This column was written by Stockpickr member Ira Krakow.
Investment Club Watch
recently profiled the Michael Price Student Investment Fund (MPSIF), a
family of funds
managed directly by MBA students at the New York University Stern School of Business. We caught up with the student fund managers in the middle of the current
quarterly stream of corporate data known as
earnings season to find out how these money-runners-in-training invest amid all the breaking news and earnings reports.
There are four funds in the MPSIF family:
small-cap. Here is a breakdown of the investment methodologies that each fund's manager uses and the recent stock picks they have made based on these methodologies.
Sticking to the Thesis
The growth fund
. According to growth fund manager Ryan Fiftal he has a disciplined investment philosophy. Fiftal doesn't react impulsively to every late-breaking story, such as trading either before or after earnings announcements.
Fiftal explains, "In the growth fund, we try to have an investment time horizon of at least two years. Given that MPSIF
analysts are effectively part-time (simultaneously taking a full load of MBA classes), we are at a competitive disadvantage against full-time managers and traders. We simply cannot predict or react to news, including earnings announcements, as well as our competitors
professional fund managers.
"Therefore, we look closely at company
fundamentals and try to determine who is going to outperform over the medium to long-term. Quarterly earnings are certainly important, providing a gauge of how each investment thesis is playing out. However, we rarely buy or sell based on a single quarter's earnings."
The value fund
. The manager of this "bargain"-focused portfolio of stocks also avoids impulsive decisions and uses a steadfast approach to trading.
Value fund manager Marc Albanese puts it like this:"The value fund is not
sector-driven. We don't chase the 'hottest' sector, or even choose sectors to invest in beforehand. Instead, our goal is simply to look for value wherever we can find it. We define value stocks as stocks that are out of favor in Wall Street, but have a solid
business and trade at a relative
discount to their peers. Using this approach, value plays can be found in every sector. However, if we found that all our positions were in consumer durables, we would reevaluate the portfolio. No matter what the market is doing, there always should be bargains somewhere."
The small-cap fund
. According to manager Zach Shannon, the small-cap fund uses industry-standard metrics, such as
P/E ratio and
discounted cash flow models, to make investment decisions.
Shannon adds, "We look at enterprise value
EBITDA multiples for companies with negative earnings, because the P/E is not relevant in that situation. Generally, we use consensus estimates for industry averages. "
The fixed-income fund
. Fixed-income manager Ryan Hart considers the entire
credit market situation before committing to a particular position. He and his team particularly focus on the
yield curve and the international credit situation.
Hart explains that "We felt that the inverted yield curve, which had been prevalent through much of last year and into this year, would steepen as we approached the end of the year as we expected economic growth to slow and the
interest rates in response. This turned out to be the right call as we saw a dramatic
rally at the front end of the yield curve, benefiting our
overweight position to near-
Treasuries. However, we did not anticipate the massive 'flight to quality' that we saw over the course of the summer, and overweight positions to
mortgage-backed securities detracted from
"In addition, we observed that economic growth throughout much of the rest of the world, particularly the so-called
BRIC countries (
China) had begun to decouple from that of the U.S. As such, we added positions with high credit quality denominated in non-U.S.
currencies, such as the
Templeton Global Bond Fund
, which gave us exposure to Brazil, South Korea and other
issues from developing nations that we felt offered attractive investment opportunities. The
fixed-income fund managers are currently reevaluating credit
spreads, which they felt were too narrow and out of line with the wider historical averages during the spring, but had widened out to more attractive levels following the credit crunch of the summer."
What about the possibility of $100 oil? Fiftal mentioned that the growth fund took advantage of the rise in energy prices to overweight its energy-related positions, especially oil driller
Recent Trades and YTD Fund Performance
The growth fund looks at Google and Signature
. Fiftal cited two interesting, and possibly unconventional, moves in the growth fund. In spite of all the turmoil in the banking sector, the managers voted to buy
on Oct. 16 at $34.95 per share.
Fiftal's reasoning was that "Signature is a niche retail bank, headquartered in New York City. We saw it as a small bank, focused on profitable private business accounts, with
revenue growth of over 20% and little exposure to subprime loans."
