An essay by Connor Darrow, AIM alumnus, on coronavirus and the markets

Stay the Course!

by Connor Darrow, Marquette Applied Investment program alumnus 

March 29, 2020

The coronavirus has obviously been a challenging time for most. From fighting for toilet paper, to worrying about job security, to switching to online courses no doubt the coronavirus has already had an impact and who knows how long it will last. 

Amidst this backdrop for many investing has taken a backseat. In addition to fears of investing, many people have likely withdrawn investment funds in an effort to navigate the global pandemic. This has the effect of buying high and selling low as the stock market has fallen back so sharply. The exact opposite of what investors seek to do. While it may be a challenging time to stay invested for many it is essential to remain invested and continue to buy on the dip while considering the broad US stock market and its history.

No question the U.S. stock market has fallen sharply since the start of the year. Year to date the S&P has fallen over 20% and most of this decline has occurred in the past two months (as seen in the graph below). Goldman Sachs is even predicting a GDP loss of 24% in the second quarter of 2020. The decline can be attributed almost solely to the outbreak of the coronavirus and the U.S.’s approach to dealing with the crisis. 

The U.S. has seen many states and cities call for a quarantine which has led to a sudden stop of the economy. According to the department of labor the most recent job report revealed that 3.28 million people filed for unemployment insurance last week. This is more than four times higher than ever recorded. These statistics clearly paint a grim picture and it would not be shocking to see the unemployment rate go up significantly higher as companies burn through their cash reserves and about 74% of people live paycheck to paycheck (according to the department of the American Payroll Association.) And almost three in 10 adults have no emergency savings at all, according to Bankrate’s Latest Financial Security Index.) 

Amidst this backdrop you may wonder why to even invest.

S&P 500

Yahoo Finance

Given such a sharp decline it is easy to lose faith in the stock market and calling a bottom is hard to predict. However, with the stock market having fallen so sharply it is likely that the decline in GDP forecasts and slowing of the American economy has already been priced into the market. This means that the stock market is likely nearing a floor and opens a potential buying opportunity. 

History has shown over the past 50 years anytime the stock market has fallen over 20% in a calendar year the following year has always seen an increase of over 20% (see the graph below). While it is uncertain if this stock market decline will perform similarly given the uncertainty of the duration of the pandemic. History indicates it would be wise to invest in a declining market.

Date	Value
12/31/1974	-29.72%
12/31/1975	31.55%
12/31/2002	-23.37%
12/31/2003	26.38%
12/31/2008	-38.49%
12/31/2009	23.45%
3/27/2020	-21.34%

The global pandemic is unlikely to last forever and with economic stimulus recently announced, potential vaccine development, and the summer on the horizon it is likely better days are coming. I know for many this will be hard to accomplish with lost income amidst a rise in unemployment but with two trillion dollars coming in the form of federal stimulus and many Americans receiving at least $1200 due to recently passed regulation this should provide some financial security to buy some time and gives hope the economy can limit the damage until people are able to go back to working. These are all positive factors that could reignite the U.S. stock market.

Understandably not everyone will have the opportunity to invest during this time but in a period of uncertainty and a rapidly declining stock market why not follow history. My advice is to utilize dollar cost averaging and invest every two weeks if one can. Because while it is impossible to predict the bottom of the stock market. At least this way you can potentially buy low and sell high at much cheaper prices. You may not see such a great buying opportunity again for quite awhile. As Warren Buffett once said, “We simply attempt to be fearful when others are greedy and to be greedy when others are fearful.” We too should look to have courage and continue investing in the stock market.

A Current AIM Small Cap Equity Holding: World Wrestling Entertainment, Inc. (WWE, $49.10): “Knocking Out Management, From the Top Rope!”

 World Wrestling Entertainment, Inc. (WWE, $49.10): “Knocking Out Management, From the Top Rope!”

By: Jack Blum, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

• World Wrestling Entertainment, Inc. (NYSE: WWE) is an entertainment and media company. Their five product segments include media, live events, consumer products, WWE studios, and other. They have branded and cemented themselves as the premium wrestling company in the world, and they are headquartered in Stamford, Connecticut.  

