Before joining Sanford C. Bernstein & Co. as an Internet analyst in 2010, Carlos Kirjner-Neto enjoyed success in not one but three fields of professional endeavor. He spent nearly a decade as a technology and telecommunications industry consultant with McKinsey & Co. in New York; then directed business development at Vodafone Group, a multinational telecom giant headquartered in the U.K., and at Sunnyvale, California–based software developer Telegent Systems; and finally in 2009 was tapped by the U.S. Federal Communications Commission to help create a national broadband plan.
Kirjner-Neto’s impressive résumé — he also holds a Ph.D. in computer science from the University of California, Berkeley — caught the eye of talent scouts at Bernstein, which hires established consultants and industry experts and trains them to become equity analysts rather than enticing researchers away from other sell-side firms or promoting from within its own ranks.
“It’s really about finding great people and facilitating them,” says New York–based Daniel Dowd, director of equity research. “It’s not like Bernstein makes them stars. We provide the platform for great people to become stars.”
Money managers agree. Each year when Institutional Investor asks buy-siders to indicate who among their sell-side counterparts merits inclusion on the All-America Research Team, we also ask them to identify the Rising Stars of Wall Street Research — analysts who have been publishing research for less than three years but already appear destined for greatness. Five of the nine Bernstein analysts who were dubbed Rising Stars in 2011 have risen to the 2012 team.
What about this year? Morgan Stanley leads the lineup, with eight of its analysts considered among the best up-and-comers. Bernstein lands in second place, with seven Rising Stars. (Last year these two firms shared the top spot; two of Morgan Stanley’s 2011 stars have advanced to the 2012 team.) Barclays, which tied for 15th place last year, rockets to share the third tier with Credit Suisse, which jumps from No. 6. These banks are home to five standout analysts each — for Barclays that is a net increase of four; for Credit Suisse a gain of two.
Kirjner-Neto, 46, acknowledges that his experience accords him insights that other analysts don’t have. For example, “I understand the details of Google’s page-rank algorithm. This isn’t crucial to the analyst’s job, because I think there are several analysts who [cover the Mountain View, California–based company] very well and don’t understand these issues, but it is helpful,” he says.
The Bernstein analyst raised eyebrows in May when he launched coverage of Facebook just ahead of its initial public offering with an underperform rating, valuing shares of the Menlo Park, California–based social networking site operator at just $25 apiece — a lower estimate than those offered by other Wall Street analysts, most of whom predicted the shares would fetch between $28 and $35. The stock opened at $38 and by the end of its first full day of trading had tumbled 10.4 percent, to $34.03. The shares are still a long way from recovering their IPO price.
In July Kirjner-Neto upgraded Facebook to market perform, at $21.71, and lowered his target price from $25 to $23 — but noted that investors might want to wait until the shares fall below $20 before buying. In mid-August they did just that. The stock was trading at $21.11 in late October.
Another analyst who attributes his current success to a background in industry is Tudor, Pickering, Holt & Co.’s Brian Lively, a Rising Star in Oil & Gas Exploration & Production. The Houston-based researcher earned a bachelor of science degree in petroleum engineering at Louisiana State University, then joined Exxon Mobil Corp. in Irving, Texas, as a senior project manager.
“I didn’t graduate from college thinking I was going to do equity research,” he says. “I had absolutely no idea what equity research was. I was focused on working at an oil company and being an engineer.”
In 2005, Lively moved to Houston-based engineering consulting firm Netherland, Sewell & Associates and enrolled in night school at the University of Houston to earn an MBA, expecting that the degree would help him realize his goal of launching his own business.
“I always
That quest for knowledge led him to his current post. “What I had done before coming over to Tudor Pickering was value the underlying assets of actual E&P companies, so I had that experience in terms of how to look at all the different basins and plays that companies were involved in,” Lively explains. “Just knowing those assets from a geologic and engineering perspective is the starting point to valuing these companies from an equity standpoint.”
That’s not to say that investment research offered no new challenges. When he joined the firm in 2008, Lively had to learn how to translate a deep knowledge of assets and company valuation to the market context. “Good companies don’t necessarily mean good stocks,” he notes. “Understanding how the market values companies and how it pays for those companies in terms of the stock price was really something I had to learn on the job.”
Of course, analysts can achieve success without having worked in a particular industry or government entity. Morgan Stanley has a program in which each new hire is paired with a mentor who guides his or her development, according to Stephen Penwell, director of U.S. equity research.
“The mentorship is very important for bouncing ideas, crafting product — everything that goes into an initiation or launch and postlaunch,” says Penwell, who is headquartered in New York. “That mentor process is critical throughout.”