On the other hand, Fiftal sold
, (a purchase on April 18, at $476.62) on Oct. 9 at $618.66 -- a return of 30% in six months, because the stock hit the
Fiftal recalls: "The Google vote was close, generating a lot of discussion. In the original pitch in April, our analyst valued Google using a discounted cash flow model, assuming the company could grow at 36% per year for five years, while maintaining its industry-leading return on equity (
ROE). During our recent review, the fund was unwilling to raise these already aggressive earnings forecasts. We concluded that the stock was fully valued and decided to sell."
As of Oct. 12, the growth fund was up 13.2% year to date (
YTD), roughly even with its
Russell 1000 Growth Index, which was up 13.4% YTD.
The value fund weighs in on Dell and Kookmin
. Albanese reported a spirited discussion about whether to sell
, which the fund purchased back on March 30 at $23.42.
Albanese elaborates: "Even though Dell had to restate earnings from 2003 to 2007, we concluded that an internal accounting investigation did not materially affect Dell's financials as confirmed in an
8-K filed on Aug. 16. We also felt confident about Dell's new management and especially the company's expansion into the Asian
emerging markets because of an announced partnership with Gome, a large Chinese electronics retailer. We voted to stick with the position, setting a price target of $32 based on a discounted cash flow analysis and a relative
valuation. Our timeframe for holding Dell is 12 months, though we will consider selling if the stock price does not increase when Dell files its
There was also a discussion about
, the largest bank in South Korea. The value managers reached a different conclusion.
Albanese recalls: "We purchased Kookmin Bank on the recommendation of a student-analyst. He cited Kookmin Bank's contemplated purchase of a controlling stake in Korea Exchange Bank as a favorable indicator of the bank's success. This past summer, however, Kookmin Bank was forced to pay a large tax bill to the government for merging a credit card subsidiary into the bank in 2003. Under a recent stock update, the new student-analyst for Kookmin Bank cited this as an example of poor management. Our analyst also valued the stock at $80 using both the
dividend discount model and a relative valuation. We sold the stock for $87.69 on Oct. 3 due to the valuation and on the news that the Kookmin Bank board reappointed its current CEO for another three-year term."
As of the end of September, the value fund was up 9.6% YTD, handily beating its benchmark, the Russell 1000 Value Index, which was up 6.3% during the same period.
The small-cap fund buys into Switch & Data and Kendle
. Shannon noted the purchase, on Sept. 19, of colocation and interconnect services provider
Switch and Data Facilities Company
( SDXC), at $16.85.
The managers really liked Switch and Data. According to Zach it was "almost a unanimous choice."
Why? Shannon breaks it down:"We felt that the overcapacity left over from the dot-com era is over, and that in fact the reverse is occurring. Bandwidth supply is growing at 3% (while demand is growing at 20% due to demands such as YouTube videos, video gaming and video streaming. The industry has high fixed costs and high barriers to entry (high switching costs and capital expenditures).
"The company trades at 12
times our 2008 EBITDA estimate -- a reasonable metric compared to the industry, which trades at 14 times EBITDA (Source:
Yahoo Finance). We used the enterprise value
divided by EBITDA multiple because Switch and Data is not
profitable. Switch and Data's multiple is better than its competitors, such as
, which trades at more than 18 times 2008 EBITDA (Source:
Yahoo Finance). In addition, Switch and Data
raised guidance on Aug. 13. Switch and Data has been public since Feb. 8, 2007. We have set a price target of $22.50 by next year."
Another recent purchase was
( KNDL) on Oct. 3 at $43.36.
According to Zach:"Kendle is a contract research organization that helps pharmaceutical companies navigate through the maze of the regulatory approval process, not just the FDA but worldwide. In fact, the largest revenue growth area is outside the U.S. The U.S. accounts for about 80% of global R&D
research and development spending, but this market is growing at only 5%. Meanwhile, European research spending is growing at 20% and growth in Latin America is as high as 40% depending on the country, according to the
PhRMA 2007 Industry Outlook.
Kendle draws 45% of its revenues internationally, which is the second highest percentage among its peers. It also has the largest number of international offices. Using a discounted cash flow analysis, based on projected cash flows over the next five years and discounting terminal value based on a 4% perpetual
growth rate, we set a price target of $50 by next year."
The MPSIF's small-cap fund is up 2.2%. Its benchmark, the
Russell 2000 Small-Cap Index, is up 3.3%. Why the lag? Zach says the small-cap team "significantly" underperformed their benchmark in August.
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