newsleXers. Mr. Dorsey holds a BA degree in Economics and International Relations from the University of Delaware. Roger Conrad, M.A., Portfolio Manager Roger S. Conrad is a Portfolio Manager and member of LCM’s Investment CommiXee. He focuses primarily on securities that provide a combination of income and the potential for long-‐‑term capital appreciation. Roger has a long history of advising on income-‐‑producing equity securities. In 1989, he founded the Utility Forecaster newsleXer, which presents investment advice on electric, natural gas, communications, water, and foreign utility stocks, bonds and preferred stocks. In 1997, Utility Forecaster was named the Best Financial Advisory by the NewsleXer Publishers Association. Roger has worked with Leeb Capital Management, Inc.’s President, Stephen Leeb, since 1990 in various capacities. He has also co-‐‑authored two books with Stephen, Market Timing for the Nineties and The Agile Investor. Roger holds a B.A. in Anthropology from Emory University and a Masters of International Management from the American Graduate School of International Management.
Page 20
Peak Resources & Energy Portfolio
Contents
I. Firm Overview Page 3 Page 6 Page 7 Page 11 Page 18
II. Investment Philosophy
III. Portfolio Strategy Thesis
IV. Investment Process & Portfolio Construction V. Appendix
Page 2
Leeb Capital Management
• Recognized Thought Leadership: Identification of Critical Mega-‐‑Trends and Translation to Investment Performance – Dr. Leeb is the author of seven books, including multiple National Best Sellers. He also sits on various corporate boards where he shares his strategic perspectives on financial markets and natural resources. • Extensive Experience: Reputable Investment CommiXee and Established Methodologies – LCM’s talented Investment CommiXee employs a disciplined investment philosophy and process with the goal of outperforming appropriate benchmarks.
•
– The Investment CommiXee utilizes risk controls to improve the portfolio’s risk/reward profile as well as maintain diversification. Impressive Performance: Favorable Long-‐‑Term Returns Relative to Comparable Indices, Peers, and Risk* – LCM’s Peak Resources & Energy Portfolio is geared towards providing investors with positive inflation-‐‑adjusted returns – combating the forces of inflation, deflation, and the weakening of the US dollar while taking advantage of rising commodity prices – LCM’s performance track record, which is verified by an outside accounting firm, places it in the upper echelon of similar managers (Large-‐‑Cap Growth).
•
A?entive Customer Service: Comprehensive Portfolio Management, Investment Advice, and Service – Multiple strategies, including Large-‐‑Cap Growth, Peak Resources & Energy, and Income & Growth
* See Supplement for full performance information and important disclosures. Page 3
Thought Leadership in Natural Resources
Advisory:
• Head of Advisory Board for Leor Exploration & Production, LLC; Among transactions, sold energy business to Encana for $2.55 billion. • Advisory Board member of Electrum USA Ltd., one of the world’s largest privately held gold exploration companies, and Sunshine Silver Mines Corp., a privately held silver exploration company.
Author: “As we’ve stressed, because of its unique ability to thrive under any kind of economic turbulence, gold is the single most important investment to own in coming years.” Game Over: How You Can Prosper in a Sha?ered Economy (2009)
“In the coming energy crisis, the devastation will likely be worse than in the 1970s. Because the energy shortage will be more severe and permanent, inflation may rise much higher and faster.” The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel (2006)
“Prices will likely reach at least $100 a barrel before the decade is out.” – “In fact, there is good reason to think that within a fairly short time, gold, which in the 1990’s was one of the dismal investments around, will be soaring. It’s not far-‐‑fetched to think that within a few years gold may reach $1,000 an ounce.” The Oil Factor: Protect Yourself—And Profit—from the Coming Energy Crisis (2004)
“Nonetheless, we have no hesitancy in predicting that within the next few years oil shortages will develop, oil prices will rise sharply, and oil stocks will soar.” Defying the Market: Profiting in the Turbulent Post-‐‑Technology Market Boom (1999)
Page 4
Investment Commi?ee
• Discusses a variety of topics including the economy, monetary policy, the direction of interest rates, energy prices, industrial trends, and other macroeconomic events that could impact a sector or industry
Stephen Leeb, Ph.D.
