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The 2013 All-America Rising Stars of Wall Street
Money managers identify the new analysts destined to make a name for themselves on the All-America Research Team.
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Cameron Horwitz has been a senior equity researcher for nearly two years and hes only 28. After earning a bachelors degree in accounting and finance at the University of Miami, Horwitz worked as an associate analyst covering oil and gas exploration and production companies at several firms, including Canaccord Genuity and SunTrust Robinson Humphrey, until February 2012. Thats when U.S. Capital Advisors offered him the chance to direct the Houston-based outfits E&P coverage. Horwitz jumped at the chance.
As an associate you are in a supporting role, he observes. I felt like I got the experience, I saw how the game worked, what it takes to be successful in the role and I wanted the shot to do it myself.
It looks like he made the right move. Each year when Institutional Investor asks buy-siders to indicate who among their sell-side counterparts warrants inclusion in the All-America Research Team, we also ask them to name the Rising Stars of Wall Street Research analysts who have been publishing research for less than three years but have already attracted the interest of money managers and Horwitz is among this years honorees. The Houston-based analyst acknowledges that the role of lead researcher is very different from that of an associate. You get so enamored with working in your models and understanding the numbers, understanding the assets, but its a very fine balance because you have to sell those ideas, he explains. You have to strike a balance between that sales ability and the ability to understand the numbers.
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Thats not always easy to do, according to Stephen Penwell, Morgan Stanleys New Yorkbased director of equity research for the Americas. For a third year running, no firm has been home to more Rising Stars than his. Five Morgan Stanley analysts win Rising Star status this year. Thats down from eight last year and one more than the total for each of the three firms that tie for second place: Barclays, Citi and RBC Capital Markets.
Penwell describes the qualities he looks for when searching for new analysts: Very intelligent people who are strong communicators. People who really want to dig, who know how to dig. Fast thinkers who can connect the dots quickly. People who are competitive, in the context of a team sport.
One such person is Penwells colleague Jennifer Swanson Lowe, now making her second appearance as a Rising Star in Software.
You can do a mathematical analysis, and you can come up with a point value for something, but ultimately behavior drives markets, changes in sentiment drive markets, the 36-year-old says. Its a business where you need to understand what people are talking about, what the controversies are, what the debates are and how you can add value around those discussions.
Lowe entered the industry on the sell side, as a junior analyst covering software and technology stocks at Raymond James & Associates, Piper Jaffray & Co. and Sanford C. Bernstein & Co., then moved to the buy side to report on tech stocks at AllianceBernstein. She switched back in 2009 to work with Adam Holt a five-time member of the All-America Research Team (and three-time champion) in Software and the following year launched her own coverage. She expanded her universe after Holts departure from Morgan Stanley earlier this year. (He moved to Qatalyst Partners, a San Franciscobased investment bank that focuses on technology companies.)
Having lived through not one but two market crises the bursting of the dot-com bubble in 200001 and the global meltdown of 2008 Lowe has learned the keep the big picture in view. If a company is a good story and its really inexpensive because of certain market conditions, you cant focus on the short term and say, The markets down 50 percent, the stocks down 50 percent, so I just cant like it anymore, she contends. You really have to take a step back with a medium- or longer-term outlook and ask, What are the ideas that really have staying power and can come back over time?
One emerging theme that Lowe stresses is the development of software as a service, as spending migrates away from infrastructure software, from hardware and other areas of technology, she reports. The first wave was the introduction of applications for example, customer relationship management tools that require little customization. More recently, with the growing prominence of such companies as ServiceNow, an information technology management software developer headquartered in San Diego, and Pleasanton, Californiabased Workday, which provides big-data analytics and financial management services, youre starting to see the next class of applications moving into the cloud, she says. Weve been paying attention to how quickly and whether some of these back-office-type applications are able to make the leap into the cloud. We think they will, and thats potentially a very large opportunity over time.
The most recent financial crisis has also taught Horwitz a thing or two. When he began covering E&P stocks in 2007, West Texas Intermediate crude was roughly $150 a barrel. The following year the price had plummeted to $30.