• WWE’s CEO Vince McMahon fired co-presidents George Barrios and Michelle Wilson at the end of January. The stock then nose-dived 21.5 percent following the announcement.

• Both Wilson and Barrios had been with WWE for over a decade, and both had major input in the lucrative TV rights deals that WWE has achieved in recent years.  

• The ousting of the executives was due to earnings for 2019 coming in on the low end of estimates, giving McMahon a reason to shake things up.

•  The stock has been trading between $48-50 lately, which is the lowest since May 2018.

Key points: 

WWE has had an extremely rocky start to 2020. As previously stated the management reshuffling was received in an extremely negative light by the market. The management change has not been the only negative point lately for the company. The end of 2019 was filled with negative headlines, including skepticism about contract renewals, and complaints about the treatment of their wrestlers. Management spoke on this during their recent Q4 earnings call stating that they are not confident in expanding their TV and media rights deals in the Middle East and India. Additionally, reports have surfaced about the lack of quality health insurance, with these reports stating that their wrestlers were dying at a faster rate than NFL players

.

The main worry of investors is the crumbling of television ratings, and the loss of pure star power than the network has consistently relied on in the past to fill seats, and generate viewers. Fans have stated that the over scripting of events such as WWE Raw used to be fine when Ric Flair, Dwayne Johnson, and Hulk Hogan were delivering the lines. While it is very hard to simply curate a superstar, it is something that management has expressed concern about in recent months.

While these recent shortcomings have drastically impacted the long-term outlook for this company there are lots of positives that can be drawn for the stock’s performance in the last few years. Since being pitched in spring of 2017 the stock has absolutely smashed its price target of $25.77. I believe that this stock should be sold in order to capitalize on our gains without losing anymore money as the stock goes through this extreme rough patch, with no end on the horizon.

What has the stock done lately?

Over the past 3 months the stock is down 16.21%. The price range for the past 52 weeks is $40.24-100.45 with the stock currently trading at just under $50.

Past Year Performance:

WWE is down 23.68% so far in 2020. This is due to the management shake-up, negative reports, and Q4 earnings. While they beat earnings, they posted lower-than-expected revenues, which marked the fourth straight quarter of top-line miss. This caused widespread panic across the street causing price targets to drop across the board.

Source: FactSet

My Takeaway

I recommend that we sell our position in WWE due its stellar performance in the past and the current uncertainty of its future contracts and management. WWE has been a profitable investment for the AIM small cap fund. I believe that it would be in our portfolio’s best interest to sell off this winner, rather than waiting and potentially losing even more of our gain.

Source: FactSet

A Current AIM Small Cap Equity Holding: Callaway Golf Company (ELY, $18.78) "With Bunkers Down the Fairway, Callaway Looks to Follow-Through"

  
 Callaway Golf Company (ELY, $18.78) "With Bunkers Down the Fairway, Callaway Looks to Follow-Through" 

By: Ellie O’Donoghue, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

• Callaway Golf Company (NYSE: ELY) is an American sporting goods company that designs, manufactures, and sells golf clubs, golf balls, and other golf-related accessories.

•ELY has three operating and reportable segments: Golf Clubs (57.8% of FY18 revenues), Golf Balls and Gear (15.7%), Accessories and Others (26.5%).

• Callaway Golf Company sells its products throughout the United States and about 100 countries under the Callaway Golf, Odyssey, Strata, OGIO, and TravisMathew brand names

• Management has indicated a focus on continuing to invest in R&D resources, especially AI, as well as tour and customer-facing initiatives, such as fitting capabilities and B2B systems.

• Callaway is facing significant financial headwinds in 2020 due to coronavirus, unfavorable foreign exchange rates and tariffs.

