The 2014 Rising Stars of Wall Street
Being paired with the right senior analyst can help associates fulfill their potential.
Shaun Rodriguez, who covers the Life Science & Diagnostic Tools sector for Cowen and Co., credits his associate Doug Schenkel with teaching him how to be an equity research analyst. Rodriguez, 35, says the latter is a “phenomenal mentor” who excels at “the real, tangible aspects of this job, like modeling at the highest level, attention to detail and really thinking about stocks. That’s all stuff that obviously was huge for me to learn, and I still base a lot of what I do on that.”
Apparently, Rodriguez was a good student. Money managers have declared him one of the most promising newcomers in investment research.
Each year when Institutional Investor asks buy-siders to tell us which equity analysts deserve to be tapped for the All-America Research Team, we also ask them to identify the up-and-comers — analysts who have been publishing research for less than three years who seem destined for greater glory. We tabulate the votes and declare these analysts the Rising Stars of Wall Street Research. This year’s survey drew responses from nearly 620 individuals at more than 350 firms that collectively manage some $5.9 trillion in U.S. equities.
Many successful analysts point to relationships cultivated with mentors, often senior analysts at their firms. Even after they’ve begun covering companies on their own, these researchers often continue to work closely with the colleagues who showed them the ropes.
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That’s certainly true in Rodriguez’s case. Since launching coverage of his sector in October 2012, he has reported on the group’s diagnostic tools developers while Schenkel has focused on the life science aspect. “There’s a huge amount of overlap between the companies,” he notes. “That’s why we really run it as a team approach.”
He’s made sure to differentiate his work from Schenkel’s by relying on his scientific background. The Boston-based researcher, who earned a Ph.D. in biomedical sciences from Harvard University (and also has a bachelor’s degree in biology from the University of Maine and a master’s in molecular cellular biology from Tufts University), believes that his education makes him the perfect person to cover diagnostic tools. “The companies in the sector are the vendors of all the machines I used to use in the labs,” Rodriguez explains, “so there’s a direct link to what I was doing.”
He initially joined Cowen in 2007 but left after two years to evaluate investments for a venture capital outfit; he returned in 2011 to help the firm expand its diagnostics research franchise. Among his current recommendations is Cepheid, a Sunnyvale, California–based company that develops systems that allow clinics and hospitals to perform molecular tests on-site rather than relying on outside providers.
Julie Yates Stewart, now in her third year as a Rising Star in Aerospace & Defense Electronics, also continues to work closely with the analyst who trained her. After earning bachelor’s and master’s degrees in accounting from the University of Alabama and spending three years as an accountant at Ernst & Young, she began working with Robert Spingarn at Credit Suisse in 2008.
“I was fortunate enough that Rob really put me out in the field from day one. This accelerated my learning process and allowed me to build a network in the industry and with clients,” says Yates, who publishes research under her maiden name. “A lot of my success I have to attribute to him being supportive of my development.”
Three years after joining Credit Suisse, the Atlanta-based researcher assumed coverage of the sector’s small- and midcap names while Spingarn — a member of the All-America Research Team from 2011 through 2013 — focused on the larger companies. “We’ve really run this franchise as a team over the past couple of years, as I’ve continued to move on, and leverage the expertise from each other,” observes Yates, 33. “The fact that together we cover more than 30 stocks allows us to have a more relevant and broader reach across the aerospace and defense sector.”
Last year she initiated coverage on specialty-metals manufacturers; in early September she added U.S. airlines. Her top picks include Bellevue, Washington–based Esterline Technologies Corp., a maker of aircraft components and instruments. “There’s a new, well-regarded CEO who came in about a year ago,” she says of Curtis Reusser. “He’s reshaping the company, so there’s really more of a self-help element to the story.”
