Best of the Buyside
As money managers continue to plug the gap left by the withdrawal of sell-side coverage, in-house analysts must work to a higher standard. Meet ten of the brightest in the business.
Rising equity markets and surging asset inflows are driving many money managers’ profits higher this year. But the industry’s good fortune doesn’t mean the business of picking stocks is getting any easier. Following New York State Attorney General Eliot Spitzer’s $1.5 billion settlement with 12 leading brokerage firms in 2002, Wall Street’s research departments began narrowing their coverage lists and, in some cases, dropping so-called maintenance research that was once a key component of the fund manager’s toolbox. To fill the gap, institutions are turning to their own researchers, expanding their head counts and becoming increasingly demanding of their staffs. And with more money chasing fewer opportunities, analysts must pound the pavement, work across time zones and collaborate with colleagues in new ways to ferret out the best investment ideas.
“The job of the buy-side analyst has only gotten more complex,” asserts T. Rowe Price Associates research chief William Stromberg, who is based at company headquarters in Baltimore.
Who is doing the best work in this increasingly tough job? We asked Wall Street research analysts who received votes in our annual All-America Research Team survey (Institutional Investor, October 2006) to nominate their counterparts at money management firms with the sharpest insights into their coverage areas and the stock picking skills to stay ahead of the herd. In total, 470 sell-siders from 80 firms responded. The analysts in nine industry groupings who received the highest scores make up the Best of the Buy Side. This year’s list features ten analysts in eight categories (there are two ties), and are profiled in these pages.
T. Rowe Price, which has $294 billion in assets under management, and Wellington Management Co., with $544 billion, once again lead the pack, with three Best of the Buy Side analysts apiece. Credit Suisse Asset Management ($1.12 trillion), Fidelity Investments ($1.28 trillion), Neuberger Berman ($117 billion) and hedge fund manager SAC Capital Advisors ($8 billion) each deliver one winner. The last time a hedge fund analyst made the list was in 2004; and before that, 1998.
There are five new faces this year, including T. Rowe Price consumer analyst Francisco Alonso and financial institutions analyst D. Kyle Cerminara, who at ages 28 and 29, respectively, are the youngest buy-siders to make the cut. Alonso is an opportunistic investor, and Cerminara focuses on long-term trends. The pair’s divergent approaches are good proxies for the variety of styles this fresh crop of top analysts brings to the list.
Among returning veterans, Wellington’s Harriet (Tee) Taggert chalks up her seventh consecutive appearance — and likely her last. At the end of the year, the 58-year-old analyst, whom sell-siders describe as “extremely insightful” and a “motivator,” will voluntarily leave the firm she joined in 1983 to spend more time teaching and serving on nonprofit boards. The other perennials returning to the list are T. Rowe’s Henry Ellenbogen; Wellington’s Ann Gallo and Bruce Glazer; and Erik Mace, who stepped down from Credit Suisse Asset Management in August when the firm closed its U.S. actively managed equities unit.
Buy-side research has become a growth business. A recent survey of money managers by consulting firm Greenwich Associates, based in Greenwich, Connecticut, suggests that buy-side staffing should jump significantly in the next year, with 48 percent of asset manager respondents (and 65 percent of hedge fund respondents) looking to hire. From 2005 to 2009, buy-side firms will roughly double the amount of money they spend on research, to $4.9 billion annually, predicts Michael Mayhew, co-CEO of Darien, Connecticut–based consulting firm Integrity Research Associates.
Fidelity has led the charge in new hiring. The Boston fund manager added 92 analysts in the past year, to double its U.S. research staff, says Walter Donovan, who runs the firm’s equity trading, equity research and high-yield bond divisions. Fidelity also added staff in London, Tokyo and Hong Kong and now boasts 300 researchers worldwide.
“The idea is that more analysts equal more coverage equals more ideas,” says Donovan. “We’re getting bigger to play smaller,” he says.