Key points:

Through their strong brand position and continued investments, Callaway Golf Company’s valuable internal restructuring and operational improvement has led it to maintain market leadership in the stable worldwide golf market. In their recent 2019 earnings call on February 10th, Callaway’s management announced a strong overall fiscal year, with a few missed figures in the fourth quarter due to some macro and industry headwinds. As a whole, management stated that due to a fiscal year filled with strategic and tactical reinvestments alongside overall positive market condition, Callaway saw a 7.3% increase in revenues in the golf equipment segment and overall revenue growth in every market.

With 2019 being a year of reaping the benefits from expanding product launches and reinvesting in product technology and development, Callaway continues to be able to claim the number one market share position in clubs in both the US and Europe.  Callaway has invested over $110MM in the past three years to create and modify product designs using computer aided design software, finite element analysis (“FEA”) software and structural optimization techniques through Artificial Intelligence methods. New product innovation combined with press coverage of using never before seen AI technology has increased historically flat performance up 1% with estimates of new product launches helping a net sales growth 56% in 2019.

In addition to these new and improved product launches, Callaway has been aggressively reinvesting in their 700,000 square foot Callaway’s Chicopee ball plant capital project in Texas in order to consolidate their DC’s in Japan, China and the UK.  Although Callaway has seen a relatively strong year of operational and financial performance, Callaway faces some sizable headwinds due to coronavirus, unfavorable foreign exchange rates and tariffs that will have a significant impact on their financial results. The most notable factor is the coronavirus outbreak, which will affect Callaway’s sales in Asia and their supply side overall. The coronavirus is already making a clear impact, with Callaway forecasting a $25 million revenue decline two days after their relatively positive 2019 earnings call. Management’s statements on the sizable headwinds they are facing had a significant impact on their stock price, with shares sliding 8.5% the day they announced their expectations on the impact coronavirus will have on disrupting their manufacturing. Although management is still positive on 2020 and their ability and commitment to make successful long-term investments, Callaway’s fiscal year success will be dependent on the viral outbreak and its effects.

What has the stock done lately?

Although having a strong past year performance, the rise and intensity of the coronavirus has adversely affected the stock price. ELY has decreased 11.42% in the past quarter and their decrease in price is not showing signs of slowing down due to the continued prevalence of their dependence on China. Callaway’s price range of $14.49-$22.33 shows the impact that the virus has had on the company, with the biggest impacts being seen after the company announced their forecasted revenue decline on February 12th, with Callaway Golf’s shares seeing an immediate decrease of 8.5%. Although the coronavirus will certainly have an impact on Callaway’s supply chain and near-term demand for their products in China, management is still positive on 2020 being a year of “above-average reinvestment” and hopes to see these investments be reflected in the stock price once the coronavirus epidemic is, hopefully, resolved.

Past Year Performance:

For their full-year 2019, Callaway’s revenues increased 37% to $1.7 billion due to strong performance in their golf equipment sales alongside gains in their soft-goods sector including their brand TravisMathew and $356 million in Jack Wolfskin sales. Callaway reported earnings of $79 million for the year, with a 36.87% growth seen in sales. With the headwinds Callaway is expecting, management still expects full-year sales of $1.75 to $1.78 billion due to their reinvestment focus.

Source: FactSet

My Takeaway

Although facing some macro factors that will have an impact on their financial results, I believe ELY still has the opportunity to make the put and thus should remain in the AIM small-cap portfolio. Since being added to the portfolio at a price of $15, ELY has proved itself to be a great swing due to their focus on transformation including considerable amounts spent in R&D, new strategic acquisitions and reinvestments in existing business to drive growth. Although facing bunkers ahead, Callaway’s strong brand position and continued investments in current and potential product portfolio has the ability to out-last the potential short-term effects of coronavirus and other macro headwinds they are working on mitigating in 2020. With an original target price of $25, playing the golf-game slow and steady will eventually ring true by the end of the year, and Callaway has the potential to recover and make a hole-in-one by the end of the year.

Source: FactSet

A Current AIM International Equity Holding: IHS Markit Ltd. (INFO, $74.79): “The Market Likes Markit”

IHS Markit Ltd. (INFO, $74.79): “The Market Likes Markit”

By: Manuel Cukaj, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

·         IHS Markit Ltd. (NYSE: INFO) provides analytics, solutions and critical information for major industries, financial markets and governments. The company was created in a merger between IHS Inc. and Markit in 2016 and has become a global leader in its industry.

