There was a moment two years ago when Nicholas Del Deo had to make a choice. He had spent five years as an associate on the cable, satellite and telecommunications equity research team at Sanford C. Bernstein & Co. Craig Moffett, the senior analyst he worked with — who by that time had been voted onto the All-America Research Team 14 times, including eight sector-topping appearances — was leaving to start his own firm.
“When I thought about my future, I had sort of maxed out at Bernstein. They tend to bring in a lot of outside experts to be the senior analysts,” explains Del Deo, 36. “When Craig told me he was leaving, the decision would have been either continue to work with him or find a job at another shop. Craig always wanted me to cover my own stocks, so it seemed a logical choice to stay with a great group of people and get my own coverage.”
In September 2014, a little over a year after the new firm was founded, Del Deo began reporting on telecom services providers on behalf of MoffettNathanson. Money managers are already so impressed with his work that they identify him as a Rising Star of Wall Street 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.
RBC Capital Markets nearly doubles its number of analysts who earn a place on the roster, from five to nine, and in so doing leaps two notches to capture top honors for the first time. Its ascension bumps last year’s winners, Credit Suisse and Morgan Stanley, down to second and third place, respectively, with seven and five Rising Stars. A total of 50 analysts from 23 firms make the grade this year.
These results reflect the opinions of 675 individuals at nearly 370 firms that collectively manage an estimated $5.9 trillion in U.S. equities.
The path that Del Deo took from associate to senior analyst underscores the fact that, to retain talent, research departments must ensure there is a visible path for promotion at the firm.
“When we’re looking to find great up-and-coming talent, our view has been that if we’re hiring and developing and mentoring and sponsoring the right associates, we should have the pool completely filled for our next generation,” reports Marc Harris, head of global research at RBC.
A level of transparency is critical. “Our advantage — perhaps our success — has been around the idea of talking a lot and talking very openly and listening very openly about that culture of sponsorship and mentorship and development,” he adds. “That includes being very self-critical about how we can do better, what training do they need, how can we do a better job of providing clarity on the promotion cycle and titling and compensation.”
David Adelman, Morgan Stanley’s director of equity research for the Americas, says failing to promote from within sends the wrong message. “We have some competitors that systematically hire from outside the firm. I think that can be very demoralizing to the associates within the department.” The former tobacco analyst — Adelman made the All-America Research Team every year from 1997 through 2014 and was inducted in its Hall of Fame in 2012 — points out that he started as an associate at the firm straight out of business school and that his first two junior analysts, Vincent Andrews III (currently celebrating his third year in second place in Chemicals) and Matthew Grainger (a Rising Star in Food from 2012 through 2014) are now senior researchers at Morgan Stanley.
Del Deo, armed with two bachelor’s degrees from the University of Pennsylvania — one in economics, the other in finance and accounting — had a brief stint at Arthur Andersen, then spent six years at two hedge funds before moving to the sell side. One of his top recommendations is Cogent Communications Holdings, a Washington-based Internet services provider that’s suffering from poor financial performance and depressed sentiment.
“I don’t think the business model is broken, and I think that a lot of these issues are going to be resolved,” the New York–headquartered analyst contends. “Given the operating leverage in the model, if those issues are resolved, I think the stock will perform pretty well going forward.”
One key to promoting from within, research directors say, is matching up associates with the right senior analysts. “There’s an apprenticeship element to the sell-side equity research profession, and irrespective of departmentwide efforts, it has been, is and always will be a case that the most important mentorship and training is the daily engagement and interaction between the lead analyst and her or his associate,” Adelman explains.
Paul Matteis — a Rising Star in Biotechnology/Mid- & Small-Cap — would undoubtedly agree. Since accepting a job as a research assistant at Leerink Partners in 2012, he has made the most of his time with the veteran researcher to whom he was assigned. Joseph Schwartz is “a great mentor,” enthuses the 26-year-old, who works out of Boston. “He definitely gave me a lot of opportunities to interact with companies and with clients. When I was promoted [to senior analyst], I already had a decent amount of experience, so it wasn’t like one day I went from sitting behind a desk 14 hours a day to suddenly being allowed to interact with clients.”
Matteis earned a bachelor’s degree in psychology from New York’s Skidmore College in 2011, then worked briefly at Boston’s Brigham and Women’s Hospital before moving to Leerink. Last year he convinced his department to give him coverage of one of Schwartz’s stocks, knowing that it could lead to bigger opportunities. “There’s a perception among people here in junior roles that if you work hard, you’re passionate and you continue to learn, the firm is not going to be hesitant to give you an opportunity,” he says. That’s certainly true in his case; he became an independent analyst in April.
One of his favorite stocks is Neurocrine Biosciences. The San Diego–based biopharmaceuticals concern has a breakthrough therapy drug that’s in Phase 3 trials for a neurological disorder called tardive dyskinesia, as well as a partnership with Chicago’s AbbVie for elagolix, a treatment for endometriosis and uterine fibroids. Neurocrine “is a company with a collection of late-stage catalysts that I’m personally positively biased on,” Matteis declares.
How do research directors know when an associate is ready for promotion? There are several indicators, they say.
“One is having a high level of competence in all of the important elements of being a research analyst, so they’re effective at modeling, they have good judgment, they write well and are very competent in engaging with clients and responding to the whole panoply of issues that our clients and sales force are asking about,” says Morgan Stanley’s Adelman. “The second element is having the support and recognition of our specialty salespeople, generalist salespeople and clients, where the salespeople and clients are almost indifferent to whether they engage with that person instead of the lead analyst, because they’re confident in the information and analysis that’s being provided.”
