By Will Manderscheid
How did you get comfortable with the replacement value analysis? Why does this business have a more durable competitive advantage than its peers? Why is short interest so low?
These are some of the questions our Kellogg team of Alex Acosta, Anish Pasari and Will Manderscheid received after our final round presentation for Ivey Business School’s Ben Graham Centre International Stock Picking Competition. The competition features 25 teams of MBA students from top business schools around the world who vie for $17,500 in cash prizes.
In the first stage of the competition, held in January, each team prepared a written report on a company that was judged by a panel of value investors. From a list of 10 companies, our team selected Monarch Cement Co. (MCEM), a manufacturer of cement and ready-to-mix concrete. We recommended a “buy” due to significant undervaluation, positive industry trends, improving cash flow, and favorable industry consolidation.
The top three teams from Haas Business School, Ivey Business School and Kellogg advanced to the next stage, which involved presenting in-person at Ivey Business School in Toronto.
The final round required us to evaluate Buhler Industries (BUI), a manufacturer of heavy agricultural equipment. We recommended a “no buy” at the current price because of continued pain from declining commodity prices, substantial overvaluation relative to larger and better capitalized peers and high leverage, which would prohibit the company from investing in needed operational improvements and growth. The challenge was ultimately to convince a panel of highly accomplished value investors to not buy the stock.
Judges for this year’s competition included Ken Broekaert (Burgundy Asset Management), Wayne Peters (Peters MacGregor Capital Management), Robert Robotti (Robotti & Company Advisors) and Kim Shannon (Sionna Investment Managers).
Our team took the top prize of $10,000, with Haas finishing second and Ivey rounding out the top three.
Ultimately, we were successful because we:
Developed creative fundamental analyses
Any good financial analyst can examine gross margins, EV/EBITDA multiples and customer concentration. However, we called farmers and dealers to get real-time feedback on the trends in the business. We also developed a unique way of estimating declining industry prices and volumes by scouring dealer websites to compare new and used versions of tractor and combine models.
Exhibited organized thinking with imperfect information
Stocks as small as BUI ($125 million market cap) are rarely covered by Wall Street analysts and frequently do not disclose much information at all. As a result, we were forced to both find and analyze the data ourselves, as well as present a compelling story to the judges with a systematic analysis of why each segment of the industry value chain was going to struggle.
Answering questions from a panel of highly respected and successful value investors can be intimidating. However, preparation and four quarters of experience in Kellogg’s Asset Management Practicum enabled us to present confidently and tell a clear story of why we believed BUI was destined to underperform the market.
Will Manderscheid is a second-year student in Kellogg’s Full-Time Two-Year Program. Prior to moving to Evanston, he worked in private equity at Sentinel Capital Partners in New York. After graduation, he will be joining Carlson Capital, a multi-strategy hedge fund based in New York.