JobCUCOB0110A-PracticumPortfolio-4.10-PATHSONLY_- 6/11/10 4:34 PM Page 1
THE 20 09-2010 PORTFOLI O PRACTI CUM TEAM
From the Dean
Dr. John’s Corner
by Anthony Hendrickson, Ph.D.
by John Wingender, Ph.D.
Most business school education attempts to apply yesterday’s business models to today’s business practice. In a financial and economic environment that has been turned on its head, our job at Creighton’s business school is to provide relevant, real world experiences for our students so they are prepared to develop business models that will take us into the future. Our Portfolio Practicum class is a clear example of just how we do that.
In 2009 the Portfolio Practicum class experienced both sides of risk's...the good and the bad. The Bear market turned out to be both our worst and best year ever, as the portfolio experienced an -18% return, but the SP500 was a -36%, so the class outperformed its benchmark by an amazing 18%. As the 2008 class did their valuations of companies, it seemed as if every stock was deeply discounted and undervalued. As a consequence of the investment process, the 2008 class increased the number of stocks in the portfolio from a historical average of 36 stocks to 48 stocks.
This year’s students have learned to find value in the marketplace by relying on their core values and knowledge to make wise decisions in a fast-paced environment. They have followed in the footsteps of thirty classes before them who have gone to New York to see the financial markets first-hand. They have also built upon a new tradition – the Value Investing Panel, or VIP – which attracted over 400 people from around the world who were in Omaha for the Berkshire Hathaway Shareholder’s meeting in May.
The 2009 class started their class with a plethora of stocks that experienced a rapid increase in value in the 2009 Bull market. The portfolio's raw return (22%) was lower than the SP500 (26.5%), but so were its market risk (beta = .76) and total risk (standard deviation). Thus, its performance on a risk-adjusted basis as measured by the Sharp, Treynor and Jensen ratios outperformed the SP500 in 2009.
Laura Meade
Steven Makowski
HOMETOWN: Williamsburg, IA MAJOR: Finance and Military Mgmt PLANS: US Army
HOMETOWN: Stillwater, MN MAJOR: Finance and Accounting PLANS: Dec. 2010 Graduate
Travis Huck Alex Kron
HOMETOWN: Aberdeen, SD HOMETOWN: Johnston, IA MAJOR: Finance MAJOR: Accounting and Finance PLANS: MSAPM for CFA PLANS: Law School at University of Iowa Aleksandr Krutik HOMETOWN: Omaha, NE Brett Caplice MAJOR: Accounting and Finance HOMETOWN: Clarendon Hills, IL PLANS: Deloitte: ERS Consulting MAJOR: Finance and Economics PLANS: BUNGE North America, Inc. Tara Ryan HOMETOWN: Bellevue, NE Colin Gordon MAJOR: Finance with an HOMETOWN: Minneapolis, MN emphasis in Psychology MAJOR: Finance and Economics PLANS: Aventine Renewable Mary Burnett Energy, Inc. HOMETOWN: Omaha, NE MAJOR: Finance and Accounting
Michael Carmody HOMETOWN: Denver, CO MAJOR: Accounting and Finance PLANS: EnCana Oil & Gas (USA) Inc.
Christine Archibald HOMETOWN: Bettendorf, IA MAJOR: Finance PLANS: Financial Analyst at UPRR
Brian Kooienga I’m very proud of what our students have accomplished this year! Undoubtedly, their experiences will help them as they begin their careers. We hope they come away from these experiences equipped with more than a roadmap for success, as a roadmap will only go as far as the course has been charted. We hope they come away with a compass for success, for they will be exploring more than just a new career…they will be charting new frontiers in the financial world on which the future stability of our economy depends.
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C R EI GHTON UNI V E R SIT Y | COLLEGE OF B US INES S
The current class has had the task of evaluating if individual target prices have changed; if any stocks have gone above their fair values and need to be sold; or if the stocks have revealed more negative news and need to be sold. As the year progressed, the current class decided to hold stocks at about 3% of portfolio by increasing the position in a stock or by selling the stocks out of the portfolio. The class has incorporated the rule that to add a stock, a holding must be sold. This guideline has definitely tightened up the recommendation process. As valuations increased in 2009, the class has difficult challenges ahead in 2010.