Chief Investment Officer
Patrick DeSouza, J.D., Ph.D.
President
• Identifies mega-‐‑trends that represent opportunities in the global economy and sectors with high growth rates
Portfolio Manager/ Head Trader
David Sandell, CFA
Genia Turanova, CFA
Portfolio Manager
• Establishes view of relative value expectations for sectors that are likely to outperform the market
Roger Conrad, M.A.
Portfolio Manager
• Meets at least once per week
Gregory Dorsey
Portfolio Manager
• Low Investment CommiXee turnover; Most current members have been involved for majority of track record* Macro-‐‑economic analysis focuses fundamental research efforts and portfolio construction process; Industry/company earnings and growth estimates informed by top-‐‑down research
* See Appendix for full Investment CommiXee biographies.
Page 5
Established Philosophy & Methodology
Our investment methodology seeks to identify:
• Sectors with revenues growing faster than the economy • Companies in these sectors with consistent revenue and earnings growth • High-‐‑quality stocks with a: Dominant industry position Positive & visible growth profile (earnings and/or production) Superior operating record Balance sheet strength Reasonable price defined by a below-‐‑market Forward P/E to Earnings Growth (PEG) ratio
- - - - -
We believe superior long-‐‑term results are best achieved by selecting growth stocks whose investment value is not fully reflected in current market prices.
Page 6
Strategy: Combining Top-‐‑Down and Bo?om-‐‑Up
• • • • • Top-‐‑down macroeconomic overlay concentrates fundamental analytical efforts into outperforming economic sectors and focuses the portfolio construction process Disciplined security selection process based on boXom-‐‑up fundamental research with both qualitative and quantitative techniques Invests in dominant companies in rapidly growing industries that demonstrate sustainable growth rates and are undervalued relative to their growth prospects Focused portfolio containing 30 to 40 positions Portfolio constructed in an effort to maximize reward while minimizing risk in leveraging major trends in resource markets
* See Supplement for full performance information and important disclosures. Page 7
Strategy Thesis: Energy and Materials
• The Developing World has overtaken Developed World in terms of combined GDP • The continued growth of China, India, Brazil, and others is straining resource markets
• The Developed World is furthering the strain as new initiatives to combat higher energy prices affect other resource markets
– Solar energy technology requires vast quantities of silver – Hybrid cars require far more copper than their conventional counterparts – Wind energy technology requires rare earth elements
– Economic growth (esp. industrialization) is energy intensive – driving global oil demand. LiXle meaningful production increase to meet rising energy needs. – Major infrastructure projects taking place around the world are causing demand for base metals to outstrip supply. This includes copper, iron ore, zinc, and many minerals. – Growing populations and rising income levels in developing nations are straining global food supplies, hastening demand for fertilizer.
Page 8
Strategy Thesis: Precious Metals
• Accommodative Monetary and Fiscal policy from governments and central banks around the developed world debase the value of paper currencies
– Specifically, record debt and spending levels by the US Government (and its proxies) have raised questions about the US dollar’s standing as the world reserve currency (will likely transition to a basket of currencies, including gold) – Central banks have added to gold positions as real value hedge
• Gold, and other precious metals thrive in times of economic turbulence, whether it be inflation, stagflation, or deflation • Rising material prices will find their way to finished goods, stoking inflationary forces, further adding to devaluation of paper currencies, and hastening the rise in precious metal prices
Page 9
History Repeated: A Decade of Turbulence
1970s 2000s
• In the 1970s, sharply rising energy costs led to stagflation: high unemployment, high inflation, and economic recession. Both oil and gold dramatically outperformed U.S. large-‐‑cap stocks. • In the 2000s, we saw a similar phenomenon. Today, the economy appears destined to continue in a boom to bust cycle, with resources as one of the last true wealth creators remaining.
