Daniel E. - Rutgers LIBOR

3rd Post-Bloomberg Terminal and F1 Racing

HedgeFundLive.com —   So I became introduced to the Bloomberg terminal during my summer 2010 internship. I would use it everyday to look up information on equities and fixed income products. Little did I know back then how many billions upon billions of analytical features and information that a small machine could pack. Earlier this semester I decided to get myself better acquainted with the machine and do the online training course through the terminal. The result of doing that self training has been great, I definitely see how the machine is useful for investment bankers (the profession I aspire to join) as well as for traders, analysts etc.

I definitely would have to say the coolest things on the terminal are features that aggregate data such as futures prices for oil contracts and forecasts of oil prices, implied fed fund futures, and the equity screen function

Here is an interesting chart of oil:

Whats interesting is that forward prices and analyst forecasts for oil prices differ in the short run, but converge in the future.

Formula 1 Racing:

So I’m into all types of cars, but my favorite kind of racing is Formula 1 or F1…its just a very exciting sport. I am really excited because the first special purpose F1 track in the US is being built in Austin, Texas and will be ready for the 2012 season.

Recently, Mercedes Benz F1 put out a TV commercial…its kind of funny, especially since a Redbull car got first place in the first race of this season.

Here is the link for the commercial:


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2nd Post-Trading Comparables

HedgeFundLIVE.com- I’ve been spending a lot of time recently on refining my technical valuation skills for technical interviews that I have coming up.

During that time I have realized how important Trading Comparables (in banker speak Comparable Company Analysis) aka Trading Comps are not only as an investment banking valuation method but also as a useful investment decision tool.

All too often, it is quite common to hear some one say “Wow, this company has 20% EBITDA margins” or “Firm A only has a P/E of 15x which is cheap”.

These statements or single data points are irrelevant in the context of investment decisions unless they are compared against similar firms or “comparable companies”.

To put it explain it more plainly, lets use a fictitious example. Say someone points out that Firm A has net income of $100 Billion and trades at P/E of 10x and asks you if you would invest in it. Thats sounds pretty good, right?

But what if I were to tell you that a Firm B existed  and has $200 Billion in net income, but only trades at a valuation of 10x earnings or a P/E of 8x.

Suddenly, that investment in Firm A doesn’t sound as good as the investment in Firm B. A lot of finance is about values in relation to other values.

By comparing these two different firms and their valuations we are doing a very basic, simple form of  Comparable Companies or Trading Comps.

In investment banking, this form of analysis is one form of analysis that is used to value a firm that is either being bought or sold.

In trading/investing, it is used to see which company is “cheaper” or “profitable” relative to another.

Now to get to the more technical aspect of it…

I will present a more technical overview here of how to do a quick comparable company analysis utilizing some excerpts from

the Investment Banking Book: Valuation, Leveraged Buyouts, and Mergers & Acquisitions by Joshua Rosenbaum and Joshua Pearl.

I have asked and received permission from the authors to use this info.

From the book:

“Comparable companies analysis is (“comparable companies” or “trading comps”) is one of the primary methodologies used for valuing a given focus company, division, business, or collection of assets (“target”). It provides a market benchmark against which a banker can establish valuation…Comparable companies has a broad range of applications, most notably for various mergers & acquisitions (M&A) situationns, initial public offerings (IPOs), restructuring, and investment decisions.

The foundation for trading comps is built upon the premise that similar companies provide a highly relevant reference point for valuing a given target due to the fact that they share key business and financial characteristics, performance drivers, and risks. Therefore, the banker can establish valuation parameters for the target by determining its relative positioning among peer companies. The core of this analysis involves selecting a universe of comparable companies for the target (“comparables universe”). These peer companies are benchmarked against one another and the target based on various financial statistics and ratios. Trading multiples are then calculated for the universe, which serve as the basis for extrapolating a valuation range for the target. The valuation range is calculated by applying the selected multiples to the target’s relevant financial statistics.”

The book points out five steps…

I. Select the Universe of Comparable Companies

-This is finding companies that are similar to your potential investment, geographically, financial profile, same industry etc

II. Locate the Necessary Financial Information

-No further explanation needed here

III. Spread Key Statistics, Ratios, and Trading Multiples

-Putting all the statistics on a spreadsheet…important to put everything in LTM (Last 12 Month terms) and adjust each company’s financials for non-recurring items so that a true apples-to-apples comparison

IV. Benchmark the Comparable Companies

-Basically do an in-depth examination of the comparble companies to find your investment’s relative ranking and closest companies.

V. Determine Valuation

-Use the comps to determine appropriate valuation for your firm/use the other firms multiples to have a discussion about whether your target investment is undervalued/overvalued on a relative basis.

This is an oversimplification of comps…but basically in theory its as easy as it sounds…comparing similar companies to determine valuation for your potential investment.

For a more in depth analysis of this form of valuation and others used on wall street, I would highly recommend this book.

I have put a basic template for a company I analyzed right here, something like this is usually sufficient for investment purposes…BYD_Comps


1st Post

HedgeFundLIVE.com — Hi my name is Daniel Esposito and I am a Rutgers Business School senior majoring in Finance and Economics.

I am on the Rutgers LIBOR Equities Desk. On this blog I will discuss trading ideas, wall street interviews, and anything finance related.

The undergraduate Rutgers team has been actively managing money for about a little under a month for now. It was difficult at first getting the logistics of managing a pool of money amongst eight students in a coordinated manner. But right now, we have pretty much streamlined our process down to 1 conference call per week with additional emails conducted through a list serve. I think its been pretty successful so far.

In order to make the fund successful and attract additional capital it is very important that we generate good, consistent returns.

So far we have initiated positions two positions, one a macro-related bet and the other a specific firm. Between the two trades currently, we are sitting on a profit, which is always a nice feeling.

Breaking into the financial services industry aka Wall Street is a very difficult thing to do. One thing that has consistently helped me out on interviews is bringing professionally made equity research reports and working them into the discussion. I will post three coversheet examples on to this blog so that any aspiring financers have something to learn off of.

Links of report coversheets are below (1,2,3), just click on them!