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Student Analysts Battle a Bull Market

Fordham’s Michael Hartigan and the University of Cincinnati’s Joel Cohen take top honors in Institutional Investor’s second annual All-America Student Analyst Competiton.

Alternative-asset managers Marc Lasry and Wesley Edens recently agreed to pay $550 million to buy the Milwaukee Bucks, while private equity executive Joshua Harris is tinkering with his NBA team, the Philadelphia 76ers. Add to that the $150 million donation that hedge fund titan Kenneth Griffin recently made to his alma mater Harvard University, and it’s no wonder that many finance grads are anxious to get into the investment management business.

But first they need to prove themselves capable of producing returns like the big guns. (Griffin began trading convertible bonds in his dorm room.) Last year, however, proved to be a difficult period to pinpoint top talent. The U.S. equity markets powered higher much of the year, creating a litany of passive winners who more than likely did nothing more than nothing at all.

For Michael Hartigan, the outsize equity returns weren’t an excuse to sit on his laurels. Hartigan is the overall winner of Institutional Investor’s 2013–’14 All-America Student Analyst Competition. A part-time student at Fordham University’s Graduate School of Business in New York, the 30-year-old Hartigan is no stranger to the financial services industry. “Markets have always been exciting and intriguing,” he says. “The opportunity for calculated risks for returns has always been something I’ve enjoyed.”

All-America Student Analyst Competition Top 100 OverallLong AlphaShort AlphaNet Benchmark OutperformanceSchools by Students in the Top 100Most Popular Stocks

The Massapequa, Long Island, native graduated from Siena College in 2005 with a BS in finance and gained early exposure to markets through internships at Wachovia before the bank was sold to Wells Fargo in 2008. Hartigan now works full-time in the finance industry — he asked to keep his company name and job title private, as per his firm’s compliance standards — and has been honing his investment strategy. He describes his approach as buy-and-hold based on catalysts, with an emphasis on valuation. “Generally speaking, I gravitate a little more toward tech,” he notes.

Stock picking is not easy, despite what the Standard & Poor’s 500 index’s nearly 30 percent return in 2013 might suggest. Hartigan acknowledges the element of luck that can play on an investor’s fortunes. “You could have the fundamentals right on a stock but the sentiment wrong, and the stock will trade against you, and vice versa,” he says. But the exposure he’s gained through work experience has seasoned his investment prowess, revealing which catalysts are important to investors.

In its second year, the All-America Student Analyst Competition pitted undergraduate and graduate students from all over the U.S. against one another in the hunt for investment returns using a professional-style trading engine. More than 2,100 students from 81 schools participated in the competition, which is supported by Alphaseal, a software platform developed by Stamford, Connecticut–based Mark My Media. The Alphaseal platform measures the daily performance of participants’ portfolios, calculating six investment factors — net benchmark outperformance, volatility, balance sheet impact, net exposure impact, long alpha and short alpha — employing the Russell 3000 Index as its benchmark. Students were each given $100,000 in virtual money and directed to follow Regulation T, the Federal Reserve Board rule designating a 50 percent margin requirement on initial stock purchases; failure to do so would, and did, lead to disqualification. In addition to the quantitative appraisal, the Alphaseal system allows portfolio managers to log entries into a trade blotter to flesh out their ideas. Trading began on September 3 and ran through January 31, though not all students entered their initial trades at the same time.

Fordham’s Hartigan was able to drive his portfolio’s returns through just a few stock picks. Among them was Marietta, Georgia’s MiMedx Group, a biotech company specializing in human amniotic tissue. Hartigan believed the small-cap company to be underfollowed by investors. The stock price rose more than 29 percent over the course of the competition.

Another major producer for Hartigan was a short call on Rackspace, a San Antonio, Texas–based provider of cloud computing services. “It’s a great company but overvalued relative to growth,” he says. The company was investing a lot into the business, putting potential pressure on gross margins, Hartigan reasoned, and as a result, the stock got ahead of itself. The call was judicious; the price dropped 19 percent during the competition.

