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Conviction Buy

Max Egan
Thursday, 17 Nov 2011 | 2:10 PM ET

At Carnegie Mellon’s Tepper School of Business, we are taught the importance of interpreting data to make informed decisions. Our strategy of selecting stocks relies heavily on quantitative stock screens that rank a set of stocks across various factors. One stock that popped up on two independent screens was the Chinese telecom equipment manufacturer Spreadtrum Communications . As a fast-growing technology company with improving analyst estimates, good momentum, and an attractive valuation, there is a lot to like about the stock.

After the stock gained nearly 5% on the first day of the competition, we were feeling good about the pick. On September 29th, however, the U.S. Department of Justice announced that it was investigating the accounting practices of Chinese internet companies listed in the United States. Spreadtrum fell as much as 15% intraday, and we had an unrealized loss of over 20%. After doing some research, we concluded that the company was unfairly lumped in with Chinese internet stocks and should avoid any investigations. Each week when we ran the stock screens, Spreadtrum was at or near the top of the technology sector. We have held it ever since the beginning of the contest and it has rallied nicely and we have an unrealized gain of over 40%. When the thesis remains intact, you’ve got to stick to your guns.

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