When youre in a more robust commodities price environment, the market is more likely to ascribe credit to things in a net-asset-value context, he maintains. But on the downside the market view can quickly flip, and you have more emphasis placed on cash flow multiples and balance sheet multiples. It certainly allowed me to have a better understanding of how the market is thinking of things in different parts of the cycle.
In addition, that spectacular reversal taught me a quick lesson on how capital-intensive this industry is that if commodities prices turn against you and youve extended yourself beyond your means, how quickly that can have a negative effect on your balance sheet, he notes. Thats certainly affected how weve recommended stocks.
Among the names Horwitz is currently urging clients to buy are Denvers Cimarex Energy Co., Energen Corp. of Birmingham, Alabama, and Irving, Texasbased Pioneer Natural Resources Co., all of which should benefit from the production growth outlooks for the North American Permian Basin, a vast reserve that stretches from southeastern New Mexico into western Texas.
He also likes Gulfport Energy Corp., owing to its exposure to the Utica shale formation in the northeastern U.S. and southeastern Canada. The Oklahoma Citybased outfit has wells that are comparable on the gas side to some of the best wells that are being drilled in the Marcellus right now which is some of the best productivity for gas wells in the country and probably in the world.
The Great Recession has also informed the work of William Slabaugh, a Rising Star in the Restaurants sector. What the market has endured since 2008 has made me more skeptical of what I hear from management teams, the Stephens analyst asserts. More important, it also made me more aware of relative valuations and the importance of a businesss true free-cash-flow generation capabilities, which I think are often forgotten in the restaurant industry.
Thanks to an environment of high unemployment and anemic real gross domestic product growth, the Little Rock, Arkansasbased researcher says, a lot of good restaurant businesses with strong brands and margin profiles were written off, such as Krispy Kreme Doughnuts and Sonic Corp. That gave me an opportunity to become more vocal on the positive side.
The 29-year-old has been bullish on those two companies headquartered in Winston-Salem, North Carolina, and Oklahoma City, respectively for more than a year.
Slabaugh describes Krispy Kreme as a broken company, but not a broken brand. Previous management teams had done a lot of things that had really hurt what was going on within the company, he says. In 2008 board chairman James Morgan was appointed CEO, with a mandate to pull the chain store operator back on track. A lot of things the new management team was doing were moving the company in the right direction, the analyst says. Now they have accelerating sales growth and accelerating unit growth.
He believes Sonic presents a similar turnaround opportunity. The company, which operates more than 3,500 drive-through fast-food restaurants, is an undervalued franchise thats accelerating its sales growth.
A graduate of the University of Arkansas with a double major in international business and Spanish, Slabaugh began his career in Stephens corporate finance department before moving into equity research. That firm, like many others, prefers to promote from within rather than pluck established analysts from competitors.
Michael Eastwood, director of Americas equity research at Jefferies in New York, shares that philosophy. Its really refreshing to hire associates because its all about talent rather than experience, and its good to be able to craft the sort of associate you want, he explains. Its easier to take an associate, give them coverage under the umbrella of a successful analyst, carve out a relevant space, allow them to cover securities within a successful franchise and then, in due course, youll find them a greater opportunity.
That approach also involves less uncertainty. Youre choosing from a group of people you know, Eastwood adds. When we go outside to hire somebody, we dont actually know them. We are taking views from clients, from consultants, from people that we know within the industry but its a higher-risk strategy.
Piper Jaffrays Erinn Murphy, a Rising Star in Apparel, Footwear & Textiles, also began as an associate fresh out of college. I would probably put myself as green as they come out of undergrad, in terms of understanding how the market works and understanding how the sell side works, the 31-year-old says. I would call the learning curve steep. For me, not coming from a finance background, it was baptism by fire.
Over the next four years, the Houston-based analyst learned how to analyze balance sheets, conduct channel checks and observe how everything fits together. Then she took an unusual career detour, accepting a position as a natural-gas negotiator with Exxon Mobil Corp., a job that involved buying and selling gas for the companys refineries.
Though unconventional on the surface, the move matched Murphys background. She grew up in the United Arab Emirates and Oman and is conversant in Arabic and French. Her expatriate childhood made her interested in a more internationally focused career, but she ended up returning to Piper after two years because she missed the markets and the creativity of the sell side. What I was hoping at Exxon, which never panned out, was an opportunity to move back overseas, she explains.