HOMETOWN: Urbandale, IA MAJOR: Finance and Marketing PLANS: Graduate School
Steven Cai HOMETOWN: Rapid City, SD MAJOR: Accounting and Finance PLANS: Pursue CFA Designation
Taylor Lemke HOMETOWN: Columbus, NE Dan Knauff MAJOR: Accounting and Finance HOMETOWN: Bloomington MN PLANS: KPMG MAJOR: Finance and Economics
Seth Goodwin HOMETOWN: Omaha, NE MAJOR: Finance
Looking Forward by Brett Caplice While the first half of 2009 showed some signs of life, we were reminded late in the year that there still may be rough seas ahead. While last year’s class witnessed how the world can come crumbling down, our class witnessed and participated in the rebuilding of our nation’s economy. In trying to form investment ideas and strategies, we have learned that there is no single indicator or narrow set of data that can point us in the right direction. To create our ideal portfolio, we quickly found that our class needed to look at the whole picture. While the S&P was up over 20% in 2009, it is still well off its 2007 highs. The United States GDP stopped declining and even began to grow, but unemployment has persisted and the fear of a “jobless recovery” has set in. Even the credit markets have improved over the past year, but the increased lending has uncertain implications for inflation.
“In trying to form investment ideas and strategies, we have learned that there is no single indicator or narrow set of data that can point us in the right direction.”
by Mary Burnett In January, a group of Creighton students discovered the meaning of this well-known phrase firsthand. During the annual New York trip, 52 finance and accounting seniors encountered investment bankers on Madison Avenue, trading floors on Wall Street, FBI investigations of Ponzi schemes, the closing bell of the NYSE, and the 354 steps up Lady Liberty. But it wasn’t just the incredible sights and scenes that touched the hearts of so many young men and women. Senior Finance major Ashley Talley couldn’t believe, “how many Creighton alumni were established in New York. It goes to show what a springboard a Creighton education truly is and gives me hope that one day I’ll jump as successfully as they have.”
These uncertainties have instilled in us a cautious outlook on the year ahead. Most believe that at some fundamental level, our previous financial system failed us. While we acknowledge that changes need to be made, we are concerned that proposed changes will address the symptoms and not the causes. New bank regulations are being debated, but there is no consensus on what these laws should include.
While it was truly an extraordinary six days in the Big Apple, most students found themselves eager to head back to the Midwest and leave behind the musical display in Central Park, $20 lunches and Jersey Shore celebrity sightings. But what these seniors didn’t leave behind was the confidence that they too could follow in the footsteps of Creighton alumni and “make it anywhere.”
Another concern is the federal deficit. It is looking more likely that at some point taxes will have to be raised to service the national debt, which could adversely affect our emerging recovery. This is one reason that while we have been able to identify buying opportunities, the prospect of a ‘W’ shaped recovery looms over our decisions. Whichever way the market may take us in the first half of 2010, the experience we have gained will prove invaluable as we start our own careers. Our class experienced market conditions that only our grandparents had before, and hopefully we will be able to learn from them and continue to prosper in the long run.
New York, New York
Students seated in the New York Stock Exchange (NYSE) Board Room listen to a history of the NYSE by Steve Wheeler, Director of Archives, Corporate Giving and Educational Services.
In loving memory of Sydney Anne Jones who made the 2010 New York Trip full of excitement and laughter. P ORT F OL I O P R ACT IC UM RE P ORT 2 0 0 9 -2 0 1 0
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FMA Update by Steve Makowski Creighton University’s Financial Management Association (FMA) is a student organization focused on preparing students for the future. FMA promotes conversation and casual interaction with business professionals and the advancement of its members in taking big strides to obtain dynamic careers in the finance industry. The Creighton FMA Chapter is aimed at helping students explore the world of finance though a variety of activities including networking, internship and career opportunities and professional speakers. Many business professionals in the Omaha area offer the group their insights on a career in finance. This year’s speakers were from ConAgra, Dundee Bank, McCarthy Group and First National Bank. The Creighton FMA Chapter is proud to be sending several individuals to the 2010 FMA Finance Leaders’ Conference in Chicago. This unique event brings together FMA members from across the United States for panel sessions with a variety of renowned business professionals, leadership workshops, tours of local financial institutions and other networking opportunities. Opportunities like this allow the FMA to stay focused on broadening business knowledge and preparing students for the professional world.