Another key factor is “having an analyst who’s willing to step up and say, in a self-sacrificing way, my associate is ready for the next step,” notes RBC’s Harris. “The analysts are the ones working most closely with them day to day. They know the raw talent. They see them on the phone with the sales force. They see them on the phone with clients.”
Indeed, J.P. Morgan’s Jessica Fye, also a Rising Star in the Biotechnology/Mid- & Small-Cap sector, credits Christopher Schott for being “supersupportive” when her chance to become a senior analyst opened up in 2014, “even though I’d been working with him for eight years.”
Schott, a 12-time member of the All-America Research Team (he is No. 2 this year in Pharmaceuticals/Major and No. 3 in Pharmaceuticals/Specialty), hired Fye as an associate for his pharmaceuticals team at Banc of America Securities in 2006. Two years later she moved with him to J.P. Morgan. There she found “a lot of encouragement for me to take on more and prepare myself to be in a position to step into a senior analyst role, should the opportunity present itself,” the New York–based analyst says. “It gave me confidence that, if I performed, a path to promotion was going to be there.”
Fye, 32, received a bachelor’s degree in business economics from Rhode Island’s Brown University then spent a year as a analyst at a small asset management firm before shifting to the sell side. She is a proponent of Ireland’s Jazz Pharmaceuticals, deeming it a “healthy organic growth story trading at a slight discount to its peer group with minimal leverage, which gives them the ability to layer on value-enhancing business developments.” Also recommended: Chimerix. The Durham, North Carolina–based biopharmaceuticals outfit has a drug, brincidofovir, that aims to prevent cytomegalovirus infection in stem cell transplant patients. It is in a Phase 3 study that has a high probability of success, with data expected in January, she says.
Credit Suisse’s Vamil Divan, a Rising Star in Pharmaceuticals/Major, was tapped to cover the sector after Catherine Arnold, the analyst he had supported for six years (and a member of the All-America Research Team from 2008 through 2010), left for the buy side in 2013.
“We do have a very strong culture in terms of growing your own talent here,” the 43-year-old observes. “After I’d done the associate role for a few years and got encouraged by the more senior people at the firm that I could do a good job as a senior analyst, that I had what it takes, I thought I would give it a shot.”
Divan has unique credentials. He holds not only a bachelor’s degree in health care administration and policy from the University of Pennsylvania, but also a medical degree from the State University of New York at Buffalo. He completed a residency in internal medicine at New York’s Mount Sinai Hospital then practiced for a year before pursuing a career in the pharmaceuticals industry. He worked at Roche Holding for two years then Pfizer for three.
Next, he earned an MBA at New York University’s Stern School of Business, joining Credit Suisse in his final year of study.
One of the analyst’s current favorites is New York’s Bristol-Myers Squibb Co. “What they’ve been doing in oncology is very exciting,” says Divan, who is headquartered in New York. “I see them very well positioned in the near term, with their products like [cancer treatment] Opdivo getting to market, but also [expect] continued progress with their broad and deep immuno-oncology pipeline driving longer-term upside.”
Stifel is another firm that “takes a lot of pride in giving associates who have proven themselves the opportunity to become lead analysts,” according to Joseph DeNardi, a Rising Star in Airlines. He should know — he has worked at the firm since graduating from Virginia’s College of William and Mary with a bachelor’s degree in economics in 2007.
DeNardi, 33, spent five years on Troy Lahr’s aerospace and defense team then a year with the firm’s government services analyst, William Loomis, before he got his chance to become the senior airlines analyst in February 2014. He added coverage of defense stocks seven months later.
The Baltimore-based researcher has buy ratings on six of the ten air carriers he covers. “The longer-term thesis is still that the degree of consolidation that’s occurred over the past couple of years will allow the industry to be more sustainable going forward and reduce the cyclicality it’s experienced in the past,” he asserts. “Mitigating some of that cyclicality will allow the industry to get a higher valuation. Right now airlines are treated — from a valuation standpoint — as very low-quality industrials, so they trade at a significant discount to the S&P.” His current favorites are Allegiant Travel Co. of Las Vegas and Dallas-based Southwest Airlines Co.
Wesley Golladay is a Rising Star in Gaming & Lodging and, for a second straight year, in REITs. Working out of the Cleveland suburb of Solon, the 39-year-old joined RBC Capital Markets in 2007 as a member of the real estate investment trusts team headed by Richard Moore. In 2012 he began educating himself on the hotels industry so that he could report on lodging REITs. He has been expanding his coverage universe ever since.
Golladay, who holds a bachelor’s degree in finance from the University of California, Riverside, and an MBA from Indiana University’s Kelley School of Business, includes Hilton Worldwide Holdings of McLean, Virginia, among his top picks.
“They are levered to the U.S., and we have a bias toward the domestic market,” he says. “They have almost 80 percent of their [earnings before interest, taxes, depreciation and amortization] coming from the United States.”
Also recommended: Bethesda, Maryland–based Pebblebrook Hotel Trust. “They were quick to identify that the West Coast was going to have a much more favorable supply-demand imbalance,” Golladay explains.
Working with the same group of people over the years has been a big help, he adds. “We can give each other constructive feedback, and no one takes offense to it,” the analyst maintains. “If someone has an idea and it’s going to be a big call, we can bounce it off each other, and we don’t have any problem pushing back on each other.”
That view underscores a point made by Morgan Stanley’s Adelman regarding internal promotion. “We’re trying as a department to be more collaborative,” he notes. “To be genuinely collaborative, you need a lot of trust and a lot of continuity among people. If you develop people from within, you have a much higher likelihood of success.”