Tiger Fund 2015

HAMPDEN-SYDNEY COLLEGE TIGERFUND

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Annual Report 2014 – 2015

~Hampden-Sydney College Student Managed Investment Fund~

Andrew S. Cooney James Hughes

Sydney Henriques Ben Samlall Greg Lewis


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Table of Contents Letter from the General Manager………….3,4 Overview, History, and Strategy……………6-8 Performance Overview………………………...9 Stock Positions Held……………………………..10-13 Conclusion…………………………………………...14


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Letter from the General Manager Dear Advisory Board Members and Faculty, First and foremost, on behalf of the 2014-2015 TigerFund, thank you. The opportunity, which you have provided us, was unbelievable, and the experiences we have gained will continue to aid us throughout our futures. The TigerFund gives economics students the chance to compete with other large schools, and see where we stand in comparison. I think I can speak for most students when I say this; it is especially hard for a Hampden-Sydney student to gain post-graduation employment. No one holds our hand, and most big companies do not recruit at small, liberal-art colleges like Hampden-Sydney. The TigerFund gave the other managers and me relevant knowledge and an applicable skill set that enabled us to impress in interviews. Most of the TigerFund members have jobs in finance lined up, and this is largely due to your support. Once I heard about the TigerFund my sophomore year, I had always wanted to be a part of this prestigious club. This year we have gone through many ups and downs, and we have fortunately come out on top for the year. Unfortunately, we had some losers, so I will get the bad news out of the way:

We were lucky this year to have a rising tide lifting most stocks, but we still managed to find a couple of big losers.

Our biggest mistake that we made this year was investing in Emerge Energy Services, a fracking company based in Southlake, Texas. We purchased EMES on September 19th for $124.99/share. We believed that the stock was undervalued, and only saw potential. One thing that we did not see coming was the tanking of the oil industry in the fall. When oil tanked, so did EMES; as of April 27, it is only valued at $41.55/share. We ended up selling EMES on October 8th for $84.90/share. This was our first loser, and we clearly let EMES drop too low before we sold it. We also learned that we needed to watch our positions with more concentration after we lost on EMES. Going off of our first big loser, we made another mistake in purchasing Twitter at the wrong time. We bought TWTR on September 24th for $52.52/share. After seeing EMES drop so low in the fall, we watched TWTR very closely. Once their earnings report came out late in the fall, TWTR began


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to plummet. The company did not meet its projections, and most of the high up employees did not like the CEO. We believed that the company could make a little comeback, but after falling to $35/share, we decided to sell when it hit $37.16.

Our second mistake, and biggest learning experience, was the fact that we did not put a trailing stop on a couple of our stock picks. A trailing stop is an order to sell the stock when it falls X% from the highest market price reached since you put in the order. For example, if you buy one share of ABC Corp. for ten dollars with a five percent trailing stop and the stock rises straight to twenty dollars. If the stock then fell to under nineteen dollars, then the trailing stop will be triggered since the stock price had fallen by 5%.

I believe that we would have done much better if we had used the trailing stop loss for every stock that we invested in. Personally, I believe that 5% is too low, so we used 10-15%. The stop loss also had to do with how volatile to the market the stock is. The more volatile the stock is, the higher we would put the stop loss trigger. We did not go over 15%, as that is already pretty high. For next year, I will make sure that the managers understand how the stop loss trigger works; if they know how to use the trigger, they will not lose big on a lot of stocks. If I were to change something for next year, I would make sure that we are more confident in the stocks that we pick. Since we try to diversify our portfolio, it is hard for everyone to know a lot about some of the companies that we invest in. If we communicate better, I believe that each manager will have time to research the specific company and give a better opinion.

Now we can move on to some good news.

We had many successful stock picks this year, but our best pick by far was Apple. With the iPhone 6 sales and its new product development, Apple is at an all-time high. Since purchasing the stock in September, AAPL has grown almost 30%. Though we have had many stocks that have gained, AAPL was one of our best picks.

As always, our team competed in the CFA Research Challenge. We competed

against William & Mary, University of Richmond, VCU, George Mason University, James Madison University, UVA, and Radford in our analysis of Booze Allen Hamilton. I am pleased to announce that we made it through the first round, and traveled to Richmond in order to give a presentation of the company. Unfortunately, we ended up losing to William & Mary, but we received good feedback for what we had done. I would like to thank


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Professor Dempster, as well as Ward Good, ’81. They were extremely helpful throughout the valuation process, and stayed in the loop as much as they possibly could. In our report, we focused mainly on the discounted cash flow analysis, as well as the projected government spending for the next few years. The judges liked our valuation, but we did not have as many as William & Mary.

I would like to go off of what Matt Kanne, ’14, wrote about last year about the economics department at Hampden-Sydney. As a group, the TigerFund have talked to Professor Dempster about the faculty/student ratio, and how economics is the most sought out major at Hampden-Sydney. The recent arrival of Professor Levkoff has been great to the school, and has taken a lot of the pressure off of the other economics professors. Though I have never had Dr. Levkoff, I have not heard one bad thing about him. He brings unbelievable Wall Street experience to Hampden-Sydney. Overall, the economics professors work just as hard, if not the hardest, at this school. I believe that they deserve more credit for their hard work, and that the school should recognize that. Lastly, I believe that the TigerFund is headed in the right direction. This year, we interviewed fourteen candidates. There are also a plethora of current sophomores that would like to take part in the TigerFund next year. With this type of support, I truly believe that we can compete with other schools around the southeast. All in all, I had had a great time running this fund, and once again, the support from alumni means the world to the rest of the guys and me. Thank you. Sincerely Andrew S. Cooney General Manager, TigerFund


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Overview and History The Student Managed Investment Fund (TigerFund) provides valuable exposure to

portfolio management and security analysis. Managers gain real world experience in

topics and theories that are discussed in the classroom. TigerFund is the capstone to

the finance “track” offered by the Economics Department.

TigerFund was created in 2003 to provide a “hands-on” experience in research,

investing, and portfolio management, as well as understanding the fundamental

forces of the stock market. The Board of Trustees started the program with a

transfer of funds from the college’s endowment. In the fall of 2003, the total

allotment approved was $50,000. It is currently valued at $89,946.

Managers are chosen through a rigorous selection process that encompasses an

application, formal interviews, and strong research reports. In an extremely

competitive year existing management is able to select up to two associate positions

for qualified applicants who did not make the final cut. The existing managers make

all decisions with general oversight from a faculty advisor. Once selected, managers

take courses in an “investment track” consisting of training in the theory of Financial

Management, Investments, and Security Analysis. The managers also receive three

hours of academic credit for their participation in the Fund. Managers meet at least

once a week to evaluate the status of the Fund and any other administrative duties

that are pertinent to its success.

Analysts are chosen through a rigorous selection process that encompasses an

application and a formal interview. The Analyst program gives third years an

opportunity to gain experience in equity asset valuation. Analysts are paired with a

manager who will provide guidance through an analyst’s research project, which

culminates with a long or short investment pitch to the management team.

The Fund is completely equity-based and the decision making is divided up between

the General Manager, Managers, Associates, and Analysts. The General Manager

actively participates in all investment decisions and ensures the professional

management of the Fund as a whole.


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Managers and Analysts act as securities researchers and portfolio managers.

Through many different research sources, information is gathered in an attempt to

lead to a buy or sell decision. Practical investment knowledge, through Finance

classes, enhanced the educational experience for the Fund managers.

The Fund hopes to create working relationships with alumni and other

professionals in the financial services industry, who would act as mentors for the

managers of the portfolio. The managers also work closely with faculty advisors

from the Economics department.

Over the past few years the fund has continued to grow both financially and

administratively. Through the combination of high caliber students, determination,

and support from the economics department, the TigerFund has grown to become

one of the most unique and prestigious programs offered at Hampden-Sydney

College.

Strategy The TigerFund is composed of five managers, one of which is the General Manager. Three out of the five votes are needed for the purchase of a stock. Each year, the TigerFund is set up a little bit differently; it is tailored to fit the needs of the specific group. This year, we held interviews for underclassmen who wanted to be analysts for the fund. We ended up taking three junior analysts, and brought in a senior associate to help us analyze the stocks. The senior associate had a little more power than the three analysts. Each manager of the fund worked with an analyst while looking at stocks, and seeing if it was worth investing. Working with the analysts gives them a good understanding for what we look for in a stock, and how we value different companies. This year, we invested in companies in seven different industries. Those industries were:

Services – Management Sciences, Rental and Leasing, Apparel Stores Healthcare – Drugs Manufactured, Biotechnology Industrial Goods – Aerospace/Defense Technology – Multimedia and Graphics, Application Software,

Semiconductor, Internet Info Providers Financials – Money Center Banks Consumer Goods – Electronic Equipment Basic Materials – Oil and Gas Equipment Services