“The Creighton FMA Chapter is aimed at helping students explore the world of finance though a variety of activities.” 4
C R EI GHTON UNI V E R SIT Y | COLLEGE OF B US INES S
Spotlight on Art McGill by Alex Kron Art McGill, a student in the 2001-2002 Portfolio Practicum class, began his career with Piper Jaffrey in Minneapolis. As an investment banking analyst, he spent most of his time dealing with mergers and acquisitions and initial public offerings.
“I wanted to build a business, to use the management skills that I developed while at school.” – Art McGill
In 2004, McGill took a job as an analyst with McCarthy Group, a private equity firm in Omaha. Here, he took on a more active role in company operations. In 2007, McGill attended Harvard Business School to receive a Masters of Business Administration. In the summer of 2008, he spent 12 weeks working for a hedge fund in Dubai. With markets on the verge of crashing, there were many opportunities and threats. McGill focused on commodities in the economies of Brazil, Russia, India and China. He spent a significant amount of time studying the U.S. markets in order to better understand the global economy, and finished his time in Dubai researching financial firms in the U.S. After completing his MBA in 2009, McGill took a position as Vice President at Leader Bank in Arlington, Massachusetts, a community bank with $320 million in assets. This move was driven by a desire to work in management. “I wanted to build a business, to use the management skills that I developed while at school, instead of just being an investor,” McGill said. “I wanted to see the impact I was making every day.” In the future, McGill aspires to eventually start his own business. For now, though, he is focused on the short-term goal of growing the Leader Bank.
The 2009 Portfolio Practicum class outperformed its benchmark, just as the class did during McGill’s tenure in 2001-2002.
Finding Opportunity: Value Investing
Portfolio Investing Strategy
by Aleksanders Krutiks
by Steven Cai
Finding opportunity is a challenging task and does not come with ease. Though we realize the challenges behind making investments in a time of unstable economic conditions, we also see this as great opportunity. As the Portfolio Practicum began the 2009/2010 academic year, we were cautious to make new investments after the summer rally of 2009. Nonetheless, our class found good investment opportunities by looking at fundamental analysis and referring to the roots of value investing. Our general strategy for choosing investments this year was focused on understanding the company’s business as well as the opportunities and risks that came with it. Because of market uncertainty we were more conservative than our benchmark and focused on businesses with steady cash flows and the ability to survive tough economic conditions over the next year. At the same time we looked at companies that had potential to grow over the course of one to two years. Additionally, our class saw opportunity in the energy sector, particularly in the natural gas segment. We looked at historical trends of natural gas prices along with political support for clean and domestic energy.
We identified natural gas prices to be significantly underpriced at times and we are optimistic that natural gas prices will revert to the historical mean. That is one of the reasons we increased our investments in companies such as Devon Energy Corp. (DVN), Apache Corp. (APA) and ConocoPhillips (COP). Due to the recession, the class also considered purchasing companies that we believe are recession proof. We identified these companies as those that sell goods with lower cost and frequent use. Under these guidelines, we increased our investments in Wal-Mart (WMT) and McDonalds (MCD). We believe both of these companies are classic value investments that will continue to prosper in years to come. We believe in finding good businesses that are well managed and that can be purchased below their intrinsic value.
“[We] found good investment opportunities by looking at fundamental analysis and referring to the roots of value investing.”
The Portfolio Practicum investing strategy remains consistent with past years as we search for value. The difference is that we conduct that search under uncertain economic conditions. We have found over the years that value investing serves us well in any economy. By using the value strategy, we look for a stock with a market value that is lower than its intrinsic value, which is calculated by our own Excel model that contains many forms of fundamental analysis. One of the financial models that we use is called relative valuation. It considers price-to-book, price-to-earnings, price-to-sales and price-to-cash flow. We also use other analytical models such as the H-model, constant stage and multi-stage dividend discount model, free cash flow to equity and Buffett’s 15% model. We tried to minimize the risk of our stock portfolio with a diversification strategy. We invested in seven different industry sectors, with no more than five percent of our total portfolio going into any specific investment. The time horizon is also an important part of our investing strategy. Our typical time horizon for a stock is from one to three years. This time horizon allows us the flexibility to allocate our resources into more valuable investments in a timely manner.