Jefferies’s Sheila Kahyaoglu, also a Rising Star in Aerospace & Defense Electronics, credits several people with inspiring her, among them Michael Eastwood, the firm’s head of Americas equity research, for “providing step-by-step encouragement and facilitating a very thought-out process that’s not bureaucratic,” and Howard Rubel, the analyst she worked with after joining the firm in 2012. Rubel, who always “shared his insights,” she says, appeared on the All-America Research Team ten times between 1985 and 1999 on behalf of several firms, including C.J. Lawrence and Goldman, Sachs & Co.
Kahyaoglu, 31, holds a bachelor’s degree in economics from New York University and worked in leveraged finance at J.P. Morgan before deciding to pursue a career in equity research. In 2008 she joined Credit Suisse, where she spent four years as an associate covering companies in the electrical equipment and multi-industry spaces. Then she made the jump to Jefferies, attracted by its culture of promoting associates more quickly than many bulge-bracket firms do.
When she began covering her first company, in June 2013, “Howard’s words stood out to me,” she recalls. “He said, ‘When you launch on a name, you want to make sure that you are the ax on a stock.’ So for every initiation I spend at least three to six months to make sure I know every detail and try to provide a different insight.”
Although she believes that at the moment “opportunities are rather limited,” Kahyaoglu is bullish on Textron. The business jet cycle has yet to recover from the market downturn in 2009, but the outlook is improving, and the Providence, Rhode Island–based manufacturer of helicopters and small planes “is one company with probably the most pure-play exposure to it,” she says. “Its margins are in the midsingle digits, and when you compare that to peers and its own company history, there’s at least 500 to 1,000 basis points of upside.”
Joan Payson joined Barclays in 2011 as an associate analyst under the tutelage of Robert Drbul, who was voted onto the All-America Research Team 19 times between 2001 and 2013, in Apparel, Footwear & Textiles and Retailing/Broadlines & Department Stores. She became a lead analyst in March and caused an immediate stir with her contrarian underweight call on Michael Kors Holdings, a Hong Kong–based designer and distributor of fashion accessories.
“It was a very controversial call,” the 27-year-old explains. “We had previously been overweight on the stock, and sentiment on the company was still very positively biased given the extraordinary growth the business has seen over the past three years. This was one of the few well-loved growth names in U.S. retail, and I knew that this call would be met with negative feedback.”
However, Payson believed that the rapid rise to maturity of the company’s domestic business and looming margin pressures meant that expectations of continued earnings-per-share growth above 30 percent weren’t “realistically sustainable.” In August the company advised that its operating margins would fall by about 200 basis points in the third quarter; by mid-September the New York Stock Exchange–listed shares were down about 22 percent since Payson’s downgrade.
“Taking on lead coverage was a great opportunity to take ownership of not only forming investment opinions but also discussing and defending them,” says Payson, a Rising Star in Apparel, Footwear & Textiles who earned a degree in applied mathematics with a finance concentration from Yale University and spent two years at Macquarie Bank before joining Barclays. “I was very fortunate to have had such an exceptional mentor who prepared me for it.”
Umer Raffat can relate to that. A Rising Star in Pharmaceuticals/Specialty this year (and in Biotechnology last year), he was hired as an associate by Mark Schoenebaum, a member of the All-America Research Team Hall of Fame and the top-ranked analyst in Biotechnology (for a tenth year running) and Pharmaceuticals/Major (for a second straight year). At the time, Schoenebaum was at Deutsche Bank Securities; he moved to ISI Group in 2010 and not only brought Raffat with him but also shared his investors.
“His own client base is so much better than everybody else’s that even if he hands out a little bit here and there to his junior people, that’s much more than what an average junior gets,” attests Raffat.
Raffat began reporting on his first company as lead analyst in January 2013: Medicines Co., a Parsippany, New Jersey–based outfit involved in both biotech and specialty pharma. Since then he has picked up coverage of five more stocks, and he plans to add midcap biotech names down the line. Raffat, 30, earned an undergraduate degree in biology from the University of ?Texas at Arlington and a master’s from the Harvard School of Public Health in 2009, immediately before signing on with Schoenebaum.
