Wilson Carletti Lyudmila Nikolenko Lydia Ping Matthew Seguin John Sullivan 1 December 2012 To: Jarrad Harford

From: Ca-Chings Subject: Stock Case Write-up

Group Name: Ca-Chings Finance 350B

Our portfolios performance was -2.96% for the period 10/2/12 to 11/27/12. Our benchmark, the Vanguard S&P 500 was down 2.90% for the same period, giving us a negative excess return of 6 basis points. The primary market-wide events that shaped the market during this period include poor corporate earnings reports, uncertainty over the presidential election in October, a negative reaction directly following President Obamas reelection, the threat of a fiscal cliff, slowing growth in China, and the sovereign debt crisis in Europe. In November, US equity markets fell sharply following Obamas reelection and continued to fall because of investor fear regarding the ever-looming fiscal cliff. In late-November new home construction reports from October were released; showing that new-home construction had unexpectedly climbed to a four-year high. In company-specific news, two of our holdings, Ceradyne Inc. and Peets Coffee & Tea, Inc. have experienced buyouts prior to our purchase. 3M purchased CRDN for $35/share, causing the stock price to rise to $35 and then flat line until shareholders approve the buyout. Because we purchased CRDN after the buyout, essentially purchasing cash, the return was very stable: -0.34%. We experienced an identical situation with PEET. The shareholders approved PEETs buyout by a private equity group for $73.50 on October 26, taking the stock off of the market. After this position was liquidated, we purchased 93 shares of Chipotle Mexican Grill for $268.46/share. In further company news, V.F. Corporation raised Fiscal Year 2012 EPS guidance, reaffirmed FY 2012 Revenue guidance, and declared a quarterly dividend on October 22. These positive financial declarations caused the stock price to rise when the market was down sharply. Comparing our portfolio with the Vanguard S&P 500 benchmark, our portfolio was slightly riskier than the broad U.S. equity market. CRDN and PEET were nonvolatile because of the buyouts; this is not a typical case because the holdings acted essentially like cash. Second, VFC was more volatile than the market. Their returns responded more drastically than the market in late October after poor economic spending reports were released. Third, Lululemon Athletica Inc. was our most volatile holding, the stock responded more drastically than the broad market in late October when there was uncertainty over the presidential election and then again in early November when President Obama was reelected. Similarly, the stock rebounded at a faster pace than the market in mid-November when positive new-home construction data was released. These extreme responses to market-wide events can be characterized by a high beta of 2.38,

portraying increased strength during positive market events as well as increased losses during negative market events. Comparing our portfolio with the Vanguard Global Equity Fund benchmark, our portfolio was much riskier. This increased risk resulted in lower returns for our portfolio as a struggling U.S. market was balanced out by the global markets. The Global Equity Fund benchmark includes securities both in the U.S. and several foreign countries. This increased diversification decreases unsystematic risk that is inherent to the U.S. For example, the Global Equity Fund was not as affected by uncertainty over the presidential election, presidential election results, and U.S. economic data as U.S. equity-specific benchmarks. The benchmark was still affected by these events because it holds U.S. stocks; and foreign stocks are also slightly affected by U.S. equity selloffs. The increased diversification to multiple industries within many countries around the world is portrayed by its 1-year trailing beta of 0.78. This beta portrays that the fund typically does not rise as much as the U.S. equity market during positive market news and does not fall as much during negative market news. In addition, the Global Equity Fund return of -0.82% beat the Vanguard S&P 500 benchmark, showing that the fund did not respond as negatively to market-wide events during the invested period. The third benchmark we tracked was the QQQ index, which tracks the U.S. technology sector, which tends to include more growth-oriented stocks. The QQQ index returns were -5.40% during the invested period. This performance, which trailed the broad U.S. equity market by 250 bps, is due to the indexs lean towards higher growth and higher volatility stocks. Investors believed that stocks were still undervalued during the invested period and favored value oriented stocks that appear cheaper than growth stocks. This was evidenced by the Russell 1000, 2000, 3000, Microcap, and Midcap Growth indices beating their respective Value indices during the invested period (Refer to Figure 1). In addition, the QQQ index has a beta of 1.09 and a P to Book ratio of 1.26. This indicates a high volatility rating and growth-bias compared to the broad U.S. equity market. In order to judge our portfolio holdings valuations, we looked at the P/E, P/B, and P/Sales ratings of each stock. Unfortunately, CRDN and PEETs valuations will not give us a correct representation of the stocks prices throughout the invested period because they were previously bought out and traded very close to the price they were purchased. LULU has a P/E of 48.04, P/B of 17.29, and P/S of 8.07. These extremely high valuations indicate that LULU is a growth stock that is expected to grow earnings at a fast rate and for this reason is currently valued at many multiples above its EPS, Book Value and Sales. These high valuations are in line with our research that growth stocks lagged value stocks during the quarter. VFC has a P/E of 17.83, a P/B of 3.95, and a P/S of 1.88. These valuations are also growth leaning; this is indicated by the Russell 1000 Index, which measures the large-cap segment of the U.S. equity universe, average stock P/B of 2.17 and P/E of 15.44 (Refer to Figure 2). Our group believes that volatility in the market is caused by market-wide events, which shifts investors confidence and causes buying in the face of strong economic data and selling in the face of the fiscal cliff and euro crisis fear. We learned that many stocks generally move in the direction of the broad market, but high beta stocks typically swing even more so in the direction that the market moves.

Figure 1: Annualized Returns - Total - USD As of November 27, 2012

Name 10/03/2012To11/27/2012

Russell 1000 Russell 1000 Growth Russell 1000 Value Russell 2000 Russell 2000 Growth Russell 2000 Value Russell 3000 Russell 3000 Growth Russell 3000 Value Russell Microcap Russell Microcap Growth Russell Microcap Value Russell Midcap Growth Russell Midcap Value Russell Midcap

-2.54 -2.77 -2.31 -3.73 -4.05 -3.42 -2.63 -2.87 -2.39 -5.5 -6.6 -4.76 -1.68 -0.38 -0.99

Figure 2: Russell 1000 Index

Characteristics
Price/Book Dividend yield Price/Earnings (ex-negative earnings) IBES long-term growth forecast (%) EPS 5-year growth 2.17 2.18 15.44 10.61 10.36

Facts
Bloomberg ticker symbol Reuters ticker symbol Weighted average market cap ($B) Median market cap ($B) Largest company by market cap ($B) RIY .RUT 101.067 5.552 556.455

Figure 3: