In the Tozzi trading floor at the Ross School of Business, I teach a class on Active Quant/Value Portfolio Management and students pitch stocks in that class. What stocks did they pitch this semester?
Each semester in my class, students learn about quant screening, back testing quant strategies, valuation, risk analysis and items relating to portfolio management. In one particular project, they screen for stocks and then run the stocks through a series of valuation exercises to determine a target stock price. The class itself is quite popular as 50 students take the class and it has about 30 on the waitlist each semester. The stock pitch project itself is a combination of science and art, as the students need to look at how different models give different valuations (a lesson in ambiguity) and then they need to decide for themselves as to which price target they believe in. It's also a lesson in the possibility of failure, as stock prices don't always go the way that you want them to go.
For the valuation, the students look at:
- Basic ratios such as PE, price/book and price/cash flow.
- What types of funds own it? Do ‘value’ funds own it?
- Comparable ratios
- Analyst estimates
- PE*EPS
- PE Bands in
Bloomberg . - A Bloomberg DDM model.
- A Bloomberg DCF model.
- A FactSet DCF model.
- Valuation models in EquityInsights.
- An eVal-based model.
- A valuation that requires finding an appropriate EV/EBITDA exit multiple based on previous deals.
- And a valuation based on quant metrics.
How have students fared with their stock picks in previous semesters? Listed below is a chart that shows the two year returns for each set of stock pitches. It also lists the average return of the picks and the return of the S&P 500 during that same time period, as well as the worst and best picks from each semester. Prior to this semester’s class, I have taught the class 8 times, starting in March of 2011. The students have a decent success rate in their stock pitches, as they have outperformed the S&P 500, 5 out of the 8 times.
Listed below are the stocks that were pitched this semester. In general, the long picks have positive earnings/sales growth, a nice valuation with nice multiplies, and most picks have fairly low Dechow fudging scores and high Piotroski financial health scores. Students pitched