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Every week, a manger would come in with a stock recommendation in the industry that he was assigned. We also stayed in contact throughout the week just in case we wanted to pull the trigger on a stock when we weren’t meeting. During our meetings, each manager would pitch the stock that he had chosen for that week. The other managers would research the company as he was talking about it, and decide if we want to invest or not by the end of the meeting. This year, we did not risk a whole lot, and tried to invest in mostly long-term stocks. We would take into account the health of the market, as well as what we thought would happen in the following weeks. Overall, we had a pretty diverse portfolio with a major focus on technology stocks. We believed that the market for technology has a lot of room for growth, and that we can hold these stocks long term. While I wish we had invested a little more in different industries, I think that we had a fairly diverse portfolio.


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Performance at a Glance

The TigerFund was officially handed over in the summer of 2014, but did not start investing until late August/early September. The fund was completely liquidated upon receiving it, therefore, the group and I were able to make our own decisions throughout the school year. We are still in the process of handing the fund over, so it is not liquidated yet, but we will most likely liquidate most all of it. We were officially in charge of the fund from late August in 2014, until the middle of April 2015.

Starting Funds……………….$89,382 Current Funds……………….$89,946 Realized Gain………………...$564.00 Dividends Paid……………....$90.00


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Stock Report

In the beginning of our investing strategy, we felt strongly about the increase of the oil

market. At the time, and even now, domestic drilling and fracking has increased

dramatically, making the United States has surpassed outputs of Saudi Arabia, with

expected barrels a day reaching 13.1 million in 2019. With this in mind, we decided to

invest in Emerge Energy Services LP (EMES). The large reason for this decision was

held on the fact that the company is vertically integrated, allowing them to cut expenses

from the top down (from fracking to refining). Their integration is in sand and fuel,

allowing them to transport at lower costs (39% of COGS due to transportation), and also

to use sand in the fracking process and in selling sand to other fracking companies.

However, with any good lesson, we learned this one the difficult way. After

investing a large portion of the portfolio ($7,506), oil took a huge hit with the dealings

with OPEC and also with the ban placed on exporting U.S. crude oil, forcing the prices to

drop due to decreased demand internationally, selling at $59.15 a barrel as compared to

the $112 range it was trading at in mid 2014.

With 2015 being a large year for economic recovery, undergoing lowering in the

unemployment rates, and also realized increases in nominal incomes due to gas price

cuts, we saw many areas for the fund to expand in terms of consumer spending. This

being said, we focused in many different areas, such as technological consumer products

with Apple (AAPL), the leading producer of technology innovation bringing in an annual

revenue of $182.8 billion for 2014, making them the largest publically traded tech

company.

In addition, we looked at the retail industry side and invested in Nordstrom (JWN)

due to their increased attention to the lower level income Americans with the opening of

more Nordstrom Racks, their more economically priced division, seeing growth of 8.7%

and a sales increase of 4% for 2014. They also delved more directly into online sales,

which has been seen as the new age of shopping with its increasing ease in “buying at

home.”

Looking into more of a government sphere, we decided that invest in Lockheed

Martin (LMT). Though they had presented rather tepid quarterly results, their expected

future potential is on fire. The company is now directing its sales internationally, with

Ticker Name Shares Buy Sold Gains/Loss

AAPL Apple Inc. 50 102.10$ 111.04$ 894.75$

EMES Emerge Energy Services LP 60 124.99$ 84.90$ (2,405.42)$

JPM JPMorgan Chase & Co. 68 58.12$ Market 373.32$

LMT Lockheed Martin Corporation 32 190.00$ Market (32.00)$

Miscellaneous


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possible increases of conflicts abroad with terrorism. In addition, the new F-35 product

line has been promising as its increased sales and set milestones for the year.

The technology sector was our biggest portion of the portfolio throughout the year. We held 6 technology companies from different parts of the industry. The Information Technology sector as a whole gained 18.99% compared with the S&P 500 at 11.03%. The technology has outperformed the entire market besides the healthcare industry, which we were also heavily weighted in. The technology sector as a whole has consistently brought value to the market. Computer technology is one of the few industries in the United States that leads in innovation across the globe. The market for hardware and software has never been greater. In the future, the technology sector will continue to be a leader because of the innovation. Hardware developers, like Apple, and software developers are improving the efficiency and expanding the capacity of what technology can do. Data analytics is an important business language to understand as applications grow. We held considerable positions with Red Hat Inc. and Salesforce.com, which are both cloud computing solution companies. The cloud has been a huge value added proposition for the technology industry. The cloud is becoming increasingly more important as users want data to be shared between devices. The opportunities for these companies to grow their business are abundant. Salesforce.com is currently a target for acquisition from conglomerates like Intel and Google. The fund held positions in the Multimedia and Graphics Software section, better known as mobile gaming companies. Glu Mobile Inc. and Activision Blizzard Inc. have both expanded their businesses by acquiring smaller gaming companies. There is upside potential for these companies as mobile gaming increases the amount of money spent per user within downloaded games. The holiday season is a crucial time for these companies to earn revenue. The market is robust as these companies become larger and produce more games.


