EMF Review: October 30th, 2013

The UO EMF fund was affected by the overall poor performance of the global economy losing 1.01% on the week. This was 0.75% worse than the MSCI EM fund (our benchmark), which lost 0.26% for the week. Overall, the fund has an annualized return of 10.24% (20.15% for the holding period), well above the MSCI EM fund’s annualized performance of 3.80% (7.27% for the holding period).

The individual stocks within the fund performed relatively consistently (albeit negative) over the past week with the vast majority gaining or losing less than 1%. The few outliers included Mercadolibre Inc., SK Telecom, and Anglogold Ashanti LTD, which lost 4.92%, 2.87% and 2.56% respectively.



Our recent purchases of gold mining firms Gold Fields LTD, and Anglogold Ashanti LTD have struggled since acquisition. Both stocks were updated this term, Gold Fields by Ryan Strub, and Anglogold by Kyle Spradling. The updated DCF for both stocks were not as strong as the original analysis, primarily due to the decrease in gold prices since their acquisition last spring. Gold prices have recovered over the past several months and we have seen the price of these stocks slowly increase as the price of gold has started to recover. In both cases, our group decided to maintain these stocks in our portfolio, citing various reasons (described below in the Anglogold update).

NEW PITCH: Dr. Reddy’s Laboratories Limited (RDY) – Haruka Abe

Dr. Reddy’s Laboratories is India’s second-largest pharmaceutical company next to Ranbaxy. It was established by Dr. K. Anji Reddy as a private company in 1984, going public the following year.  RDY has a strong presence in highly regulated markets such as the United States, the United Kingdom, and Germany, as well as other key markets such as India, Russia, Venezuela, Romania, and South Africa. The firm derives its revenue from the sale of finished dosage forms, active pharmaceutical ingredients and intermediates, development and manufacturing services provided to innovative pharmaceutical and biotechnology companies, and licensing fees from marketing authorizations for its products.



The class saw a lot of advantages in purchasing a firm like RDY. Kyle Spradling noted that Haruka’s DCF was very conservative in her assumptions and the stock still appeared to be undervalued based on the analysis. Shu Zhu thought that a pharmaceutical firm would bode well for diversification as we currently lack the presence of one in our portfolio. Analyst Matt Justice liked the high profit margins of the firm and was impressed that the margins stayed consistently high even as revenue grew substantially over the past few years. Ryan Strub liked the idea of having a lower beta stock in the portfolio and commented that even in down economies there would still be a strong demand for RDY’s products. Finally, Kyle Worley saw an advantage in investing in the brand of RDY as it is highly recognized in the emerging markets it serves.


As with any stock, RDY poses many risks that need to be considered when we contemplate adding it to the portfolio. Kyle Spradling was quick to point out that the firm grew quickly in recent years but it did not have a long history of growth, which may not be sustained in future years. Shu Zhu piggybacked on Kyle’s comment and noted that it was difficult to pinpoint where the drastic spike in revenue was derived from. Matt Justice was also concerned that the products that RDY specializes in are generic drugs that were easy to duplicate and thus the firm could be at risk of being undercut.

UPDATE: Anglo Gold Ashanti – Kyle Spradling

Anglo gold was purchased last spring along with our other gold mining firm, Gold Fields LTD. Immediately after the acquisition the stock price fell but since has been recovering, which started around that the time of the Q2 report. Additionally, gold prices continued to fall after the acquisition, dragging the stock price down with them. As gold began to recover, Anglo Gold also saw an increase but at a much slower rate than the commodity.

Some good notes from the Q2 report brought a sense of confidence in the stock as the new CEO’s strategic plans are beginning to pay off. These changes were geared toward shareholder satisfaction and included a massive debt restructuring that would increase annual payments but do so in a less volatile manner.



Analysts in the fund were still optimistic about the stock and thought that the decrease in gold prices as of late was in part due to the dumping of gold as a safe investment tool during the recession. This practice has been reduced by 50%, dropping the demand for gold and ultimately lowering the price. Additionally, the forecast for gold demand looks promising as it is being used in more high technology products as of late, something that hasn’t been done in the past. Finally, Anglo gold is opening new gold mines that will reduce the cost of gold down to $630/oz. Compare this to their current cost of $898/oz.


As a firm that is highly dependent on the price of a commodity, Anglo Gold does pose many risks for investors. First, it is hard to determine what the firm is doing to hedge their risk against the price of gold declining. Additionally, the forecasts that are in our DCF assume that gold is undervalued at this time. If this is incorrect and gold prices have yet to bottom out, our analysis could suffer. Even if gold prices do recover, but not up to the levels of our expectations, the stock could still be overvalued.


Our fund had one of its first unanimous decisions in the two-year holding period, electing to buy RDY and hold Anglo Gold. Both presented an upside that was hard to ignore. The conservative assumptions in RDY left a lot of room for error before the stock would have been overvalued, and the funds bullish stance on gold prices made it easy to select a hold for Anglo Gold.

Do you agree or disagree with our analysis? Keep checking back for updates on these stocks and more, and feel free to reach out for more detailed analysis including our DCFs, and portfolio reports.

Written by strub@uoregon.edu

Ryan Strub is a second year MBA student in the Finance and Securities Analysis Center. He currently works as an Acquisitions Analyst for ScanlanKemperBard Companies, a Portland based real estate merchant banker. Ryan plans on developing socially responsible communities upon graduation.