Data Source: Bloomberg Page 10
Investment Process
Investment Universe 500 Stocks Bo?om-‐‑Up Fundamental Research Watch List: 100 Stocks Portfolio: 30-‐‑40 Stocks Portfolio Construction Top-‐‑Down Macro-‐‑Economic Analysis
Page 11
Investment Process
Investment Universe:
• Our stock universe begins with the components of S&P 500 GICS Energy Sector Index and the Philadelphia Gold & Silver Index • Additional stocks outside of these indices can be included if they satisfy our fundamental criteria. These stocks could be identified in energy and natural resource ETFs or through our boXom-‐‑up research, discussions with Wall Street analysts, industry reports, the press, and other publications
Top-‐‑Down Macroeconomic Analysis:
• Macro-‐‑economic analysis focuses fundamental research efforts to core sectors of energy and materials, as well as related sector groups including alternative energy; Industry and company growth estimates informed by top-‐‑down research
BoXom-‐‑Up Fundamental Research:
• Companies within core sectors are evaluated to identify candidates that meet the following characteristics: -‐‑ Addressable market that ties in with Peak Resources theme -‐‑ Market/Industry dominance -‐‑ Projected growth rate greater the market -‐‑ Market capitalization greater than $250 million
The resulting Watch List of approximately 100 stocks is further analyzed in the portfolio construction process
Page 12
Portfolio Construction
LCM Portfolio Managers utilize established fundamental research processes to delve deeper into the Watch List and construct an investment portfolio. This Bo>om-‐‑Up research incorporates:
• Dominance & Competitive Analysis – LCM places an emphasis on identifying companies with strong franchises that have: Growth Analysis – Informed by Top-‐‑Down Macroeconomic analysis, portfolio companies should exhibit positive growth prospects, including:
• • • • Visible growth profile (earnings and/or production) Expectations for sector Expectations relative to peers Sales growth by market segments • Dominant position and market share in industry or niche • Market position largely immune to competitive threats (high barriers to entry)
•
•
Quality Analysis – LCM concentrates its efforts on finding sound investments that can withstand market turmoil. This quality comes in the form of: Management Analysis – LCM concentrates its efforts on finding companies with proven leaders. We consider a company’s management in regards to:
• • • • Operational track record Reputation and experience Strategic vision Stability • Balance sheet and financial strength • Profitability (when applicable)
•
•
Valuation Analysis – Portfolio inclusion requires aXractive valuation in addition to the above.
• Forward PEG less than that of the market and/or peers
Page 13
Buy Example
• Macro-‐‑Economic Analysis ü Themes: Currency Debasement & Growth of Emerging Economies
ü Core Sectors: Precious & Base Metals
Investment Investment Universe Universe 500500 300 -‐‑ Stocks Stocks
• Security Characteristics at purchase ü Capitalization: $600 million
BoXom -‐‑-‐‑Up BoXom Up Fundamental Fundamental Research Research
Top -‐‑Down Top -‐‑Down Macro-‐‑-‐‑Economic Macro Economic Analysis Analysis
ü 29.3 million oz. proven and probable gold reserves ü 8.9 billion lbs. of measured and indicated copper reserves ü Highly leveraged to rising metals prices
Watch List: Watch List 100 Stocks 150 Stocks
Portfolio: Portfolio 30 -‐‑-‐‑ 45 35 40 Stocks Stocks
Portfolio Portfolio Construction Construction
• Fundamental Research
• Portfolio Construction ü Initial Position Size: 2%
ü Stock undervalued due to remoteness of mines and lack of infrastructure ü Potential for substantial upward revision in reserve estimates ü Assets located in politically stable countries ü Partnered with two of the world’s largest mining companies
All information is provided for informational purposes only and should not be deemed as an investment recommendation. Page 14
Sell Discipline
LCM Portfolio Managers adhere to strict sell discipline to protect client portfolios. Positions are sold if any of the following occur:
• Stock becomes overpriced – LCM does not use explicit price targets, but rather relies on relative valuation metrics such as the Forward PEG ratio. Stock can be replaced with a be?er risk/reward opportunity – Portfolio managers are constantly researching for more aXractive stocks. Current holdings may be replaced with other securities that demonstrate beXer upside potential, a more favorable PEG, or a lower risk profile. Company undergoes changes in its business fundamentals – LCM continues to monitor and evaluate a company’s competitive edge; a stock is sold should this be compromised or an event occur that threatens a company’s likelihood of meeting expectations. Such an event may be either macro-‐‑economic or company-‐‑specific in nature. Position weight reaches 8% – Individual positions will not exceed 8%. Upon reaching this level, a stock will either be scaled back or sold entirely (depending on valuation and other factors). Price decline of 20% – Any discrepancy in performance relative to a company’s sector and/or the market is reviewed by the Investment CommiXee. If the cause is fundamental in nature, the stock will be sold from the portfolio.
