SCM Year in Review 2017-2018

Let me start by saying what a pleasure it has been to be a part of such a wonderful organization for four years, and to have had the privilege of leading the club for three of those years. This annual review will in many ways seek to demonstrate the positive trajectory of SCM over the course of the last several years, and to detail the significant changes that are about to take place in the near future.

Coming back from my junior year internship, I sought to utilize the newly acquired knowledge that I had obtained to teach our SCM members elements of being a successful analyst. The fall semester of 2017 was marked by an emphasis on several of the most important tools in the security analyst’s toolkit, namely techniques such as Porter’s 5 Forces & Value Chain Analysis to contextualize the operating environment for a given firm or group of firms. Students at the 5Cs are particularly well-equipped to perform this holistic analysis given their liberal arts backgrounds. Furthermore, our members delved into the study of companies KPIs (Key Performance Indicators) to figure out what drives their financial results.

Following the fall semester’s focus on high-level company and industry analysis, we began the spring semester by going granular – single firm operating models. Over the span of approximately two months, our members learned the entire process of model construction; beginning with industry and firm analysis, then KPI estimation, to inputting historical financials to identify important trends, formulating various scenario analyses, linking the assumptions to the operating model, comparing model outputs to consensus to determine source and magnitude of variance, and finally valuation exercises (both idiosyncratic and versus peers).

Building upon operating models, we decided to reverse the process through a strategy known as Expectations Investing. Whereas most analysts spend their time building models of various complexity and pushing their assumptions into the future, expectation-style investors play a very different game. Rather than trying to determine the correct value of P (the current stock price), those schooled in the expectations mode of investing take P as a given. The analyst then examines the consensus assumptions that produce P in order to determine whether or not they find the assumptions reasonable or not. Hence, the expectation investor is basing his/her investment decisions solely off of magnitude of variance from consensus assumptions.

The first few months of 2018 have so far been marked by a return to volatility, beginning with the sudden, sharp sell-off in early February. As a club we contextualized some of the most notable components of the pullback, which included the implosion of inverse volatility products (i.e. SVXY). In order to understand the collapse of such products, we introduced the concept of “black swans” in a multi-part lecture.

Turning from the educational component of SCM towards the unique hands-on approach that the club provides, it has certainly been a busy year in this regard. SCM was invited to participate in the CFA Undergraduate Research Challenge, which culminated in a presentation in downtown Los Angeles.

In February the club presented for the third year running at the annual BMGI (Bill & Melinda Gates Investments) Student Investment Pitch night. Lead by Sterling Schwartz, Sam Glazer, Joseph Scheuer, and Bryan Lynch the club pitched a long position in Flex (FLEX), a leading EMS (electronic manufacturing services) firm. The judges decided to award SCM as this year’s winning investment club.

The final investment competition that SCM participated in was the USC Value Investment Group Pitch Event in April. SCM sent two teams; team 1 included Sterling Schwartz, Joseph Scheuer, and Ben Sacks who presented a short position in clothing subscription box company, Stitch Fix (SFIX), while team 2 pitched a long position in leading energy producer Diamondback Energy (FANG) and was composed of Thomas Anastos, Diego Vergara, Eric Oregel, Will Abele, and Efrain Gonzalez.

In addition to investment competitions and weekly lectures, the club was fortunate to host several alumni via in-person visits, video calls, and the annual Claremont Finance Conference. Speakers included:

  • Dave Wallace –  Managing Director of the Pomona College Endowment

  • Gator Adams (CMC '17) –  former senior leader of SCM during his time at the 5Cs and worked at Goldman Sachs as an equity analyst out of school before leaving to work on a fintech firm

  • Jim Floyd – Director of the Claremont McKenna College Endowment

  • Ian Jaime (Pomona Class of 2017) – currently a quantitative researcher at Graham Capital

  • Matthew Lubman (Pomona Class of 2005) – currently a senior analyst at Citadel Capital in their Surveyor Capital group

  • Sam Kaplan (Pomona Class of 2014) – former leader of SCM, Sam went to work at Lazard in their investment banking division, and has since transitioned to Apollo, a leading private equity firm

Several other developments that took place within the past year are worthy of note. In order to raise awareness of the talent of our member base, I have sought to forge relationships with a variety of financial services firms and their recruiters. By doing so, we have built recruiting pipelines between our club and several top tier investment banks, consulting companies, and asset managers. These relationships are natural means of talent acquisition for the firms, and serve as an effective way of allowing SCM members to network and find internships and full-time employment opportunities. Over time I expect this to be a very fruitful endeavor.

I am pleased to announce the upcoming transition of SCM leadership. For the 2018-2019 school year, SCM will have a dual-leadership structure headed by Sam Glazer (Pomona Class of 2019) and Joseph Scheuer (CMC Class of 2019). I have confidence in these two individuals and their ability to take the club to new heights given their demonstrated dedication to the club and interest in the financial markets.

Since SCM was founded in 2001 by our primary benefactor and Pomona alumnus, Marcel Houtzager, our club has been operated and funded by means outside of the Claremont Colleges. I am excited to formally announce a major restructuring within SCM that will further bolster our capabilities. Going forward, SCM will manage capital that has been raised by a variety of investors, and will be held within the Pomona College Endowment infrastructure. Our current investors include 5C alumni and friends of the colleges, a list we expect to grow over time. Through their generous support, our investors have allowed SCM to further build our brand and asset base.

As SCM enters its 18th year since inception, the club is at all-time highs. This feat has been accomplished by all of our members who participate and add value to our bi-weekly meetings, make presentations, and compete in investment competitions. With a new fund structure in place and a qualified leadership team ready to take the reins, the club is in an excellent position. I would like to thank all of our members, our alumni, and SCM’s investors for entrusting me with the stewardship of the club for the past three years – I could not be more grateful for the opportunity, and will never forget this experience.


May the alpha be with you.


Sincerely,

Sterling Corbett Schwartz