·         Recent success is based on their well-diversified global customer base, a solid brand recognition and a competitive advantage in depth and breadth in their offerings.

·         Future catalysts will be solid business model with high percentage recurring revenues, growth through M&A, and margin expansion over time.

·         Risk associated with the investment thesis are typical M&A risks, volatile non-recurring revenues, and high leverage limiting future expansion opportunities.

·         Strong hold!

Key points:

IHS has experienced strong top line growth in the past years and margins have improved continuously since the stock has been added to our international portfolio. The reasons for INFO’s success have been their well-diversified global customer base, a solid brand recognition and more depth and breadth in their offerings than their competitors. A range of research analysts and industry experts enables them to provide quality services across several industries. A close relation to their customers has helped in building essential long-term relationships, that will secure market share in the future.

Furthermore, the business model of the company allows for recurring revenues which are achieved through subscription contracts and make up 85% of their sales. A high customer retention rate that is constantly in the low 90%’s and a high cost of switching for their clients is very supportive of that strategy. Additionally, many of INFO’s products and services are mission-critical to their customers, while at the same time, competitors have a hard time replicating them.

Future catalysts that will drive the value of INFO’s stock will mainly be their M&A activity, recurring earnings with slightly increasing margins and debt paydown. Historically, the acquisitions of the company helped foster growth and it is the hope that this strategy will continue to support the company’s expansion in the future.  Their latest acquisition of Novation Analytics increases their portfolio offerings by providing software solutions, data analysis and advisory services to the automotive industry, a space the company is expanding into. Besides, the company is focusing on further improving operations and staying financially disciplined to keep the margin expansion of the past quarters going. Even though INFO missed top line expectations for the five most recent quarters, they were able to beat EPS estimates by an average of 6.5% during the same time span. This shows their successful efficiency improvements and lets investors expect margins to increase by 100 bps each in the next two years.

Even though there is a positive outlook and solid drivers for IHS Markit’s future there are main risks that would change the thesis of this investment. Since an extensive M&A strategy always involves inherent risks its important to keep an eye on how new acquisitions play out. The 15% of revenues that are derived from non-recurring sources can become volatile and impact whether the company will meet the markets expectations. Multiple missed earnings could make investors afraid and impact the stock price strongly. Lastly, IHS Markit is highly levered and paying down that debt will pose an obstacle for future growth and needs to be considered a serious risk.

What has the stock done lately?

Since the beginning of the new year, INFO returned -1.3% compared to the -3.9% return of the MSCI AC World ex USA. These negative returns are due to the current week’s market reaction to the international outbreak of the corona virus.  Nevertheless, the company revealed their Q4 and annual results for NOV ’19 in January this year and beat EPS expectations by 6.8%.

Past Year Performance:

In the past year INFO’s stock price has shown very bullish growth representing a one-year return of 41%. Compared to the MSCI AC World ex USA total return of 4% for one year, IHS Markit strongly outperformed the benchmark and was able to continuously surprise investors and beat expectations.

Source: FactSet

My Takeaway

In the past couple days, the stock dropped together with the markets as concerns about the corona virus continue to scare investors. However, we are experiencing and expecting growing demand for data analytics and solutions in all industries and as financial services are being disrupted by new fintech companies, there is need for experienced consultants. Considering the solid business model and strong market position of IHS Markit, I believe we should hold on to the stock. As long as the drivers continue to play out and none of the major risks interrupt the thesis, the stock is well equipped to generate more returns for the AIM International Equity Fund.

Source: FactSet

Coronavirus (COVID-19) How does this impact a college student?

The Conoravirus is going to impact college students more than they realize!

Here are some of the likely possibilities:

You probably won’t have in-person classes for the rest of the spring semester – or probably summer.

Your summer internships and/or entry level jobs could be cancelled, suspended or delayed.

Education, work, play, etc. will change moving forward as more social distancing is employed. 

