When considering which stocks to purchase as part of an MBA competition, a team of Tepper MBAs opted for leveraging sophisticated analysis against a common-sense strategy: Regardless of how soft the economy is, people will always need to buy underwear.
At the prestigious Alpha Challenge stock pitch competition at Kenan-Flagler Business School, classmates Dan Jester, Jesse Paone and Brad Burke put their analytical skills to the test against teams from 14 other top B-schools and emerged big, winning the competition and claiming the cash prize.
Teams were given a list of stocks in the apparel/retail/luxury industries, then allowed one week to formulate a strategy in the real-time context of the current economy.
Jester, Paone, and Burke opted to buy the Hanes brand and short the popular luxury sports apparel manufacturer Under Armour.
“First, we thought there was going to be a trade-down effect from consumers buying more high-priced goods to consumers buy lower, apparel-essential type clothing,” explains Jester, who worked as an economist for Moody’s before enrolling at the Tepper School. “We had noticed that some of this effect is already happening in stocks for Wal-Mart and discount retailers.”
However, the trend had not impacted discount suppliers, so the team reasoned that a company like Hanes would actually stand to benefit from the weakened economy. Though the company had significant debt on its balance sheet, the team’s analysis revealed that the debt wasn’t as problematic as the market was pricing it. So while Hanes’ stock was being punished, the debt actually would not affect its operations for many years, they said.
“Everybody needs to buy underwear,” says Jester. “[Purchases rotate] much more quickly than regular apparel.”
The opposite was true for Under Armour, the team concluded. Their research revealed that in all segments in which the company competes, its products are priced at a 20 percent premium over peers such as Nike or Adidas.
“They are a luxury good in a discretionary industry,” says Jester. “We felt Under Armour would be the flip side of the trade-down effect.”
With plans to launch a new running shoe in the first quarter of 2009, Under Armour had hoped to boost sales, basing that expectation on strong launches for footwear in the past. But the Tepper School team believed the running shoe market would be vastly more competitive than those segments Under Armour had previously conquered.
The specialized footwear segments in which Under Armour had excelled — cleats and performance weightlifting shoes, for example — only had 6 competitors, compared to 15 to 18 different brands of running shoe competition.
Moreover, the Tepper School team didn’t think the broader demographic of running-shoe consumers would give Under Armour the price premium it wanted.
“It’s going to be hard for them to gain traction in the running shoe market,” Jester says.
The teammates, who are all involved with the Tepper School’s Alpha Club, used statistical models that were developed in their first-year core classes.
“Our modeling was far beyond the scope of what [the judges] thought we’d bring to the competition,” says Jester. “It was very clear that our sophistication in doing high-level finance work — a Tepper strength — was very important in our ability to compete.”
Just as crucial was the group’s ability to make a compelling presentation to the judges, who included prominent hedge fund and institutional portfolio managers as well as equity research analysts.
“The presentation classes that we had last year and Brad’s and my internship experiences in presenting to large groups of people proved very helpful,” says Jester, who completed a summer internship at Deutsche Bank, while Burke worked at Merrill Lynch.
The three were pleased not only to split the prize money of $6,000, but also to showcase their skills and to network with the judges.
“It’s definitely a significant differential when somebody reads my resume,” says Jester. “It’s one of the most prestigious stock-pitch competitions in the world for MBA students. Having won it and having seen the competition from the other business schools, it puts me in a good position.”
He was also pleased by the win’s reflection on his soon-to-be alma mater: “Tepper is a top finance school regardless of what methodology you use.”