Best of the buy side
Sell-side research may be in turmoil, but analysts working at money management firms have never been so valued. Here are ten at the top of their game.
There’s no place to hide. Wall Street’s stock pickers have earned censure for their conflicts of interest and their contribution to the stock market bubble. Though less flamboyant, analysts at big money managers sport their own badges of shame: the sorry performance of the funds they advise.
Today’s bear market has left every research department with its share of embarrassing calls. But the shortcomings only underscore the importance of rigorous, insightful research, especially for institutional investors. Wall Street proposes. The buy side disposes. In the end, it manages the money and must make the picks and live with them.
Despite the traumas of the past few years, many researchers are doing superb work. In the pages that follow, you can read about the most outstanding of these analysts, selected for 2002’s Best of the Buy Side. In keeping with the changes caused by tumultuous markets, six of our ten winners make their first-ever appearances. (Institutional Investor asked the Wall Street analysts who received votes in our All-America Research Team to single out their most esteemed counterparts at money management firms. Nearly 600 sell-siders from 87 firms responded.)
Doing good research in-house matters more than ever to the buy side. Representing institutions with a combined $13.5 trillion in worldwide assets, buy-side analysts have the clout to make companies take notice. These researchers can’t hide behind confusing rating systems; they have to tell it straight to their firms’ portfolio managers.
“It has never been as important to do good, fundamental, bottom-up research,” says Mark Mandel, director of global industry research at Wellington Management Co. “You can differentiate yourself and make investments based on that knowledge.”
If, as seems probable, regulatory challenges and falling profits force Wall Street firms to slash research staffs, big money managers may step into the void. “The more Wall Street retrenches, the less efficient the markets will be. That means more opportunities for us,” says William Stromberg, director of equity research at T. Rowe Price Associates.
Adds Katherine Collins, group leader of equity research for Fidelity Management & Research Co., “There’s nothing better than when everyone shrugs their shoulders at a company.”
Buy-side firms are backing up this talk by hiring selectively despite their own intense cost pressures. Fidelity, which recently announced that it will lay off 5.4 percent of its 31,079 employees, expects to hire five to ten people to augment its 75-person research staff, says Collins. T. Rowe Price and Northern Trust Global Investments say they may add modestly to their analyst rosters.
Not that stock picking will get any easier. In this “once-in-a-generation bear market,” says Jim McDonald, Northern Trust’s head of research, it’s harder to value stocks than ever before. Derivatives, options accounting and pension liabilities are just a few of the new complexities analysts must master. And despite the clamor for transparency, information doesn’t always flow freely. Regulation FD, the two-year-old Securities and Exchange Commission rule, has only made corporate executives more circumspect. “There’s a real void in the quality of information. There’s lots of misinformation,” says Wellington’s Mandel. Agrees State Street Research & Management Co.'s research chief, Clifford Krauss, “There’s a lot of static in the market.”
Following are profiles of the analysts mentioned most often in ten broad industry categories. This feature was overseen by Senior Editor Jane B. Kenney and compiled by Associate Editor Emily Fleckner; the profiles were written by Senior Editor Steven Brull, Senior Writer Deepak Gopinath, Staff Writer Rich Blake and Contributing Editors Jeanne Burke and Mike Sisk.
MARK DIBBLE, Fidelity Investments
Not many analysts were bearish on tech stocks back in May 2000, but Mark Dibble, who appears on the team for the first time, was one of the few. Using his own technical analysis, Dibble concluded that price movements in the large-cap portion of the technology sector indicated that the shares weren’t going to revive. The decision to pull back while others were touting a new rally was typical of Dibble. “He doesn’t get caught up in fads,” says an admirer.
Dibble, 41, has an eclectic brief. He focuses on U.S. technology stocks, follows the Canadian stock market and also heads up Fidelity Investments’ technical analysis team. In 1983, armed with a BA from Trinity College, he joined New Yorkbased Cowen & Co. as an apprentice to an old-school market technician, Richard Eakle. After less than a year at Cowen, Dibble moved to Morgan Stanley & Co., and eight years ago he joined the Boston fund giant.