Globalization is also driving new hiring at Wellington. “There are 25,000 public companies in the world, and 18,000 of them are outside the U.S.,” says Mark Mandel, head of the firm’s global industry research. On any given day, 40 percent of Wellington’s analysts are traveling to visit companies. Wellington has 45 senior analysts and 17 junior analysts working out of Boston and is setting up coverage based outside the U.S. (the firm has offices in London, Singapore, Sydney, Tokyo and Hong Kong). Mandel expects analyst ranks at his firm to grow “at a low-teens rate” for the next several years.
This growing international mind-set is changing the very nature of the buy-sider’s job. “There’s been a globalization of our whole research effort,” says T. Rowe’s Stromberg. At his firm analysts have been challenged to become more global in their thinking and are communicating frequently with colleagues in other parts of the world. “Our tech analysts [in the U.S.] talk frequently with our tech analysts in Asia; they visit companies together and visit with each other,” he says.
As the job of buy-side analyst evolves, the position continues to shed its traditional role as a stepping stone to portfolio management, becoming instead a respected career path of its own, industry observers say. According to Fidelity’s Donovan, half of the firm’s new hires this past year were experienced analysts, recruited from industry, buy-side competitors and Wall Street. That’s a sharp contrast to the firm’s past hiring strategy, which focused exclusively on campus recruits. Today analysts at Fidelity can aspire to follow an industry sector, run one of the firm’s select portfolios or cover a few industries with an eye toward becoming a fund manager. “We’re opening up the career path of the analyst,” he says.
Whether buy-siders aspire to run money or just run the spreadsheets, the job isn’t getting any easier — even if this year’s all-stars make the art of picking stocks look deceptively simple.
This feature was compiled by Associate Editor John Livingstone under the guidance of Director of Research Operations Group Sathya Rajavelu and Senior Editor Jane B. Kenney.
Harriet (Tee) Taggart
Wellington Management Co.
This may be Harriet (Tee) Taggart¹s swan song appearance in the Best of the Buy Side: At the end of the year, the accomplished 58-year-old Wellington Management Co. analyst will exit the firm to begin a new professional chapter. ³After nearly a quarter-century, it¹s time to rebegin,² says Taggart, whose Wellington contract includes a three-year noncompete clause. The career change will leave more time for the Boston-based analyst¹s scholarly pursuits. She plans to continue serving as an adjunct professor of finance at Boston College¹s Carroll School of Management, and she sits on several academic boards, including the dean¹s advisory council at Harvard University¹s Kennedy School of Government.
Recently, Taggart turned her attention to Japan and its big semiconductor makers. ³It¹s not just the traditional silicon markets that are driving these businesses,² she explains. ³High demand for solar panels has exceeded the supply of the polysilicon used to make them.² Taggart purchased shares of Sumco Corp. on the Tokyo Stock Exchange at the November 2005 IPO price of ¥3,900 ($32.98), judging the semiconductor manufacturer a likely beneficiary of solar panel demand. The shares soared to ¥8,320 through the end of October, a 113.3 percent gain.
Taggart also uncovered opportunities in midcap U.S. companies that became attractive takeover targets. A longtime owner of pollution-controls developer Engelhard Corp., Taggart took some profits in January after a hostile takeover bid from German chemicals giant BASF Corp. pushed the stock up 23 percent in a matter of days, to $38. In May, when BASF made its final offer at $39 per share, she sold the rest of her holding. The deal closed in June.
Taggart will be sorely missed on Wall Street. ³Tee is extremely insightful,² says one analyst. In fact, some counterparts groan that it can be difficult to tell her anything she doesn¹t already know about her coverage universe. ³I get more from her than I give,² admits one. ³Tee is a motivator,² adds another. ³I dig deeper trying to find information worth her listening to.² — Ben Mattlin
T. Rowe Price Associates
For a fourth year running, Henry Ellenbogen, 33, earns the title of top buy-side media analyst. Among other talents, his ready understanding of the industry is simply better than just about anyone else¹s, say those who deal with him. ³Henry is the guy who knows the information before you do,² says one buy-side media analyst at a bulge-bracket firm. According to another, he has ³one of the strongest grasps I have ever seen of the driving forces in the media mosaic.²
Boosters say that a typical conversation with Ellenbogen combines visionary insight with pragmatism. ³Henry is as passionate in the intellectual exercise of the thesis as he is in its purpose: making money,² explains one fan. ³This is perhaps the most important ingredient in his secret sauce.²
Ellenbogen has thrived during his six-year tenure at Baltimore-based T. Rowe Price Associates and co-manages the firm¹s $1.2 billion Media & Telecommunications Fund, along with the $550 million media and Internet portion of T. Rowe¹s $10.7 billion U.S. Structured Research Strategy common trust. He says that the pace of change in his sector is finally picking up. ³The convergence and globalization of the media that people talked about ten years ago is really coming true today,² he asserts.