Don't let the coronavirus destroy small businesses - make an effort to buy local!

It is crucial for the next two months to BUY LOCAL!

COVID-19 will result in some industries and countries doing better than others – but without our support local small businesses will suffer

Wow, this certainly escalated quickly. In the United States the coronavirus went from a minor story to a national emergency in a heartbeat.

It seems like yesterday - March 11^th - when the World Health Organization declared the coronavirus a pandemic. That for me was the turning point...

Life got a little trickier – what about the family, work, school, NCAA tournament, baseball, etc.? I had to scramble to put six weeks of lectures and material for my courses at Marquette University online. And life for millions of people has changed almost overnight as they adapt to the changes in daily activities.

In Marquette University’s Applied Investment Management (AIM) program, the students learn how to evaluate companies and industries. And one thing is very clear with the COVID-19 pandemic – local small businesses will likely fail without their customers.

Before you order everything you need for the next two months online from Amazon.com, think about how you can support your local retailers. Jeff Bezos' business will survive the pandemic, but your local bakeries, restaurants, and retailers won't without your support.  

Think about going out and supporting your local businesses. While you should follow the CDC’s guidelines on restaurants, I hope you try to eat out (or at least order take-out) - and we should consider other ways to support small businesses.

Alright, if you can't eat out - then order carry-out or delivery. And if you can safely buy something locally instead of buying it online from Amazon or some big box store's web site, then do your best to support small businesses. Also, if you need something from a hardware or craft store - or anything else – then call and ask them to hold it for you. Who knows, they might actually deliver it to your home.

Why should we do this? Well, because it matters -  you see, if we don’t support our local service providers and retailers, then they will fail. At this time we need to support each other and not let the next two months destroy what remains of our local businesses – Amazon, Walmart and Target have already hurt many to the point of breaking.

Over the next two months please be safe and smart. If you are sick, stay home and don’t go to work or school. Call your parents and tell them and other people that you are close to that you care about them. This is a good time to read the books you’ve been putting off or to find creative ways to connect with friends with more than a one-line text. 

While it is important to follow the social distancing suggestions of the CDC, don’t allow our local businesses down – the next two months are critical to their survival.

Take care of yourself and each other - and see you in May!

Marquette's Student-Managed AIM Funds Continue to Outperform the Indexes During the COVID-19 Outbreak

Another challenging week with Coronavirus taking its toll on stocks; however, the AIM Small Cap and International Funds continues to outpace their benchmarks

The @MarquetteAIM student-managed small cap and international funds have continued to outperform the Russell 2000 and MSCI All-Country World Index ex US over ever time period the past three years – through Friday 3/13/2020.

The best performers for March 2020 thus far are shown below:

Starting on Monday, 3/16/2020 Dr. Krause's FinTech Topics taught at Marquette University will be moving 100% online

FINA 4931 – FinTech Topics – will be moving 100% online following spring break through the end of the 2020 spring semester. 

The outbreak of respiratory illness caused by Coronavirus (COVID-19) is the reason for this decision and this will be the case whether or not Marquette University retains in-person class meetings during the semester.

FinTech Topics is going 100% online
for the remainder of the spring 2020 semester

According to David Krause, Associate Finance Professor and instructor for Marquette's FinTech Topics course, "While the majority of the course was online, adjustments have been made to move all material and requirements online via the course's learning management platform - D2L."

"We will be making extensive use of digital technologies, such as Online Rooms and Chat Rooms - as well as using some old-fashioned tools such as Voice-over PowerPoint," Krause added.

"It is unfortunate that we won't be meeting in person for the remainder of the term; however, it was the intention to move this course 100% online by the fall 2020 semester - so I guess we got a head start," Krause quipped.

We wish everyone the best and hope to see all of the seniors at graduation in May!

You still want to own passive ETFs rather than actively managed investment funds? Maybe the COVID-19 outbreak will make you think again!

