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Security Selection

Student managers undertake a number of analyses in evaluating portfolio holdings:

Identification of promising companies

Each student manager identifies promising companies for investment from an assigned industry sector (Financials, Consumer Discretionary, etc.). For each prospective investment, students calculate an intrinsic value, based on a thorough fundamental economic analysis of the company. An attractive candidate will be in a business with a stable or growing long-term sales trend; declining industries are generally avoided.

Analyses of financial statements

Students reformulate both the income statement and balance sheet into separate operating and financing components. Students compare key financial ratios with those of close industry competitors, both in terms of levels and trends. They look for companies with low to moderate debt levels, stable or improving profit margins, and stable or improving asset turnover.

Forecast of earnings

Student managers create pro forma income statements and balance sheets for the company for future years. Students evaluate the company’s past record at creating value from its capital investment and R&D decisions, and develop forecasts for the future. In forecasting sales and profit margins they analyze the competition and barriers to entry in the business, the potential for cost savings through use of technology, the macroeconomic outlook, and the company’s operating leverage. Earnings quality is a strong focus.

Calculation of intrinsic value

Calculating intrinsic value requires students to estimate costs of debt and equity capital for the company. Student fund managers recommend purchasing stocks with an intrinsic value well above the market price, thus providing a sufficient margin of safety. Student managers recommend sale when the market price exceeds the current estimate of intrinsic value, either because of a change in prices or fundamentals.

Based on their analyses student managers make recommendations to the MSU Foundation to buy or sell a security. All decisions to recommend purchase or sale of a security require a simple majority vote of the students in the class.

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