Crummer Finance Students Adjust SunTrust Portfolio Amid COVID-19 Pandemic

Students in Dr. Koray Simsek and Dr. Clay Singleton’s Managing Global Portfolios class had to adjust the Crummer SunTrust (Now Truist) Portfolio for an incoming recession as the COVID-19 pandemic broke out during the semester.

A Major Adjustment

Midway through the spring semester, murmurs of the brewing pandemic in Wuhan, China started to catch the eye of the student investors.

“We were already incredibly invested in this class from the beginning, but as things started to shift with COVID-19, I think our focus intensified,” said Fletcher.

Up until that point of the semester, the team had forecasted a slow, modest growth in a relatively flat economy.

However, as the pandemic started affecting the United States, it was becoming increasingly clear that the students would have to revise the portfolio based on an incoming recession.

“As COVID-19 began to impact our economy, I had just started working on the economic outlook section,” said James Bishop, a student in the class. “As I was writing, I stopped and emailed both Dr. Simsek and Dr. Singleton as I could not continue with the original forecast; it just did not make sense.”

Like many other industries and sectors, the students had to re-think their entire strategy.

“We had to take a step back and rethink some of our decisions, as well as a complete overhaul of our economic outlook and sector weights,” said Eddie Cutillas, a student in the class.

Being that the portfolio helps enrich the lives of future students, the team felt an even greater obligation to make sure their investment recommendations were sound.

“We wanted to make sure that we did everything in our power to see the portfolio through this historic moment so that it can continue to provide scholarships and offer this incredible learning experience to other students long after we have graduated,” said Fletcher.

After a rigorous quantitative and qualitative analysis, the team theorized that current stock prices amid this pandemic are highly suspect. When making their recommendations, they put more credibility in companies with strong balance sheets and compelling stories.

“One of the most important lessons that I learned from the class is to always know how to tell a story. Regardless of the bottom line, valuation, or how great the company might be doing, it doesn’t matter if you don’t know how to tell the story,” said Gerardo Abril, who was also the first student in the class to predict an incoming recession even before COVID-19.

In order to not jeopardize future scholarship commitments, they decided to not recommend any stocks that were at risk of severe impairment. The students also paid attention to the Environmental, Social, and Governance (ESG) factors concerning their recommendations. The team expects the recent emergence of ESG investing to be a long-term trend.

In the team’s economic thesis, they projected that despite unprecedented measures to prevent economic contraction, the economy will still slip into a recession. However, they do predict a recovery towards the end of 2020.

Below are the team’s final recommendations in addition to a defensive allocation in sector exchange traded funds (ETFs) and a selection of bond mutual funds:

The Recommendations

• Discovery, Inc. (DISCA) – HOLD
  • “Discovery is a global media content provider with a very bright future ahead, in part due to the acquisition of Scripps, and adding additional distribution platforms for its programs. We believe that investors continue to be overly concerned with the future of streaming and that Discovery’s stock is undervalued, validated by our proforma FCFE model. We recommend a HOLD, as Discovery is still undervalued.”
• T-Mobile US, Inc. (TMUS) – BUY
  • “With the recent news of the merger being approved, and the enhanced ability for T-Mobile to compete in a tough industry, we believe the company can continue to grow. Even with relatively modest growth rates used in our pro-forma post-merger FCFE model, we estimate the company is currently undervalued. We recommend a BUY.”
• Darden Restaurants, Inc. (DRI) – BUY
  • “We expect Darden Restaurants strategy, regardless of the economic outlook, to remain with steady growth. Even with our modest long-term growth forecasts, our H-model estimates that even in the most pessimistic outcome the company is currently undervalued. We recommend a BUY.”
• Nike, Inc. (NKE) – BUY
  • “Nike’s strategy of digital growth should lead to continued growth. Once the market realizes Nike is no longer an ESG pariah, we expect the price to rise. With our intrinsic value, the company is currently undervalued. We recommend a BUY.”
• The Coca-Cola Company (KO) – BUY
  • “Coca-Cola has not been recognized yet for the contributions it is providing to our environment and social well-being. The recognition of this and the change in its business model, coupled with our modest forecasts all suggest Coke is undervalued. We recommend a BUY.”
• Walmart, Inc. (WMT) – BUY
  • “Walmart’s strategic acquisition of Flipkart will allow them to continue to be a competitor in e-commerce both in the U.S and abroad. This, as well as potential new revenue in health care, and a strong ESG program will all spur on growth. Even with the modest long-term growth forecasts our two-stage dividend discount model estimates Walmart is undervalued and we recommend a BUY.”
• Johnson & Johnson (JNJ) – HOLD
  • “JNJ has faced adversity as the result of negative headlines involving their products. Our sentiment is that the current price of JNJ is the result of an overreaction by the market. JNJ continues to be a global leader within the pharmaceutical industry and maintains a strong pipeline of patents and approvals for future growth. We believe that management has shown the ability to leverage JNJ’s global position into growth year over year, and we recommend a HOLD for at least one more year.”
• Quest Diagnostics Incorporated (DGX) – BUY
  • “Management at Quest has displayed the ability to increase revenues and control costs. As a result, CIM is confident that Quest will continue to achieve modest growth. Our recommendation to buy is based on the growth opportunity that exists for Quest in the use of their database of test results. With an intrinsic value of $148.60, our models indicate that DGX is currently undervalued.”
• Microsoft Corporation (MSFT) – BUY
  • “Overall, we expect Microsoft’s strategy of expanding in cloud computing and platform integration to continue to provide revenue growth over the short and long term. Our model utilized a modest growth rate and still showed Microsoft as undervalued. Accordingly, we recommend a BUY.”
• Visa, Inc. (V) – HOLD
  • “Overall, we expect Visa to continue to grow due to their investment in digital payment processing, as well as their continued focus on ESG, particularly with small business in emerging markets. Our model utilized a slightly high growth rate; however, it is in line with the investment community’s consensus. Based on our model, Visa is undervalued resulting in a HOLD recommendation.”