A group of five University of Waterloo students recently snapped up first place in CFA Institute’s 2016 global research challenge, beating out more than 800 other university teams from 70 countries across the globe. It’s the first time a Canadian team has ever won at the global level.
To earn the $10,000 grand prize, the University of Waterloo students analyzed Canadian Tire’s CTC.A shares (which are non-voting). The team members, who study at the university’s School of Accounting and Finance, are:
- Brent Small;
- Adnan Khan;
- Daniel Zhang;
- Kamaljot Dhaliwal; and
- Rudder Zhang.
So, how did they come out on top, and what can you learn from these industry up-and-comers?
The team’s mentors Steven Balaban, founder and CIO Mink Capital, and Craig Geoffrey, an accounting and finance lecturer at University of Waterloo, offer some insight on their team’s process and why they won.
Why the team researched Canadian Tire
The stock was assigned by CFA Society Toronto and Ottawa, says Geoffrey. All students competing in Ontario analyzed the same stock.
The team’s analysis
The team chose a buy recommendation for CTC.A, based on a one-year target valuation of $150 and a 15% possible return. The stock’s current price is around $143, compared to about $134 when the students won the competition in April 2016.
The team found the main risks associated with investing in CTC.A are:
- the volatility of oil and gas prices, which could decrease revenue and result in a target stock price of $137 if prices remain weak;
- the value of the loonie versus USD, since 40% of the company’s products are sourced in USD; and
- the impact of Lowe’s acquisition of Rona, which makes them a competitor of Canadian Tire. But the team said this was largely mitigated by Canadian Tire’s competitive pricing.
To check out the team’s full presentation at the global finals, watch this video (the winning team’s 10-minute presentation begins at 1:03:54).
Why they won
The panels of judges at each level of the competition ask all teams how they come up with final valuations and growth rates.
The students prepared for that by analyzing all of Canadian Tire’s business units separately before presenting their one-year target price of $150, says Balaban. “Canadian Tire can be broken up into retail, financial services and REITs,” and it owns Mark’s and FGL Sports. “Our team looked at all of those segments individually, used different valuation methodologies for each one,” and divided the work based on their strengths.
For REITs, he explains, “That has to do with the land under most Canadian Tire stores. So the team used the multiples approach based on FFO, instead of looking at EBITDA, to look at various other real estate companies and REITs. They not only knew the company inside and out, but each part of the company was assessed with a different methodology.”
And for Mark’s, “they said they knew the rate at which GDP was growing, but that Mark’s would grow at less than GDP because of softness in oil and gas and that would affect people who buy work wear,” says Balaban.
“[So] they assessed this segment by saying, ‘Mark’s represents a $9.54-per-share valuation, representing 6% of the target share price,” and they found it would be Canadian Tire’s slowest-growing segment. They offered the same detailed analysis for each business division, showing how each unit contributed to the total of $150.
What the mentors learned
Through his participation in the competition, Balaban’s learned to predict the types of questions people will ask before going into meetings or presentations.
Geoffrey says, “These students were so prepared that it would have been difficult to trip them up. If you know information backwards and forwards when preparing for meetings, then you’ll be ready no matter what question people ask.”
Also, both suggest that advisors use the same approach these students used: break down a company into segments when analyzing its stock. This will help advisors explain potential opportunities to clients.
Money management lessons
This year’s winning team consisted of students who also participate in the University of Waterloo’s Student-run Investment Fund. This fund invests $250,000 that was donated anonymously to the School of Accounting and Finance, says Craig Geoffrey, a lecturer at the university.
When managing the portfolio, he adds, “Students make actual stock selections, with [junior] students pitching stocks and senior students acting as portfolio managers to decide what to buy and what to sell.” Students also present to the fund’s advisory board each quarter—the fund doesn’t often beat its benchmark, but its average return for spring 2015 was 0.68%, excluding cash, compared to 1.07% for its benchmark (50% S&P/TSX Total Return Index and 50% S&P 500 Total Return Index).
The fund is restricted to investments in North America, and there are caps on how much students can allocate to U.S. equities and single sectors. But, through their involvement with the fund, the five students who won the CFA challenge had experience with equity analysis, since they review the portfolio when fundamentals change and when holdings reach 12-month target prices, says Geoffrey.
“The written component [of the CFA competition] is fairly technical so [we] also selected students who knew how to build financial models and understand accounting rules,” and who could handle Q&A sessions with judges.