These days Dibble looks most often at the 700 largest U.S. stocks, as measured by market capitalization. His technical screens focus on momentum and sentiment indicators. Looking for new coverage candidates, he might screen for stocks hitting new highs relative to the Standard & Poor’s 500 index.
Sell-siders say Dibble got in early on the brief bull market in gold shares early this year. Reviewing Canadian equities, he noticed that many midcap gold stocks looked like buys on his technical charts.
Whither tech stocks? “Tech has done its thing on the downside. Sentiment is extremely bearish,” Dibble says. Even so, his stance is “neutral.”
PHILIP W. RUEDI, T. Rowe Price Associates
Back in January many analysts were pushing the time-honored idea that supermarket chains were a safe bet in a weak economy. Everyone has to eat, right? True, but, as Philip Ruedi pointed out, they don’t have to buy their food at the same stores they did a year or two before. Ruedi detected increasing competitive pressures on traditional grocery franchises from superstores such as Wal-Mart Stores and Waldbaums, as well as drugstores and shopping clubs. So he put sell recommendations on Safeway and Kroger Co., which by late October had fallen 40 percent and 25 percent, respectively.
A 1993 graduate of the University of Michigan, Ruedi, 31, worked as an analyst at John Nuveen Co. in Chicago before earning his MBA in 1998 from the University of Chicago Graduate School of Business. That summer he landed at T. Rowe Price Associates in Baltimore, where he now covers about 40 companies in a wide variety of industries, from waste management to information technology services. “Usually, there’s one industry on the front burner,” he explains.
One of his smartest picks of the past year: Weight Watchers International, the diet franchise that went public in the chilly market of November 2001. Opening at $26, the stock has since risen to a recent high of $44. Ruedi bought in on the day of the IPO, attracted by Weight Watchers’ high cash flow (members pay $12 a week to weigh in) and the undeniable reality “that obesity is one of the most visible public health issues,” he says.
“He’s not afraid to take a contrarian position, even when after a month or two it looks like he won’t be proven correct,” says one sell-sider familiar with his research.
A few months ago Ruedi took on a new challenge when he began to teach himself the guitar. “I figured out how to play my wedding song so I could serenade my wife on our anniversary,” he says, laughing. The tune: “Nothing Else Matters,” by Metallica.
HARRIET (TEE) TAGGART, Wellington Management Co.
Harriet (Tee) Taggart, a 19-year veteran of the buy side, believes her job is to evaluate a market of stocks -- rather than the stock market. And that makes all the difference in her approach. She uses a rigorous, bottom-up analysis that treats each individual company as a unique story. “There are two key metrics: understanding the fundamental business and understanding the financials of the specific company -- the balance sheet, the cash flow, the franchise strength,” says Taggart, who arrived at Wellington Management Co. in 1983 and appears on the Best of the Buy Side for the third year running.
One of her greatest challenges, she notes, is “understanding what business a company really is in,” given that managements will often shift their public emphasis based on what’s hot. Sell-siders say that keeping senior executives honest is Taggart’s forte. “When she quizzes top management of companies, she shows the knowledge of the industry she has, which is something I was quite impressed with. She makes them sweat a little,” says one Wall Street analyst.
A longtime globe-trotter, Taggart, 54, closely follows 200 companies and keeps tabs on 400 more. “We don’t say we’re global just to be catchy,” says Taggart, who has an undergraduate degree from Harvard University and a Ph.D. from Massachusetts Institute of Technology. “It’s the key way to garner competitive information.”
Proficient in Hanyu, the dialect of Shanghai, mainland China’s booming business center, Taggart sees China as possessing a wealth of opportunities. Recently, she has spent a lot of time with a European fragrance company, which she declines to name, that has promising prospects in China. Says Taggart, “China offers a large market, a large labor pool and a long and rich tradition of medicinal culture.” She believes the scent maker will be able to tap into the country’s huge consumer market and develop new products there that could be exported back to Europe. “This company has a very innovative pipeline of flavors and fragrances,” she says.
DENIS WALSH, State Street Research & Management Co.