Back at the firm, Murphy worked as an associate for specialty-retailing analyst Jeffrey Klinefelter, then launched coverage of apparel and footwear companies in August 2012, carving out a piece of Klinefelters space when he was promoted to head of global equities. Her positive outlook for the fashion and lifestyle brands she covers centers on premium brands with global footprints and strong market share positions that can benefit from a nascent recovery in Europe and an expansion into Asia. Examples include footwear maker Deckers Outdoor Corp. of Goleta, California, and New Yorkbased clothiers PVH Corp. and Ralph Lauren Corp.
Philip Ng, a Rising Star in Paper & Packaging, followed a different path to investment research. A graduate of the University of Michigan with a bachelors degree in economics and communication, Ng worked for several consulting firms in business valuation, but it was very backward-looking, he says. Our clients were across industries, so I didnt have any expertise in understanding any of these businesses.
To gain more in-depth knowledge, Ng decided to move to equity research, first as a sell-side associate covering packaging companies at Lehman Brothers and Wachovia Securities, and then on the buy side at Bala Cynwyd, Pennsylvaniabased Susquehanna International Group and Boyar Asset Management, a hedge fund headquartered in New York. He rejoined the sell side in 2010, when he was offered a lead analyst position at Jefferies.
The 35-year-old, who works out of New York, cites many positives about his newest post. Its more dynamic. Its stock picking. Its researching. Its client facing. Its more entrepreneurial.
Ng is upbeat about his groups prospects. Youve seen a lot of consolidation, and thats translated into pricing power, he reports. Pricing goes straight to the bottom line, and most companies I cover generate a lot of free cash flow. Theyve been able to use that cash in a very astute fashion. Were at a point where balance sheets are strong enough that youre going to see a lot of cash being returned to shareholders.
His recommendations include Memphis, Tennesseebased International Paper Co. and Rock-Tenn Co. of Norcross, Georgia. The latters 2011 acquisition of Smurfit-Stone Container Corp., one of the worlds largest containerboard recyclers, was a transformative deal in the marketplace, Ng declares.
Another analyst who cut his teeth as a consultant to companies in the sector he now covers is Leerink Swanns David Larsen, a Rising Star in Health Care Technology & Distribution for a third straight year. Larsen, 42, spent more than a decade in the finance units of such outfits as Harvard-Pilgrim Health Care, Newton-Wellesley Hospital and UnitedHealth Group, then joined PricewaterhouseCoopers as a consultant advising providers on how to use technology to streamline operations and improve cash flow.
I learned to really value high-quality, very clean IT infrastructures within these provider and health plan organizations because if you have good clean data, thats how you run the business, the Boston-based analyst explains. Ive used [Medical Information Technology], which is an IT vendor with one third of the hospital market. Ive used Eclipsys [Corp.]. Ive used Cerner [Corp.]. Ive used a lot of these different systems that I cover.
Larsen, who earned a degree in economics at Boston College and an MBA in health care management at Boston University, entered the world of sell-side research in 2005 when he joined SunTrust Robinson Humphrey as an associate tracking health care services stocks. He moved to Cowen and Co. and then, in 2009, to Leerink. The following year, Larsen was offered the opportunity to direct coverage of health care technology companies.
Equity research always appealed to me because theres a heavy math component to it, he says. Plus its a very dynamic, fun space to be in. Im traveling all over the country, visiting with management teams and clients. Its very interesting work, and the people in the field can be very smart.
The analysts current top pick is Cerner. He believes the North Kansas City, Missouribased company will benefit as both the Patient Protection and Affordable Care and Health Information Technology for Economic and Clinical Health acts prompt hospitals to migrate to one technology platform. If all of the hospitals in an integrated delivery network are on the same technology platform, that can help the management of the health system better manage and coordinate care, Larsen explains.
As this years team of Rising Stars attests, theres no single road to success in sell-side equity research. Theres talent everywhere, and we want to have a bigger pool of talent to draw from, observes Morgan Stanleys Penwell. Over the last few years, weve been aggressive in trying to tap as many sources as possible because theres good talent with great experience at a number of different places.
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