Student Stock-Pickers, Smart Strategies
By Robert Barker
Among the very best stock-pickers profiled in this column in 2001 was a bunch of -- get this -- students from Stetson University in Florida. They had won the University of Dayton's portfolio management contest and offered BusinessWeek Online readers tips on such picks as MFC Bancorp (MXBIF ), trading-card company Topps (TOPP ), and the bakery-café chain Panera Bread (PNRA ). Each went on to register fat gains (see BW Online, 4/27/01, "Savvy Investors with the Wisdom of Youth"). When it comes to stock picking, the winners of an intercollegiate contest could teach some old hands a thing or two.
So I was all ears a few days ago to find out who won this year's contest, concluded on Feb. 21-22 in Dayton, Ohio. Among the 375 students representing 61 universities, Stetson's team repeated as winners. This year, the school took honors in the value-investing category, while teams from Michigan Tech and Purdue won the blend (that's a mix of value and growth styles) and growth categories, respectively. Each of the competing teams ran "live" portfolios with real money.
What do the students like now? Stetson's Jeff Hamrick told me his current favorite is Misonix (MSON ), a Farmingdale (N.Y.) maker of ultrasonic medical devices and laboratory safety gear. It's a small company -- sales last year came to less than $30 million -- with a market cap of just under $43 million. At a recent price of $7 a share, it's well below its 52-week high of $10.25.
Purdue's stock-pickers took the growth-investing category by using a variety of quantitative strategies that called for holding 25 stocks for an average of just one month. "Everything we're doing is based on the latest, greatest academic research," Dan Gertner, a second-year Purdue MBA candidate told me. While the Purdue team's strategies entail picking baskets of stocks without paying much heed to fundamental, company-level research, the results are impressive: It's portfolio gained 51.2%, tops among the winning teams over the contest period, which was the 12 months ended Nov. 30.
Surprisingly, one of the most-effective strategies turned out to be a well-known one -- the so-called "January effect." This is the phenomenon when stocks rebound in January after having been beaten down in December by investors who sell their holdings that have declined to capture a tax loss before yearend. Because it's a familiar phenomenon, some market watchers think the January effect doesn't work well any more because too much money chases too few opportunities. Yet Purdue's team exploited the January effect between December, 2000, and January, 2001, to a 50% gain.
Gertner thinks Purdue's portfolio of such stocks, including Aftermarket Technology (ATAC ), bounced back in January because the team focused on very small companies, with market values of $10 million to $20 million. "That is giving us an advantage that a mutual-fund manager doesn't have, because they usually don't buy such small stocks," Gertner says.
STAYING THE COURSE.
Taking the middle road between value and growth was Michigan Tech, which relied on fundamental company research. Jeff Call, a senior, told me his team likes such stocks as reinsurer XL Capital (XL ); as well as THQ (THQI ), a maker of gaming software; Vulcan Materials (VMC ), which is in construction materials and chemicals; and homebuilder Pulte Homes (PHM ).
His teammate, Tony Yates, had to think long and hard about what he would do with a spare $10,000 to invest. "I've got more college debts than money to invest," he says. Given that primary demand on his financial resources, Yates figures $10,000 would do best in a safe place, such as a well diversified mutual fund.
More than any sort of flashy stock-picking prowess, what each of these teams seemed to demonstrate was discipline. Each had a clearly stated investment approach and apparently stuck to it. Purdue's Tuan Tran told me that as the market plunged after the September 11 terrorist attacks, the team was fearful about investing further. But it stuck to its quantitative indicators. "We continued to invest," he says, "and trust in our numbers."
That seemed to be the common denominator among all the teams that made a good showing, not just the three top finishers, organizer David Sauer, a Dayton associate professor and director of its Center for Portfolio Management, says. "Those who made radical moves were hurt much more than those who rode out their plan," he says. "To have a plan and then to stick with the plan is key." From these students, that's a lesson most adults could stand to learn.
Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His barker.online column appears every Friday, only on BusinessWeek Online
Edited by Patricia O'Connell