With the collapse of Enron Corp. and the allegations about energy price manipulation in California, most investors didn’t want anything to do with the shares of power companies, particularly those with trading units. Although he had similar concerns, Denis Walsh was able to seize the momentary trading opportunities the sector did provide. Consider his work on Williams Cos.
The cash-strapped energy services and pipeline company was under threat of bankruptcy in July, when Citibank was scheduled to decide whether to renew an unsecured revolving credit line. Walsh reasoned that the bank would not extend new credit and that Williams shares, already down 92 percent from their highs, would come under still more selling pressure. Walsh also knew from experience, however, that banks are reluctant to let companies fail -- especially companies to which they have a large exposure -- and reasoned that Citibank would come through with new financing. That’s exactly what happened. Walsh recommended buying the stock at $1.18 per share on the news that the original loan wouldn’t be renewed and advised selling it a week later -- at $3.99 -- once a new credit facility was announced. “This was clearly an offensive move,” says Walsh, who repeats as a member of Best of the Buy Side.
Brokerage analysts say the Williams play was vintage Walsh, a University of Massachusetts graduate with an MS in finance from the Carroll School of Management at Boston College. “He’s able to identify asset value in companies with a lot of problems,” says one sell-sider. Notes another, “He’s not afraid to make controversial calls in either direction.”
This courage stems from firmly held convictions about larger trends. Walsh, 42, was prescient on those as well, rotating out of refining, marketing and oil services and into exploration and production in the past year. Refiners and marketers, he reasoned, wouldn’t be able to pass higher prices on to consumers and thus would see their margins shrink. Oil service companies, in turn, had limited growth prospects. As of early October, the oil services index was down 16 percent, and major refiners like Valero Energy Corp. and Premcor had fallen 40 to 50 percent. At the same time, the average exploration and production stock had declined just 3 to 5 percent thanks to higher-than-expected oil and gas prices.
Walsh also made sure to stay clear of U.S. power companies caught in the fallout of Enron’s collapse and California’s energy crisis. “My biggest call was avoiding the pitfalls out there,” he says.
JOHN AVERILL, Wellington Management Co.
“He’s an information junkie,” says one Wall street analyst of John Averill, a Wellington Management Co. analyst and partner. “He doesn’t care where you are or where he is, he wants the information as quickly as possible. Some guys hide from the sell side and some interact -- John interacts.”
Armed with a BS in electrical engineering from Cornell University and a master’s degree from Massachusetts Institute of Technology’s Sloan School of Management, Averill, 38, has worked at Wellington for eight years and makes his first appearance on our team. Earlier, he spent four years as an analyst at Eaton Vance. He has been covering the communications sector for a decade. “There’s always a new company you don’t know about,” says Averill. “It’s an open-ended intellectual challenge to see what makes them tick.”
Today’s market presents many “pricing anomalies,” Averill notes. Case in point: Agere Systems, the spin-off from Lucent Technologies. Agere is unfairly lumped into the telecom carrier equipment supplier category, he says, when in fact it is exiting that market and already does substantial business as a supplier of technology for enterprisewide projects of nontelecom companies. Averill sees another pricing discrepancy in Samsung Electronics. It’s got the fastest-growing cell phone franchise in the world and enjoys operating margins of about 20 percent, on par with Nokia’s. However, it trades at just 7.5 times 2002 earnings, versus Nokia’s multiple of about 25. “Samsung is a world-class company with a fantastic balance sheet,” Averill says, but its multiple reflects volatility in earnings and the fact that there is no Samsung ADR.
Many analysts accumulate vast quantities of data, says one sell-sider, but Averill knows how to interpret the numbers. “He’s unbelievably quick to connect different data points, even if they seem only quasirelated,” says this fan.
ANN GALLO, Wellington Management Co.
As a health care analyst at Wellington Management Co., Ann Gallo follows several hundred -- yes, hundred -- companies, from hospitals and HMOs to drugstore chains and drug distributors.
