by Group 1: Matthew Abraham, Cory Gleason, Sam Gurney, Matt Powell, and Kyle Quackenbush

Make it or Break it with Momentum Investing: How to Capitalize on Volatility 

By Group 4: Trang Nguyen, Terrence Frierson, Denton Zeeman, and Hatem Shoshaa

On February 15, Chris Allen (APM S05) an analyst with American Century Investments, discussed the investment philosophy of American Century's Vista fund (TWVIX) and its strategy of momentum investing. Allen received his bachelor's degree from the University of Kansas, and his MBA from the University of Wisconsin.

The Vista fund has $1.25 billion in assets under management. It is a mid-cap fund that forms part of the American Century's growth funds. Together those funds make up almost 25 percent of the total $117 billion assets under management at American Century Investments. Allen noted the funds at American Century were 97 percent invested and were typically limited to not more than 10 percent non-US equities. Vista targets medium-sized and smaller companies with earnings and revenues growing at an accelerating rate. This actively managed fund is most suitable for investors looking for long-term capital growth.

This fund uses a second derivative growth momentum strategy to pick stocks. The philosophy is that stock prices follow expectations of earnings trends and market participants under-react to new information. Attractive alpha is possible if acceleration is based on sustainable factors such as new markets or better gross margins because of a technology change or similar fundamental changes. The fund also used some technical analysis to prevent behavioral biases. The basis of a buy decision hinges on fundamental analysis with the second derivative accelerating. A sell decision is indicated when the value drivers are declining. An example is Netflix's subscriber growth in relation to its stock price. Allen showed how the strategies worked with four stocks: Opentable Inc., Netflix Inc., Rackspace Hosting Inc., and Buffalo Wild Wings.

His insights on momentum investing helped the class understand how investors capitalize on market volatility by taking short-term positions as compared to a long-term buy and hold strategy. However, this high reward strategy risks losing the bigger picture and timing a buy or sell decision incorrectly. Allen left the class with one lasting recommendation by saying that "absolute growth is not as important as the direction of its growth."

Stewart described Butler National as a microcap stock. Butler's current market cap is $26 million with Casino operations contributing more than 50 percent of revenues. They are not sold on an exchange, rather over-the-counter (OTC). Many institutional investors are prohibited from investing in OTC stocks because of liquidity and transparency concerns. Peters told the class that having such diversified business interests, makes it difficult to "make the case" for selling Butler to investors. Stewart added that Butler keeps $6-7 million "in the bank" in case an opportunity presents itself that will allow them to act quickly.

In the long run, Butler is looking to expand its aircraft operations through organic growth or through acquisition. Casinos currently generate the largest portion of its revenue, however, Butler indicated that expansion of this business is not a priority and would exit it at the right price.

The APM portfolio finished up 6.2 percent for the first quarter of 2012 with assets of $1.02 million. Best performers of the year include Blackrock (BLK), Visa (V), Diageo (DEO), Spirit (SAVE), and Allegiant Travel (ALGT). Losers include Google (GOOG), Joy Global (JOY), Nic Inc (EGOV), and Bijou Brigitte (BIJ).

We exited positions in Mediware (MEDW) and Wuxi Pharmatech (WX). We took some profits and lightened positions in Allegiant, Spirit, Inergy Midstream (NRGM), Pinnacle Entertainment (PNK), and Kansas City Southern (KSU). We added to positions in China Cord Blood (CO), Google, and NIC, Inc.