 Here’s why you want active investment managers! The United Nations reported today that some industries and regions of the world will be hit much harder by COVID-19 than others

This morning the United Nations Conference on Trade and Development (UNCTAD) issued a special report on Global Investment Trends on the potential impact of the Coronavirus outbreak on Foreign Direct Investment (FDI) in 2020 – and it wasn’t good

Depending on the scenario for the spread of the epidemic, the downward pressure on FDI caused by Covid-19 is expected to be -5% to -15% (compared to previous forecasts projecting marginal growth in the underlying FDI trend for 2020-2021).

The impact on FDI will be concentrated in those countries that are most severely hit by the epidemic, although negative demand shocks and the economic impact of supply chain disruptions will affect investment prospects in other countries.

Investing in a passive global ETF will subject you to major risks that active managers will avoid. This is a time for active management - naive investing is dangerous during periods of economic crisis.

Check out this table from UNCTAD:

Many multinational enterprises (MNEs) in UNCTAD’s Top 100, a bellwether of overall investment trends, are slowing down capital expenditures in affected areas. In addition, lower profits – to date, 41 have issued profit alerts – will translate into lower reinvested earnings (a major component of FDI).

On average, the top 5000 MNEs, which account for a significant share of global FDI, have seen downward revisions of 2020 earnings estimates of 9% due to Covid-19. Hardest hit are the automotive industry (-44%), airlines (-42%) and energy and basic materials industries (-13%). Profits of MNEs based in emerging economies are more at risk than those of developed country MNEs: developing country MNE profit guidance has been revised downwards by 16%.

Despite Cornonavirus - the @MarquetteAIM student-managed small cap fund has continued to outperform the Russell 2000 over the past decade – including YTD and for the March

Coronavirus has taken its toll on stocks; however, the AIM Small Cap Fund continues to outpace the benchmark

Total returns for the AIM Small Cap Fund exceed the benchmark (Russell 2000) for every time period over the past decade

The @MarquetteAIM student-managed small cap fund has continued to outperform the Russell 2000 over the past decade – including YTD and for the month of March (through 3/6/2020).

The best performers for March 2020 are shown below:

David Hermanny, AIM Alumnus, Visited Marquette's AIM Program on March 6, 2020

David Hermanny of Wells Fargo Asset Management, Spoke to Students in the Applied Investment Management Program Recently

AIM Alumnus, David Hermanny, Visited the AIM Program on March 6th

David Hermanny, Wells Fargo Asset Management

On Friday, March 6, 2020, the students in Marquette’s Applied Investment Management (AIM) program heard from David Hermanny of Wells Fargo Asset Management. David is a Senior Research Analyst on the PMV Cap Equity Funds team.

Wells Fargo Asset Management operates a multi-boutique approach. They believe that their independent, focused investment teams have a better opportunity of generating alpha. The investment teams can focus on investing without the distractions of operating a business.

David Krause and David Hermanny
in Marquette's AIM Room

David Hermanny obtained his BS, Finance degree from Marquette University in 2011. He was a member of the Applied Investment Management program and he also studied in Germany during his college experience and obtained a German minor.

David discussed the private market value (PMV) investment philosophy that their team employs. He stated that they believe that public equity markets are laden with emotion, in part, because investors do not control, nor do they have all the information about the companies they invest in. The idea is that successful investing in that environment is a function of conviction in individual securities and diversification across sectors.

He indicated that the team’s conviction comes from an in-depth private market valuation analysis of the business model, key trends, and worth of an enterprise, coupled with a pragmatic assessment of management.

The AIM Class of 2011

David Krause, AIM program director added, “David talked about the importance of a firm’s business model, the management team, and key secular trends within their process. This was another example of a fund that employs solid fundamental analysis along with consistent valuation practices.”

“It is important that the students see the value of utilizing a consistent, repeatable and accurate process that incorporates the key elements of fundamental analysis,” Krause said. “David made a strong case for how the PMV approaches can generate alpha.”

Two other AIM alumni are a part of the PMV team – Jillian Morrissey and Joe Bachmann. And over the years other members of the Wells’ team, including portfolio managers, Kurt Gunderson and Theran Motl, have visited the program.