Nonetheless, not all of the winning stocks in his sector have ³.com² in their names. In spring 2005, Ellenbogen decided to buy big into billboard provider Lamar Advertising Co. at less than $40 a share. Although outdoor advertising is ³arguably the oldest of all media businesses,² says Ellenbogen, companies such as Lamar can profit from technological upheaval in other parts of the media landscape as advertisers seek durable exposure for their brands. By the end of October 2006, the stock was trading above $57, and T. Rowe owned close to 14 percent of the total float.
Ellenbogen also casts a watchful eye around the globe. Recent notable successes include Shenzhen-based Tencent Holdings, a Hong Kongtraded firm that operates the biggest instant messaging platform in China. He started buying the stock at about HK$8 ($1) in late September 2005. Through October 2006 the shares had more than doubled. — Scott Martin
D. Kyle Cerminara
T. Rowe Price Associates
A longer-term view differentiates T. Rowe Price Associates’ D. Kyle Cerminara from many of his peers who cover financial institutions. “I prefer to think about how the business is going to evolve over the next three to five years,” he says. Adds one sell-side admirer: “Kyle often asks the question, ‘So what does that mean for earnings in 2009?’”
Cerminara, 29, makes his debut in the Best of the Buy Side ranking. A 1999 graduate of the University of Maryland’s Robert H. Smith School of Business, he joined T. Rowe Price in 2001. In the words of his supporters, he exhibits a “tremendous” work ethic, “incredible” attention to detail, close relationships with managements and a “unique” talent for finding stocks whose earnings are likely to beat the consensus. His 50-company universe ranges from the biggest Wall Street investment banks to smaller specialty finance companies, such as middle-market lender CapitalSource.
Cerminara incorporates his long-term view into the profit models that drive his work. Two recent successes were online brokers E*Trade Financial Corp. and Ameritrade Holding Corp. Cerminara concluded in mid-2004 that excess capacity in the sector would ultimately lead to consolidation. “That was when we built our big positions,” he says. “We started buying [both stocks] at around $10 to $12 a share and at one point owned 7 to 8 percent of those companies.” In June 2005, Ameritrade agreed to merge with TD Waterhouse U.S.A. and paid a $6-a-share cash dividend. By the end of October 2006, the new entity, TD Ameritrade Holding Corp., was trading at $16.47; E*Trade stock was at $23.28.
Cerminara actively seeks a wide range of views to understand what the Street is thinking. “I believe that there’s value in all information, whether correct or incorrect,” he says. “So I try to have as much information as possible and talk to as many people as possible — beyond the CEO and CFO.”
The result, for most people, would be information overload. But Cerminara excels at translating data points into profitable plays. “He is one of the best stock pickers I’ve met,” says one analyst. — S.M.
SAC Capital Advisors
Newcomer Ted Orenstein, 35, is the lone hedge fund analyst in this year’s Best of the Buy Side ranking. Given how reticent he is to share information about himself, it is ironic that his Wall Street counterparts emphasize how much they look forward to talking with him. “We always have valuable two-way conversations,” says one.
This much Orenstein will share: The Stamford, Connecticut–based father of two holds an MBA from the University of Pennsylvania’s Wharton School and tracks 200 mostly U.S.-based multi-industry conglomerates. “While I look at all companies in the space,” Orenstein says, “I’m cognizant of liquidity when I take a position.”