Another Rising Star in Biotechnology, Deutsche Bank’s Alethia Young, is also paired with a member of the All-America Research Team: Robyn Karnauskas, who debuted last year. “I couldn’t have done this without her,” the 36-year-old says. “Robyn taught me how to simplify the story down to all groups, which is invaluable in this business.”
Young joined the firm in 2011, after working in the investment banking and asset management divisions of J.P. Morgan, then as a consultant at Marwood Group, which provides health-care-focused advisory services to institutional investors; she holds bachelor’s degrees in economics and Spanish from North Carolina’s Duke University.
She’s been busy building her franchise this year, adding coverage of six companies in the past six months. Her current favorite is Cambridge, Massachusetts–based Alnylam Pharmaceuticals, which develops therapeutic drugs based on RNA interference. “The technology is so incredibly interesting and elegant, and it can be used across so many different diseases,” Young explains. “Knocking down proteins in the liver is a powerful thing that has broad implications, so when you look five or six years out, that’s probably the company out of all the coverage, Robyn’s or mine, that I’m the most excited about.”
Like Young, Ardalan (Alex) Arfaei is a Duke alumnus (with an MBA in health sector management from the university’s Fuqua School of Business) and a Rising Star: He’s cited in Pharmaceuticals/Major for a second year running. Before joining Arlington, Virginia–based Friedman, Billings, Ramsey Group as an associate in biotech research, Arfaei worked in the industry he now covers, in sales and product management, respectively, at Merck & Co. and Endo Pharmaceuticals. He moved to BMO Capital Markets Corp. in 2008 and four years later was promoted to senior analyst. He covers eight companies.
“In my position I leverage every aspect of my background,” the Toronto-based researcher says. “I think it’s that diverse background that’s allowed me to garner a certain level of recognition.” One stock he’s recommending is North Chicago, Illinois–based AbbVie, owing to its promising new treatments in such areas as hepatitis C, multiple sclerosis and oncology. “You have leadership in key markets,” notes Arfaei, 38. “You have pipeline in exciting markets like hepatitis C. You have an M&A story with a tax inversion. It has a little bit of all the hot topics these days.”
As does Facebook, the social media site operator based in Menlo Park, California, according to Brian Wieser of Pivotal Research Group. A Rising Star in two sectors, Internet and Media, the Portland, Oregon–based analyst enjoys challenging conventional wisdom. “I’ve been writing forever about the need to not think about advertising as a monolithic thing, so it’s very helpful that a company as pronounced as Facebook is trying to communicate these ideas to investors and putting forth a wide range of products and initiatives for each of these segments,” he says.
The 40-year-old, who earned a bachelor’s of commerce from Canada’s University of British Columbia and an MBA from the University of Western Ontario’s Richard Ivey School of Business, held various management posts in media and technology companies before deciding to focus on a career where all facets of his experience could come to bear.
“I’ve got a very good model for forecasting advertising — basically, the same model that I’ve spent eight years refining — and I have independent views on how advertising evolves from eight years of living and breathing it and being able to think about it in a near-academic context,” he explains.
Wei (Betty) Jiang left an academic setting — New York’s Cornell University, where she received a bachelor’s degree in chemical engineering — and jumped into equity research in 2007, just as the financial services industry was beginning to implode. A Rising Star in Oil & Gas Exploration & Production, Jiang joined Banc of America Securities as an associate and moved to UBS the following year. There she met her mentor, William Featherston, who has been voted onto the All-America Research Team 13 times since 2003. She took over coverage of a single company in 2011, raised that number by ten the following year and today tracks 13 names, mostly small- and midcaps. The ones she prefers are pure-play because “in order for a small-cap E&P with limited resources, both financial and operational, to gain critical mass and be competitive with the bigger companies, they need to focus on one or two assets,” she says.
Jiang, 28, is quick to acknowledge the role that Featherston has played in her success. “Having that role model is not about telling you if your analysis is right or wrong, but how to approach the analyst track, how to do presentations and most effectively communicate to investors,” she says. “Seeing on a day-to-day basis exactly what he does, how he interacts with clients and sales — that’s an example right there of ?how to be successful.” • •