ATVI Activision Blizzard, Inc. 345 21.69$ Market 469.20$

CRM Salesforce.com, inc. 16 61.91$ 65.13$ 51.52$

RHT Red Hat, Inc. 80 62.99$ 75.20$ 976.82$

HIMX Himax Technologies, Inc. 700 7.13$ 8.93$ 313.50$

TWTR Twitter, Inc. 100 52.52$ 37.16$ (1,536.00)$

GLUU Glu Mobile, Inc. 550 5.34$ $ 3.72/4.40 590.61$

Technology


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The healthcare sector has outperformed the entire market. Healthcare is improving faster than ever. Advancements in medical technology, medical devices, research and development of new drugs have created great results for the sector. Biotechnology is adding tremendous value to the market place because these companies are creating drugs that are curing health problems like the world has never seen. Industry leaders such as Gilead Sciences, Celgene Corporation, and Biogen are changing the face of modern medicine. These biotechnology conglomerates grow through the acquisition of smaller biotechnology companies. It cost a lot of money to research and create a successful drug. In takes three stages of clinical trials to gain approval by the Food and Drug Administration. Companies can invest millions of dollars into developing a drug and have it thrown out by the FDA. Once a drug passes the FDA, companies have a monopoly on the sale of that drug for over a decade. The Biotechnology conglomerates can use their large network of distribution and manufacturing to buyout these small drug companies with a hopeful drug in its pipeline. Within the Healthcare section of the market, the fund was diversified between multiple different industries. We successfully bought Gilead Sciences at a discount to the market and believe that this is a healthy stock to continue to hold in the long-term. We also held drug manufacturer, Glaxo Smith Kline, and small biotechnology firm MannKind. The healthcare sector performed terrifically for the fund and is a healthy place to keep money because the industry continues to grow.


GSK GlaxoSmithKline plc 120 45.88$ Market 10.80$

GILD Gilead Sciences Inc. 10 94.39$ 105.65$ -$

GILD Gilead Sciences Inc. 50 104.79$ 105.65$ 155.61$

MNKD MannKind Corp. 600 5.14$ 6.29$ 691.44$

Healthcare


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Services

The Services sector of the industry was another strong performer in comparison to the overall market. As the economy continued to grow over the past year, the service industry saw considerable gains except parts of the industry tied to energy. Retail Stores, like Nordstrom, shares performed well as the market factored in extra consumer spending from gasoline savings. The sector has taken a slight decline since its been reported that consumers have not been spending the money saved on cheap gasoline. Within the Services sector, our fund diversified into Management Services, Rental and Leasing Services, and Apparel Stores. We wanted to be exposed to a broad portion of the industry and not be weighted too heavy in one particular industry within the Services sector. Our holding of United Rentals took a significant dive because the stock is correlated with oil prices. The company leases construction equipment to large construction companies. Predictions that U.S. oil shale production would fall hurt the construction equipment rental market.


AAPL Apple Inc. 50 102.10$ 111.04$ 894.75$

EMES Emerge Energy Services LP 60 124.99$ 84.90$ (2,405.42)$

JPM JPMorgan Chase & Co. 68 58.12$ Market 373.32$

LMT Lockheed Martin Corporation 32 190.00$ Market (32.00)$


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Conclusion Once again, we would like to thank you all for the opportunity that you have given us this year; we enjoyed every second of being on this fund. We believe that the fund is taking steps forward, and gaining more interest within the school. This can be justified by the 14 guys who interviewed with us this past semester. Every candidate was passionate about being on the fund, and the competition was extremely tough. The five managers next year are extremely smart, and hard working men. I hope that the fund will continue to grow, and that the men representing the TigerFund will have as much fun as our team did this year. Thank you all for your time, and I hope you enjoyed our presentation. Thanks, TigerFund 2014-2015

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Tiger Fund 2015

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