No doubt that approach stems in part from Orenstein’s mission to devise both long and short plays, primarily in stocks. An analyst and a portfolio manager, he is aided by several other, more tightly focused industry analysts — and he employs a largely fundamental approach using standard tools of the trade, including “detailed industry and company analyses, company presentations, conferences and industry trade shows.” If Orenstein has a secret analytical weapon, he is not divulging it. Nor will he reveal his portfolio’s size, his investment parameters or even which fund he manages.
His employer, SAC Capital Advisors, ran nine hedge funds with a total of 1,803 equity positions as of the end of last year, when the value of those funds jumped an average of 18 percent, net of the firm’s 1 to 3 percent management fee and hefty 44 percent performance fee. Institutional Investor’s sister publication, Alpha, recently estimated SAC Capital’s equity portfolio at $8.5 billion.
Dubbed “thoughtful, balanced and experienced” by one sell-sider, Orenstein joined SAC Capital in December 2003 after seven years with Fidelity Investments, where he ran the then–$17.7 million Fidelity Select Industrial Equipment Portfolio. Earlier in his career he worked for Morgan Stanley in New York.
Orenstein says the sell side is helpful “in understanding some of the issues and consensus views.” They in turn look forward to his focus. Despite working for a hedge fund, Orenstein is “not easily caught up in the day-to-day moves of stocks and not easily swayed by ancillary factors,” says one admirer. — B.M.
Brian Younger may be just 30 years old, but he is the kind of analyst who can call a company as big as Verizon Communications and “have the CEO’s ear,” reports one admirer. An All-American swimmer and Olympic hopeful at Harvard University, Younger interned during summers at Boston-based Fidelity Investments for three years in a row, first on the quant desk and then in equity research. He joined Fidelity full-time in 1998 and makes his debut in this year’s Best of the Buy Side.
Younger’s performance edge extends well beyond access to company managements. He has excelled in the dual role of head of Fidelity’s telecommunications and utilities coverage and manager of the firm’s $388 million Select Telecommunications Portfolio by understanding the short-term forces that move stocks while staying focused on the long-term picture. “He knows these companies better than the Street does,” says one brokerage telecoms analyst. “That’s his competitive advantage.”
At Fidelity, the bar is high. “Given how this has been the most hated sector for nearly half a decade,” says Younger, “covering this industry requires an analyst to not just know the fundamentals inside and out but to be sufficiently persuasive to convince the firm to make a contrarian investment.”
Exhibit A is Qwest Communications International. Younger backed the company for years despite speculation that it was about to go bankrupt. He first bought heavily into the stock in 2002, when it was approaching $1 a share. Since then, Qwest’s margins have expanded, and free cash flow is now “prodigious,” according to Younger. At the end of October 2006, the stock was trading at $8.63.
That kind of independent thinking requires dedication, and Younger is up to the challenge. He says his “fervent” work ethic and competitive drive are key factors in his ability to live and breathe both the stocks and the business fundamentals of the companies he covers. “I work to gain an edge over my competitors through knowing the companies and their operating drivers better than anyone, even many company managements,” he says. — S.M.
Rasmus Gerdeman is a stock picker with the ability to see the big picture and the talent — as one sell-side backer puts it — “to rescue the babies from the bathwater.” .
Such was the case in 2005, when shares of commercial cleaning products giant Ecolab were hovering in the low $30s and much of Wall Street expected the company’s annual growth rate to slow from 13 percent to 11 percent. Gerdeman, based in New York City, took the contrarian view. He recommended the stock in January 2005, in the low $30s, based on discussions with the company’s salespeople and an analysis of hotel and travel trends. He also believed that a privately held competitor, JohnsonDiversey, was faltering. JohnsonDiversey subsequently exited the institutional service business in North America, and Ecolab’s sales trends improved. The company’s diluted income per share from continuing operations rose 14 percent in 2005. The shares closed at $45.35 on October 31.
“I never saw anybody come down the learning curve as fast as Rasmus,” says one admirer. “He’s got the basic research ability, and he can see how a piece of information relates to the movement of a stock.”