P OR T FOL I O PR AC T I C UM R E P OR T 20 0 9 -2 01 0
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Current Holdings Company Name
Ticker
Market Value
Cost
Portfolio Weight
3M Co
MMM
$49,602.00
$45,967.00
2.10%
Abbott Labratories
ABT
$26,995.00
$23,315.00
Altria Group Inc
MO
$29,445.00
Apache Corp
APA
Apollo Group Inc CL A
Ticker
Market Value
Cost
Portfolio Weight
McDonald's Corp
MCD
$74,928.00
$70,774.80
3.18%
1.15%
McGraw-Hill Cos Inc
MHP
$50,265.00
$58,258.45
2.13%
$25,320.00
1.25%
MSC Industrial Direct Co Inc CL A Com
MSM
$23,500.00
$17,998.86
1.00%
$87,694.50
$64,310.13
3.72%
Norfolk Southern Corp
NSC
$52,420.00
$37,420.20
2.22%
APOL
$54,522.00
$54,532.00
2.31%
Oneok Inc
OKE
$44,570.00
$24,598.50
1.89%
Apple Computer Inc
AAPL
$42,146.40
$19,142.00
1.79%
Oracle Corp
ORCL
$61,325.00
$43,049.00
2.60%
Berkshire Hathaway Inc CL B
BRK.B
$72,292.00
$77,207.70
3.07%
Patterson Cos Inc
PDCO
$13,990.00
$18,357.54
0.59%
Clorox Co
CLX
$45,750.00
$43,066.08
1.94%
Pepsico Inc
PEP
$45,600.00
$39,461.45
1.93%
ConocoPhillips
COP
$88,351.10
$93,196.68
3.75%
Potash Corp of Saskatchewan Inc
POT
$65,100.00
$39,749.40
2.76%
Devon Energy Corp
DVN
$95,550.00
$73,876.32
4.05%
Powershares Global Water Portfolio
PHO
$80,085.00
$95,511.10
3.40%
Diagio PLC ADR
DEO
$69,410.00
$47,419.95
2.95%
Rockwell Collins Inc
COL
$34,876.80
$39,101.50
1.48%
Ecolab Inc
ECL
$44,580.00
$36,900.00
1.89%
St Jude Medical Inc
STJ
$45,975.00
$42,740.93
1.95%
Emerson Electric Co
EMR
$93,720.00
$91,175.96
3.98%
Stryker Corp
SYK
$40,296.00
$37,062.00
1.71%
Fiserv Inc
FISV
$43,632.00
$39,592.00
1.85%
Vanguard Energy
VDE
$16,674.00
$22,205.33
0.71%
GE
$27,234.00
$52,861.25
1.16%
United Parcel Service Inc CL B
UPS
$51,633.00
$61,478.73
2.19%
Goldman Sachs Money Market
GCPXX
$135,779.41
$135,779.41
5.76%
UnitedHealth Group Inc
UNH
$33,528.00
$40,522.35
1.42%
Industrial Select Sector SPDR
XLI
$44,464.00
$54,351.85
1.89%
Vanguard Consumer Staples
VDC
$45,983.00
$49,689.00
1.95%
Intel Corp
INTC
$61,200.00
$48,148.50
2.60%
Vanguard Large Cap Vipers
VV
$70,938.00
$79,309.88
3.01%
Johnson & Johnson Corp
JNJ
$57,969.00
$57,539.57
2.46%
Vodafone Group PLC
VOD
$30,294.08
$30,331.76
1.29%
JP Morgan Chase & Co
JPM
$57,296.25
$62,862.39
2.43%
Wal-Mart Stores Inc
WMT
$69,485.00
$65,200.25
2.95%
K
$26,600.00
$18,664.85
1.13%
Wells Fargo & Co
WFC
$45,883.00
$57,684.60
1.95%
LLTC
$21,392.00
$22,648.00
0.91%
Western Union Company
WU
$37,700.00
$42,420.00
1.60%
MATW
$46,059.00
$49,333.73
1.95%
General Electric Co
Kellogg Co Linear Technology Corp Matthews International Corp CL A
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C R EI GHTON UNI V E R SIT Y | COLLEGE OF B US INES S
Company Name
Portfolio Asset Allocation
SEC T OR B R E AK DOWN
Sector
Portfolio Weight [%]
S&P 500 Weight [%]
Information
17.87
24.43
Software
3.24
4.78
Hardware
7.01
11.25
Media
2.60
2.58
Telecommunications
5.02
5.82
Services
40.30
38.76
Health Care
10.49
11.88
Consumer Services
8.68
8.66
Business Services
9.00
3.85
Financial Services
12.14
14.37
Manufacturing
41.83
36.80
Consumer Goods
12.86
10.89
Industrial Materials
15.46
10.73
Energy
12.65
11.55
Utilities
0.86
3.63
Stock Type High Yield
Portfolio Weight [%]
S&P 500 Weight [%]
4.48
0.00
Cyclical
33.81
34.56