On Wall Street Gallo’s coverage would typically be divvied up among four or five specialists. But Gallo doesn’t shortchange any of her stocks, say her sell-side counterparts. “She has good filters and the ability to boil down a lot of information to the raw factors that will drive a stock,” explains one.
Gallo, 37, likes the breadth of her assignment because the various health care categories are so interdependent, she says, adding that at any given time she follows “only” 50 to 60 companies closely. “I can make money by subsector bets as well as by picking stocks,” she points out.
Indeed, Gallo has a knack for anticipating which particular areas will come into favor. Early this year she switched her allegiance from drug distributors, such as Cardinal Health, which had returned more than 100 percent since late 2000, to more undervalued hospitals and HMOs, according to her sell-side peers. So far this year hospitals are up about 15 percent and HMOs have gained more than 30 percent.
Two of her big bets in the first half: hospital operator HCA and HMO Anthem, both of which had gained market share and pricing leverage in their core regions. Their stocks had risen 25 percent and 37 percent, respectively, through mid-October.
Although Gallo works mostly on her own, she maintains good relationships with Wall Street. “She knows what she’s looking for when she calls,” says a supporter.
A Massachusetts native, Gallo graduated from Boston College. After receiving her MBA from Massachusetts Institute of Technology’s Sloan School of Management in 1991, she worked in the investment banking group at Citicorp in New York and then in health care banking at Piper Jaffray in Minneapolis, where she switched to research. She made her way back to Boston in 1998, when she took her current job at Wellington.
BRIAN ROHMAN, Weiss, Peck & Greer
Is the financial services industry suffering from an identity crisis? “These aren’t growth companies,” says Weiss, Peck & Greer analyst Brian Rohman. “Yet somehow they perceive themselves as being in a growth industry, so they manage for growth, grow aggressively for three or four years, and then what do they do? They watch it all get wiped out.”
These days the 42-year-old analyst, who has been following the sector for the past 12 years, chooses companies that focus on risk management. “The past 12 months have been all about disaster avoidance,” Rohman says.
One smart call: Rohman became bearish on J.P. Morgan Chase & Co. at the end of last year. The analyst believed that the bank had bad loans that would eventually become apparent -- which, of course, they did. (The stock traded recently at $20, down from its 52-week high of $40.95.)
“Brian has just the right mix of curiosity and skepticism,” says one sell-sider who knows him. “It always pays to bounce ideas off him, because he’s not afraid to shoot holes in your theories.”
For example, a lot of sell-siders had written off North Fork Bank as a regional player with little hope of succeeding on its own. But Rohman identified the Long Island bank as one of only a handful of U.S. banks focused on growing their deposits. He began recommending the stock in March at $34. North Fork shares had risen 10.5 percent by late October, while the average bank stock was down 17 percent in the same period.
A native of Mineola, Long Island, Rohman graduated from the University of Pennsylvania’s Wharton School in 1982 and got his start the following year at the former C.J. Lawrence brokerage house. After stints at Wertheim Asset Management, Citibank and Brown Brothers Harriman & Co., he joined Weiss Peck in 1998 as a financial services analyst.
He doesn’t always say what they want to hear, but his sell-side counterparts appreciate his Rohman’s frankness. Says one, “With Brian you always know you’re going to get a straight answer.”
ARTHUR CECIL III, T. Rowe Price Associates
Not many analysts remember the last truly ugly bear market, the stretch between 1973 and 1974 when the Dow Jones industrial average fell 45 percent, but Arthur Cecil III, is one of them.
“The 1970s felt worse to me, maybe because at that time you had the economy in much worse shape than it is today,” recalls Cecil, a 32-year veteran equity analyst at T. Rowe Price Associates. “But this is a unique market.”
Cecil’s experience allows him to bet against the crowd successfully. “If you can find good companies that have come under pressure from Wall Street because of a short-term problem, that’s a great time to buy,” says Cecil, 60, who has an MBA from Loyola College and appears on the Best of the Buy Side for the second year in a row.
