By Steven Krolak
(NEW ALBANY, Ind.)–IU Southeast finance students Danny Recktenwald, Jordan Pope-Studstill and Reynaldo Sierra-Escobedo claimed second place in this year’s Certified Financial Analyst (CFA) Institute Research Challenge, held virtually.
The IU Southeast team was in third place after the paper round, but rebounded to place first in the presentation, good enough for second overall behind the winning team from the University of Kentucky.
The CFA Institute Research Challenge is an annual event organized locally by CFA Society Louisville, a member society of the CFA Institute, a global association of investment professionals that sets the standard for excellence in the industry for chartered financial analysts (CFAs).
The Challenge gathers students, investment industry professionals, publicly traded companies, and corporate sponsors together locally, regionally, and globally for a real-world competition, according to the Institute website.
Over the course of four months, student teams dissect a corporation and deliver an investment recommendation based on exhaustive research into corporate structure and performance, a site visit and face-to-face interview with corporate representatives, and best valuation practices.
In the real world, these recommendations help investors decide whether or not to purchase stock in a company, a decision that can make or lose fortunes for both parties.
This year’s focus was Louisville’s Churchill Downs Inc. (ticker: CHDN).
Founded in 1928, the company is now an industry‐leader in racing, online wagering, and gaming entertainment. As noted by the IU Southeast team, CHDN developed, owns, and operates the largest online horseracing platform in the U.S., which is legal in 39 states and includes a sports betting option in five more states, as well as operating thousands of slot machines and video lottery terminals in eight states.
Despite its iconic brand and international renown as the home of the Kentucky Derby, CHDN has been slow to fully capitalize on the tectonic shift to online gaming, in the view of the IU Southeast team, who considered the company’s share price to be inflated by high expectations for the sports-betting market in general, rather than confidence in the value of CHDN itself.
“We believe that the market has over‐estimated CHDN’s current ability and desire to capitalize on the sports‐betting opportunity,” the team wrote. “Additionally, we believe that creeping economic, tax and competitive headwinds, along with lingering COVID‐19 uncertainty, will dampen long‐term, high‐growth prospects.”
After its comprehensive examination, the IU Southeast team recommended that investors sell CHDN stock.
This year’s competition faced some unique obstacles due to precautions relating to COVID-19, according to Elizabeth Reisz, lecturer in finance and the team’s academic advisor.
The team was unable to meet in person, which made high-quality collaborations seen in the past — all those long nights and weekends spent crunching numbers — impossible. And there were no meetings with CHDN management or investor relations representatives, which deprived the team of a chance to get a feel for the culture and mentality of the company, as well as ask questions in person.
Team captain Danny Recktenwald, a Louisvillian hoping to transition from his current work in corporate accounting and auditing to a more finance-based career, acknowledged the daunting nature of the challenge.
“This valuation was unlike any book assignment to date, with elements at the tips of valuation theory that bordered on speculation,” Recktenwald said. “The real challenge for our valuation was the market giving Churchill credit for future growth in the online-sports betting (OSB) market despite its apparent lack of intent and strategy to compete based on its results to date,” Recktenwald said.
With no experience in the gaming industry, the team divided up the work and grappled toward and understanding of this unorthodox sector consisting of traditional brick-and-mortar business and a helping of wishful thinking.
“Ultimately, we used a sum-of-the-parts approach to compute a value for the known portions of the business (excluding OSB) and compared that with the then market value to estimate an “implied market premium” on the OSB portion of the business,” Recktenwald said.
Jordan Pope-Studstill, a native of New Albany, Indiana, tackled industry/competitor research, providing the team with a picture of an ecosystem with many fast-moving parts. Against a background of global actors gearing up for aggressive action as soon as the ground rules are set, CDI appeared to be “slow out of the starting gate,” as Recktenwald said.
“There is a lot of speculation placed in sports betting at the moment, and it won’t be as easy as people think, because the big international players know North America is about to be the fastest growing sports betting market in the world, and will account for a projected 50% global growth in the short term,” Pope-Studstill said.
Reynaldo Sierra-Escobedo, a native of Michoacan, Mexico who lives in Jeffersonville, Indiana, became the first undergraduate selected to the IU Southeast CFA team. A double-major in accounting and finance, he took on the financial analysis of CDI, and was confident of the team’s approach.
“We knew we had great research and went in with confidence to the presentation,” Sierra-Escobedo said. “I knew that this would be a great learning experience for me, and it has pushed me to stay in the finance industry.”
That the team found its groove was down in no small part to faculty advisor Reisz and mentor Jeff Hoskins, CFA, senior equity research analyst and ESG specialist at River Road Asset Management.
“This team kept up the long tradition of hard-working, focused and diligent CFA Challenge teams that have represented IU Southeast so admirably,” Reisz said. “They did an excellent job of seeking and incorporating feedback to produce their best work.”
Recktenwald summed up the exercise as a real-life problem that surpassed in intensity, complexity and rewards any other project or simulation he had dealt with as a student.
“No guard-rails, no map, no instruction books, no right or wrong, just three team members guided by intuition, curiosity and two very smart advisors, trying to determine a ‘buy’ or ‘sell’ position,” Recktenwald said. “It is what the college experience should be about and is something that every business student at IU Southeast should want to be part of in the future.”