•
•
•
•
Page 15
Sell Example
• Original Thesis
ü Theme: Peak Energy ü Core Sector: Oil Exploration & Production ü Projected Earnings Growth: 10%, Production Growth: 9% ü Forward PEG: 1.3 < S&P 500 = 2.0 • Sell Rationale ü Company still holds tremendous deep-‐‑water reserves, but lower oil prices cloud investment return equation for hard-‐‑to-‐‑reach deposits. • Rising prices for iron ore and steel raise price to drill for ultra-‐‑deepwater deposits • Other non-‐‑conventional, easier-‐‑to-‐‑reach oil coming on market in short-‐‑term • Concerns over deepwater safety (personal and environmental) raise costs ü Government’s majority ownership stake may compromise company priorities ü Lowered our production growth estimates • Stock no longer aXractive relative to other exploration & production companies
All information is provided for informational purposes only and should not be deemed as an investment recommendation. Page 16
Portfolio Composition & Risk Controls
Weighting Guidelines
Capitalization • Up to 15% of portfolio may be invested in securities with market-‐‑cap below $250 million Sector Allocations • LCM aims to maintain a balance between energy and materials (incl. precious metals), though the actual portfolio distribution will be determined by market conditions • The portfolio may also include investments in other sectors that could be beneficiaries of resource scarcity (e.g. defense, technology, etc.) • LCM aims to diversify across sub-‐‑industries within targeted sectors
Security Level Risk Controls
Capitalization • Seek market-‐‑cap greater than $250 million • • Initial Position Size 2% -‐‑ 4% based on the risk of the underlying position Investments with market cap less than $250 million have an initial position size of 2% or less • • Position Limits 8% maximum weighting Typically not larger than 5%
Page 17
Appendix
Page 18
Investment Commi?ee
Stephen Leeb, Ph.D., Founder and Chief Investment Officer As Leeb Capital Management, Inc.’s Investment CommiXee Chairman, Dr. Leeb uses a systematic approach in evaluating market trends. His team of investment professionals combines knowledge of macro-‐‑economic trends, current market conditions and detailed fundamental research about specific companies. They apply this knowledge to guide decisions regarding which stocks are placed in portfolios under the Firm’s management. Dr. Leeb is responsible for coordinating the macro-‐‑economic analysis and his fundamental research focuses on the energy, materials, and industrial sectors. Stephen Leeb is the author of seven books. His latest book: Game Over: How You Can Prosper in a Sha?ered Economy (Business Plus, 2009), offers a wealth of prudent and potentially profitable strategies for surviving what he predicts will be an extended downturn and a sobering look at the options available to solving the crisis. Dr. Leeb currently sits on the board of both public and private companies, including the advisory board to two sizeable precious metal exploration companies. He is also a recurring guest on Fox News, Bloomberg, CNN, and other media outlets. Dr. Leeb received his bachelor’s degree in Economics from the University of Pennsylvania’s Wharton School of Business. He then earned his master’s degree in Mathematics and Ph.D. in Psychology from the University of Illinois. Patrick DeSouza, J.D., Ph.D., President Joining Leeb Capital Management, Inc. as President in 2008, Dr. DeSouza brings leadership experience that will reinforce our capabilities to deliver first-‐‑tier performance long-‐‑term. Dr. DeSouza is also CEO of the Plain Sight Group, a technology holding company centered at Yale University with various investments in private companies. Plain Sight and its team of Yale scientists have been working with Leeb Capital to develop next generation quantitative tools with the goal of providing Leeb Capital with an analytic edge. In addition to Plain Sight, Pat has twenty years of experience