For example, Cecil became bullish on PepsiCo in mid-July after the company reported disappointing second-quarter earnings and the stock sank to $36 from $49 earlier in the month. (PepsiCo traded at about $44 in late October.) Although many of his colleagues were worried that revenue growth was not keeping up with volume growth at the company’s snack foods division, Frito-Lay, Cecil believed that top management was “doing the right things” to improve sales and earnings.
“His willingness to look not just at bottom-line earnings but also management’s vision separates him from a lot of short-term investors,” says a Wall Street researcher.
“I like to play the game of, ‘Where do you think the company will be a year or two from now?’” Cecil explains. But the simple questions are never simply answered.
CHRISTIAN KOCH, Trusco Capital Management
“The hero of a Greek tragedy displays a fatal flaw that ultimately leads to his demise,” says Christian Koch, the senior technology analyst at Trusco Capital Management. “I try to identify the fatal flaw that could cause investors to back out of a stock.”
Koch found one in Siebel Systems, the largest provider of enterprise solutions software in the U.S., which he studied intensively but never owned. In early January investors expected Siebel to grow about 25 percent this year. Researching the company’s customers and competitors, Koch uncovered what he thought was Siebel’s Achilles’ heel -- a higher market-penetration rate in 1999 and 2000 than was generally assumed, diminishing the potential for future growth. The company recently warned that earnings would remain under pressure through the fourth quarter; the stock trades around $6.60, down from $35 at the start of the year.
After receiving his BA from Stetson University in Florida and his MBA from Jacksonville University, Koch, 33, got his professional start in 1994 as an analyst at Lindner Funds. He says it gave him a grounding in value investing. But as technology stocks took off in the mid-1990s, Koch became frustrated at this bias. “I felt that we were letting some great companies go through our hands,” he says. So he jumped to Fifth Third Bancorp. He worked there from 1997 to 2000 as a technology analyst and then joined Trusco, where he’s responsible for semiconductors, hardware, software and networking.
Sell-siders note that Koch combines a broad vision -- “he almost has a portfolio manager’s approach,” says one -- with a focus on specific earnings drivers. He’s not afraid to share his opinions. One fan remembers pitching Citrix Systems, a company going head-to-head with Microsoft Corp. in the Intel server software niche last December. “He said, ‘That dog don’t hunt.’ I wished I’d listened to him,” the researcher says. Citrix stock dropped from about $23 when Koch weighed in to $7.45 at the end of October.
Says one admiring sell-sider, “Getting the theme right is one thing, but finding ways to invest is another, and that’s where Christian is really impressive.”
GORDON CRAWFORD, Capital Research and Management Co.
Just about any media investor will tell you that Gordon Crawford is that rare entity in the trade -- a gentleman. “A lot of people let power go to their heads, but not Gordon,” says one sell-side analyst.
Crawford, who appears on our team for the tenth time, says it’s just “common courtesy.” Of course, it’s easier to be nice when you have his kind of clout. The 55-year-old is the lead media analyst and a portfolio manager at Capital Research and Management Co., the Los Angelesbased firm that oversees more than $350 billion in 29 funds. Capital is the largest institutional shareholder in AOL Time Warner, News Corp. and USA Interactive and the second-biggest stakeholder in Viacom, which are its four biggest media holdings.
As Capital’s media investments have lost billions of dollars over the past year, Crawford has had to be more confrontational than he likes. The analyst may have blundered by boosting his stake in AOL by more than one third in the months up to and after news of AOL’s accounting problems emerged in July. Capital spent some $1.2 billion to buy 108 million shares, bringing its total to 299.9 million shares as of September 30, according to SEC filings. AOL shares have jumped about 35 percent since mid-August but at the end of October were still down more than 50 percent for the year. Crawford has openly challenged AOL chairman Stephen Case. “I do feel that Steve Case should step down, and I’ve told him that directly,” Crawford says plainly. Still, he adds, “AOL’s problems are serious, but we think the stock has gotten reasonably cheap.”
Despite the tough year, Crawford, a 1969 Wesleyan University graduate who earned an MBA in 1971 from the University of Virginia’s Darden Graduate School of Business Administration, remains upbeat about his industry’s prospects, though he hesitates to predict when a recovery will come.