Slow Growth
15.00
13.94
Classic Growth
7.31
20.46
Aggressive Growth
19.95
13.07
Speculative Growth
3.22
2.93
Not Classified
0.23
0.41
STOC K T Y PE
Value
Balance
87%
Equities
7%
Foreign Equities
$164,804.08
6%
Cash & Equivalents
$135,779.41
100%
Total Assets Value
Core
$2,056,149.05
$2,356,732.54
Growth
Small
12.81
Asset Class
Medium
1.82
15.26
Foreign Equities 7%
Large
0.75
Hard Asset
Equities 87%
Size
Distressed
Cash & Equivalents 6%
Valuation
P OR T FOL I O PR AC T I C UM R E P OR T 20 0 9 -2 01 0
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2009 Value Investing Symposium
by Seth Goodwin
Economic Outlook 2010 by Tara Ryan The U.S. economy continues to strengthen after a year of turbulence. The outlook is now brighter and more predictable. Portfolio Practicum students think several factors indicate that the recession will persist in the short term, despite the widely held belief that the economy has bottomed out and we are headed for recovery. In contrast to 2008, the first three quarters of 2009 saw an increase in GDP. We expect it to rise an average of 2.5% over 2010. We also believe the Fed will keep inflation under control and expect it to average at 2% throughout 2010. Since short-term interest rates cannot be reduced more than current rates, we expect the Fed to increase the Federal Funds rate to 1.3% as the economy gains momentum.
The first annual VIP attracted 200 participants in 2009 and doubled to 400 in 2010.
The year 2009 marked the start of a new tradition for the Portfolio Practicum class. On May 2, the class hosted the first annual Value Investing Symposium at the Harper Center on Creighton's campus. The event was designed to coincide with the annual pilgrimage of investors to Omaha for the Berkshire Hathaway Annual Shareholders Meeting. Panelists included Dr. Bruce Greenwald, holder of the Robert Heilbrunn Professorship of Finance and Asset Management at the Columbia Business School, Thomas Russo, General Partner of Semper Vic Partners, L.P., James Crichton, Co-founder and Portfolio Manager of Scout Capital Management LLC., Ryan Sailer, Vice President and Portfolio Manager of Union Investment
Management Group, Mark Wynegar, Equity Portfolio Manager First National Bank, and Dr. Frank Reilly, the Bernard J. Hank Professor of Finance, Mendoza College of Business, University of Notre Dame. The panel was co-moderated by John L. Maginn, President of Maginn Associates, and Charles Heider, President of the Charles Heider Company. The inaugural event was well attended. Attendees ranged from students and faculty to outside community members and even guests from foreign countries. At least five foreign countries were represented by attendees in town for the Berkshire Shareholder’s Meeting.
POR TFOL IO P R AC TI C UM RE P OR T 20 0 9-2 01 0
Additionally, we expect long-term rates to rise to 4.2% from the current 3.3%. We anticipate crude oil per barrel to rise from current levels at $66 to about $93 over the next year. Current national unemployment is at 9.7% and we expect it to rise to 10.2%. We have seen some recovery in the housing market and expect the current trend of rising home prices to continue into 2010. Overall, we expect a steady, but slow, recovery in 2010.