Harvard alum Griffin represents the pinnacle of student investing gone right, having turned his dorm room operation into the Chicago-based multibillion-dollar hedge fund firm Citadel. While many managers may have started off trading for themselves before they could legally drink, the results of this year’s competition suggest, perhaps unsurprisingly, that professional experience makes a difference when it comes to generating alpha, or market outperformance. The top four finishers overall and seven of the top ten students are pursuing a graduate degree, and several already hold full-time positions in the financial services industry. Like Hartigan, fellow Fordham graduate student Jeffrey Zundel, who finished No. 10 in the 2012–’13 All-America Student Analyst Competition, says that his professional experience has better prepared him for a competition like this. Being around those who invest for a living “helped me to dig deeper into analyst reports,” notes Zundel, who falls out of the top 100 in this year’s competition but is No. 2 in shorting (arguably one of the most difficult investment skills).

The top-finishing undergrad started his collegiate career on the premed track only to succumb to the lure of finance. University of Cincinnati sophomore Joel Cohen has maintained an investment portfolio since his father brought him to a financial adviser when he was a young boy. “I’d put in money from Christmas,” says Toledo, Ohio–born Cohen, 20, whose father “was really strong about saving for the future.”

Cohen invested his way to fifth place overall through the strength of a few well-timed trades. One of his best was global oncology company Ariad Pharmaceuticals, which began the competition trading above $18 a share. Its share price fell by 66 percent after the U.S. Food and Drug Administration suspended use of its drug Iclusig because of its potential to cause blood clots. Cohen bought in at approximately $2.50 a share; the company, whose drug was reinstated by the FDA in December, finished the contest trading at $7.39.

Reconciling psychology with research is a key aspect of Cohen’s approach. “I never let my emotions take the place of cold, hard facts when trading,” he says. “The hardest part of trading is not getting too emotionally involved that you lose yourself or your vision for a certain stock.”

The Alphaseal system is designed to replicate a professional trading engine. The platform marks to market the positions held in all investors’ portfolios and stores all the data in a SAS-70-compliant co-location facility with multiple redundancies. Although students may have been sitting on the quad or stuck in a library carrel with a laptop, once they entered the cloud software, they might as well have been on Wall Street.

Fordham University tops the list of schools by placing nine students in the top 100. Four schools tie for second — Baruch College/City University of New York; the University of California, Berkeley; the University of St. Thomas in St. Paul, Minnesota; and Charlottesville’s University of Virginia — each finishing with five students in the top 100.

It may not be March Madness, but the All-America Student Analyst Competition produced interesting results on a school-versus-school basis. With 9 percent of the top 100 students, Fordham’s participants also represent 9 percent of the total competition. Provo, Utah–based Brigham Young University, by contrast, places three in the top 100 while contributing just 0.6 percent to the pool of entrants. Similarly, the University of Cincinnati sees four of its students in the top 100 out of the 20 that entered — 0.9 percent of the competitors.

The results suggest that it’s not easy to beat the market. Only 345 participants, or 16 percent, outperformed the Russell 3000 benchmark, which gained around 9.3 percent over the course of the contest. Impressively, 12 students beat the index by more than 50 basis points on an average daily basis.

One of them, University of Cincinnati senior Colin Fogel, cut his investment teeth in high school — on the precipice of the financial crisis. His first taste of the stock market was an investment in Bear Stearns Cos. after the brokerage firm’s shares lost most of their value before the company’s sale to JPMorgan Chase & Co. in March 2008. Since then Fogel has gained experience through internships at Merrill Lynch after his freshman and sophomore years. He worked in the asset management division for financial advisers, honing his portfolio analysis skills.

“My goal is to target highly volatile stocks that were reacting on emotion driven from news,” says the 21-year-old, who is set to graduate after three years. His picks helped land him in the top spot for long alpha returns, with an average daily outperformance of 111 basis points.

An especially good buy was Sarepta Therapeutics, a Cambridge, Massachusetts–based biopharmaceutical company. Fogel recognized a market overreaction to the FDA’s denial of early approval for a muscular dystrophy drug rollout, which Fogel believed to be just a minor setback. Its share price had dropped from around $36 to less than $14 but finished the competition at more than $24.

Student investors in this competition and their professional counterparts differ in at least one major aspect: money. Whereas a professional asset manager has reputation, client redemptions and even job security to worry about after poor performances, a student participant had at most 100,000 Internet dollars on the line.