A native of Sweden, Gerdeman emigrated to the U.S. a dozen years ago. He studied finance at North Park University in Chicago and pursued internships in retail brokerage and futures trading. After graduating in 1999, he landed in the equity research department at Northern Trust Corp., working his way up from junior analyst to senior analyst in the basic materials sector.
“Maybe they thought, being Swedish, I’d know about paper and forest products,” jokes Gerdeman, who makes his debut in the Best of the Buy Side survey. He moved to Neuberger Berman in 2005.
The 31-year-old analyst is highly sensitive to valuations but looks at stocks first from a big-picture perspective, evaluating economic conditions and secular trends. He seeks out companies with above average returns on capital and follows market share trends carefully.
His 55-to-60 hour work weeks leave little time for his new baby daughter. Still, Gerdeman has no regrets — and is even thinking about pursuing an executive MBA. “The job is fun,” he says. — P.A.
Credit Suisse Asset Management
Consumer stock analyst Erik Mace “is good to bounce ideas off of, because he’s not one of those people who thinks he knows it all,” says one sell-side backer. Mace, says another, “cuts through all the crap and gets to the factors that drive a stock.”
Often he is ahead of the curve. Like many of his peers, the 37-year-old analyst is fond of electronics retailers whose sales growth is generated by television and video game cycles. Last fall, though, Mace didn’t recommend market leader Best Buy Co. Instead, he endorsed shares of Circuit City Stores, then trading at around $16 amid extensive investor pessimism. In light of a restructuring, Mace thought shares were mispriced based on intrinsic value and the company would show margin improvement.
He was right: In the past 12 months, Circuit City shares have risen 52.3 percent, double the performance of that bigger rival’s. Circuit City shares closed at $26.98 on October 31.
Mace, a graduate of the University of Virginia and Columbia Business School, also bet on department store chain Kohl’s Corp. when the market was punishing the stock for its slowing square-footage growth. But Mace believed in the company’s strong potential for cash flow growth and in January bought the stock in the low $40s. Kohl’s later sold its credit business and instituted a stock buyback program, helping propel shares north of $70 by the end of October.
“I approach every investment knowing what I think a stock is worth and why,” says Mace, who makes his fourth appearance in the Best of the Buy Side.
Like the companies he covers, Mace himself is in the midst of a transformation. After more than eight years at Credit Suisse Asset Management in New York City, where he comanaged an internal fund, he left in August as part of a restructuring, which included CSAM’s exit from the U.S. actively managed equities business. Mace took a few weeks off to spend time with his family, coaching soccer but also keeping tabs on his stocks. He is now looking for another buy-side research job where he can be close to trading decisions — or make them himself. — P.A.
Wellington Management Co.
Boston-based Ann Gallo, who makes her fifth consecutive appearance on the Best of the Buy Side, says her coverage universe spans “any health care company that doesn’t manufacture drugs or devices” — some 175 in all. Despite that breadth, she is “more knowledgeable than other analysts, most of whom are more narrowly focused,” says one admirer.
Gallo, 41, comanages several of Wellington’s health care sector funds, including the Hartford Global Health portfolio for institutional clients. In January, her fundamental approach led her to buy two stocks she deemed undervalued — Magellan Health Services, a managed-care provider of psychological-health benefits, and Universal Health Services, a midcap operator of acute-care centers. She reasoned that Magellan would benefit from accelerating new business growth as demonstrated by its recent move into radiology management. And despite Universal Health’s troubled acute-care hospitals, she thought its stock would win investors over as the company’s psychiatric facilities — worth 40 percent of revenue — benefited from growing Medicare reimbursements.
She was right on both counts: Through October the stocks were up 36.8 and 13.4 percent, respectively.
“Ann has a great sense of the market and always seems early,” declares one supporter. In part, it seems, by going to bed late. “We’ve exchanged e-mails on industry news at 1:00 a.m.,” says another Wall Street analyst.
Admirers praise Gallo’s unmatched depth of contacts. Since the government is the biggest consumer of health care in the U.S., Gallo keeps close ties to Washington insiders “to figure out what’s going on, hopefully before the market does,” she says.