in investment banking and practicing securities law. Over the course of his career, Pat has significant experience with respect to billions of dollars of M&A and corporate finance transactions both in the United States and internationally. Dr. DeSouza has also served at the White House as Director for Inter-‐‑American Affairs on the National Security Council. In addition to several articles on economic policy, he is the author of Economic Strategy and National Security (Westview 2000) which includes contributions from former senior members of the Bush and Clinton Administrations. He is currently a visiting lecturer at the Yale Law School where he teaches a course on global wealth management. Dr. DeSouza is a graduate of Columbia College, Yale Law School and Stanford Graduate School where he wrote his doctoral dissertation on foreign investment in the United States. He is a member of the Council on Foreign Relations.
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Investment Commi?ee
David A. Sandell, CFA, Portfolio Manager and Head Trader David Sandell began his career with Leeb Capital Management in 2004. He currently serves in the capacity of Portfolio Manager, Head Trader, and member of the Investment CommiXee. David provides fundamental research in multiple sectors. As Head Trader, David is responsible for trade allocations and trade execution. He is also responsible for maintaining the firm’s GIPS compliant composites. David’s market observations have been quoted in the media including Wall Street Journal Radio, Reuters and Bloomberg TV and Radio. Mr. Sandell graduated with honors from Washington University in St. Louis in 2004 with a degree in finance and psychology. David is a CFA charterholder. Genia Turanova, CFA, Portfolio Manager Genia Turanova joined Leeb Capital Management in 2001, and currently serves as a Portfolio Manager and member of the Investment CommiXee. She provides fundamental research in multiple sectors. Prior to joining the LCM team, Genia was a research analyst with Independence Asset Management LLC in New York. She received her BS degree in Economics from Kharkiv National University (Ukraine), where she later taught for more than nine years. Ms. Turanova earned an MBA in Finance and Investments from the Honors MBA Program at Baruch College, CUNY in 2000. Genia is a CFA charterholder. Gregory Dorsey, Portfolio Manager Greg Dorsey joined the Leeb Group in 2004, and currently serves in the capacity of Portfolio Manager and member of the Investment CommiXee. Greg brings to the table 24 years of experience as a securities analyst and portfolio manager. He has wriXen for and served as editor of several award-‐‑winning investment publications over the years and currently contributes to several Leeb Group newsleXers. Mr. Dorsey holds a BA degree in Economics and International Relations from the University of Delaware. Roger Conrad, M.A., Portfolio Manager Roger S. Conrad is a Portfolio Manager and member of LCM’s Investment CommiXee. He focuses primarily on securities that provide a combination of income and the potential for long-‐‑term capital appreciation. Roger has a long history of advising on income-‐‑producing equity securities. In 1989, he founded the Utility Forecaster newsleXer, which presents investment advice on electric, natural gas, communications, water, and foreign utility stocks, bonds and preferred stocks. In 1997, Utility Forecaster was named the Best Financial Advisory by the NewsleXer Publishers Association. Roger has worked with Leeb Capital Management, Inc.’s President, Stephen Leeb, since 1990 in various capacities. He has also co-‐‑authored two books with Stephen, Market Timing for the Nineties and The Agile Investor. Roger holds a B.A. in Anthropology from Emory University and a Masters of International Management from the American Graduate School of International Management.
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