Sergey Barabanov, an associate professor at the University of St. Thomas’s Opus College of Business, says he has seen a shift among finance students over the past five years and is impressed with the level of sophistication in their investment approaches. Barabanov has noticed his students become more value-oriented, even spying them reading books by Benjamin Graham, the father of value investing.

Somewhat unsurprisingly, though, Apple was the most popular ticker in the competition, with almost 14 percent of participants holding the innovative tech company (a much higher percentage probably own iPhones). Just 13 percent of those held a short position.

The technology and consumer sectors dominate the list of most-held securities this year, with perennial favorites like Tesla Motors, Google, Facebook and Microsoft Corp. all driving returns. The consumer sector struggled, however. Starbucks Corp. and Ford Motor Co. each dropped more than 11 percent, while even Jeff Bezos’ Amazon.com finished in the red, albeit barely.

Of the top ten stocks selected by the students, troubled retailer JC Penney Co. was the most shorted, with 33 percent of holders predicting gloom. The company has been a popular hedge fund trade; Pershing Square Capital Management founder William Ackman unloaded his entire position in the summer of 2013. During this competition the price fell an additional 27 percent. Video-streaming service Netflix was the sixth-most popular equity and the top performer among the consumer picks, returning just under 25 percent. Nevertheless, 30 percent of student investors were short CEO Reed Hastings’ company.

Shorting was especially challenging in 2013, given the huge run-up in equity prices. But some students, like Fordham’s Zundel, stand out for their bearish calls. After an impressive showing last year, in which he finished third in the short alpha factor, Zundel jumps one spot to finish second, with average daily outperformance of 71 basis points.

The Fairhope, Alabama, native knows his preference for shorting may raise some eyebrows, but it’s the strategy with which he feels most comfortable. “I’ve found it easier to locate stocks that are trading at what I believe to be above what they should,” says the 33-year-old, who finishes 13th in net benchmark outperformance and 175th overall.

Ignoring the retail sector that had quelled his returns in last year’s competition, Zundel focused his portfolio on energy and biotech tickers. He netted profits twice on short-term trades in Chongqing, China–based Daqo New Energy Corp. Each time he saw price movements and no news around to justify them, subsequently cashing in on the market’s self-correction. He acted similarly on the UK’s GW Pharmaceuticals, in the wake of what he perceived as inconclusive early testing on a new drug.

The University of Alabama undergrad had previously worked at Citi and most recently held an equity research internship with Light Green Advisors, a West Coast–based environmental sustainability investor. After graduation in May he will start full-time at boutique Wolfe Research.

Alpha of course is an increasingly scarce resource, but the next wave of analysts in search of it have more research tools than ever before to leverage for ideas, company information and trends. The top performers in this year’s All-America Student Analyst Competition were constantly on the wires, digging into quarterly reports, following all they could to develop winning strategies.

Fordham is working to “build a clinical process around getting individuals ready for the Street,” says Robert Fuest, an adjunct professor of finance at the university’s Graduate School of Business. The focus, he adds, is on “getting them applicably job-ready, not just technically job-ready, in order to increase the competitiveness when they are sitting across the table from an employer.”

Fuest considers his school’s success in the All-America Student Analyst Competition a by-product of that process. Careful not to give away all his secrets, Fuest explains the importance of letting nature run its course as well as of nurturing neophyte investors to better prepare them for real-world finance. Students are expected to find resources on their own, developing and refining personal approaches to analysis, with professors available for guidance. Forcing students to develop strategies on their own, as opposed to force-feeding investment theory, not only sharpens their critical thinking but also prepares them for what will be expected of them on Wall Street.

“I use language as if I were their manager, rather than professorial language,” Fuest says. He envisions a collegial environment where the more seasoned students help their less experienced classmates develop. So far, the peer-to-peer networking has paid dividends, Fuest notes; student clubs even hold office hours.

“We need to augment some of the internship [experience],” he says. “A lot of the time, they won’t get the mentoring there that they need.”

Likewise, Fuest couldn’t stress enough to Fordham’s competition participants the importance of explaining their trades via the journal provided by the Alphaseal system. These students are ever closer to the workplace, he says, and have to be able to justify their work.

“From an educational perspective, it helps them learn more quickly,” Fuest adds. “And from a professional perspective, it’s required.”

Please visit our Storify to view all of the press coverage and live tweets surrounding the 2014 #iiTopStudents.

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