Those efforts pay off. In March, Gallo bought shares of WellCare Health Plans at $39.56, judging the manager of HMO services for government-sponsored health programs to be poised for earnings growth. By the end of October, her forecast had proved correct, and the stock had surged 48.5 percent, to $58.75. — B.M.
T. Rowe Price Associates
Francisco (Frank) Alonso is happy following retail and restaurant stocks for T. Rowe Price Associates. “It’s nice being able to invest in a company where you can hop in your car and, in ten minutes, go out and see their assets,” he says. “We use these products every day and eat their food.”
Alonso, 28, is new to the Best of the Buy Side, but in his six-year career covering the consumer sector he has built deep relationships. “Frank knows the companies he follows and their managements like no one else,” says one sell-sider. “He’s got a knack for developing great long-term relationships with the right people.”
A 2000 graduate in economics from Miami University of Ohio, Alonso went straight to T. Rowe Price in Baltimore and, after some limited energy industry coverage, began following his current universe. He tracks about 40 companies closely — a diverse mix of retailers, restaurant companies and apparel brands — and keeps some 40 additional stocks on his radar screen.
Alonso says he is “very opportunistic.” In late 2005, for example, he noticed that Starbucks Corp. still showed tremendous growth potential even though fears of a slowdown in volume expansion had hurt its stock. “That was kind of a shorter-term idea,” he says. “We started buying shares at the $25 to $26 level, and the business didn’t really slow down. We sold in the spring, up around the $38 level.”
Another example is pet supply chain Petco Animal Supplies, which had been battered in the fall of 2005 amid stalled industry growth. T. Rowe Price bought shares on Alonso’s recommendation when the stock was at about $19. “We thought it would either get fixed or get acquired,” the analyst explains. In mid-July two private equity firms, Leonard Green & Partners and Texas Pacific Group, made a successful bid to take the company private for $29 a share in cash, earning T. Rowe’s mutual fund investors a tidy profit. — S.M.
Wellington Management Co.
Sell-side backers of Wellington Management Co.’s Bruce Glazer, 38, who returns to this list after a two-year absence, clearly respect his intelligence. “One of the truly great minds,” declares one supporter. “Bruce’s most salient trait is his ability to boil down every stock to a couple of critical drivers and stay focused on those without getting distracted by noise from other parts of the story.”
Armed with an MBA from the University of Pennsylvania’s Wharton School, Glazer joined Wellington in September 1997. He is a fundamental, bottom-up researcher who does his legwork by visiting companies and gaining “a sense of all the different pieces of the puzzle,” he says. His universe includes 50 to 100 primarily midcap computer, information technology and other business services companies worldwide. Glazer also comanages Wellington’s tech sector portfolios tailored to institutional clients.
In August the analyst stuck with his long-standing endorsement of Resources Connection, a provider of temporary accounting, IT and other professional services, even though the stock had plunged 21.8 percent since May. Resources had suffered a sharp drop in revenue from its Sarbanes-Oxley-related compliance work, which its customers began pulling in-house. Nonetheless, Glazer set his sights on the company’s growing revenue in other parts of its business, especially gains from global expansion and market share wins. By the end of October, the stock had rallied 29.0 percent, from a low of $22.43 to $28.94.
Such focus is typical of Glazer’s long-term approach. Despite investors’ concerns about a possible slowdown in the U.S. economy, he decided to maintain his bullish stance on bellwether staffing company Manpower, given its margin expansion and international growth. His call proved wise when the stock surged 51.2 percent, to $67.77, in the 12 months through October.
Glazer, based in Boston, also keeps his eyes on short-term catalysts such as mergers and acquisitions. At the moment, he’s especially keen on cheap stocks in his universe with compelling business models. “They make great targets for private equity,” he explains.
Glazer values sell-side analysts for their “insights into investor expectations,” he says, and his receptivity to the Street’s views has not gone unnoticed. “He respects my opinions, is willing to weigh both sides of an argument and never penalizes me if I disagree with him,” affirms one grateful admirer. “We learn from each other.” — B.M.