And it has worked well for Matthew Kelley, a Rising Star in Brokers, Asset Managers & Exchanges. The 34-year-old had planned to pursue a career in journalism, but midway through his undergraduate studies at Virginia’s University of Richmond, he changed tack and earned a bachelor’s degree in business administration. He accepted a position as account executive at Grey Worldwide, an advertising and marketing outfit headquartered in New York, where his duties included writing creative briefs and ad copy.
After two-and-a-half years Kelley decided to further his education. He earned an MBA at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill in 2006, and the following year joined Citi as an associate analyst covering asset managers and online brokers. “I had a writing background, and research was the perfect fit for me because I like understanding companies and industries from the top down and bottom up,” he explains.
Kelley moved to Morgan Stanley in 2009 and Betsy Graseck, a runner-up in Banks/Large-Cap on the All-America Research Team for the past four years, became his mentor; he began publishing research in November 2011. “I helped [Graseck] launch coverage on credit card companies, and I helped build models from the ground up because I knew how the business worked inside out.”
Wedbush Securities’ Sarah James, a Rising Star in Managed Care, also appreciates the value of having a coach. “When I was looking for my first job out of undergrad, I was just looking for good training and a good mentor,” she says. “The analyst I found who I thought would be a great mentor — Edmund Kroll — happened to cover managed care. I didn’t know anything about the insurance sector at the time, but the person I wanted to work with covered that sector, so I took the job.”
James, 32, earned a bachelor’s degree in finance at Florida State University in Tallahassee. She then began her career as a research associate at Tucker Anthony Sutro, leaving after only a few months when that firm was acquired by Royal Bank of Canada. James moved to Cowen and Co., where she met Kroll (who had been a member of the All-America Research Team five years earlier, in 1996, when he was with Lehman Brothers). She worked at UBS and Lehman, earned an MBA from the Anderson School of Management at the University of California, Los Angeles, and joined Wedbush in 2009. She began publishing research the following April — the month after President Obama signed the Patient Protection and Affordable Care Act into law.
“Over the past year there’s been more change in the managed care sector than ever before,” says James, who works out of Los Angeles. “It’s probably helped me that I was coming to it with fresh eyes and a new approach. In some aspects the fact that it was changing so much leveled the playing field.”
Offering a unique perspective also helps Lucas Pipes distinguish himself from his peers. The Brean Murray, Carret & Co. researcher, a Rising Star in Metals & Mining, says that at the outset of his career he decided to offer something that had never been attempted: a means of predicting price movements for domestic coal producers.
“At the time there wasn’t really any cost curve available for the domestic coal space,” the New York–based researcher says. “I used a creative approach to devise one, and that set me apart. It helped to come in and take a fresh look at things.”
Pipes, 27, joined Brean Murray in 2008 after earning a bachelor’s degree in psychology at Bard College in Annandale-on-Hudson, New York. He covered metals and mining companies under the guidance of then–lead analyst Jeremy Sussman; when Sussman left the firm last year, Pipes took over as senior analyst.
In mid-July he broke with the consensus and told clients that he was “cautiously optimistic that the worst may have passed” for the thermal coal industry, which last year experienced a sharp decline in production — and even some shuttered facilities — as low natural-gas prices shifted demand to that commodity. Companies most likely to benefit from a recovery in coal, he said, would be those with strong balance sheets and low production costs, such as Consol Energy, a coal and natural-gas producer located in Canonsburg, Pennsylvania. By the end of October, its stock had jumped 16.5 percent, from $30.17 to $35.16, and led the sector by 8.3 percentage points.
Also attracting notice for a contrarian stance is Raghuram Bondada, a Rising Star in Aerospace & Defense Electronics for a second straight year. The RBC Capital Markets analyst was outspoken in his support of Triumph Group’s acquisition of Vought Aircraft Industries of Dallas. While other observers expressed concern about the debt the Berwyn, Pennsylvania–based component manufacturer would incur to finance the $984 million deal, Bondada was convinced that the executive team’s plan to combine operations would lower production costs.
“I was one of the few people out there who was more bullish on the name,” he recalls. “It turned out to be a very smooth integration, and being able to talk to management and ask them the right questions about how things were proceeding definitely helped me engage in what was going on.”
Bondada didn’t have to wait long for vindication. Triumph’s year-over-year revenue in the quarter following the June 2010 takeover soared 145.3 percent, to $768.2 million.
Bondada, who earned a bachelor’s degree in science and engineering at Pennsylvania State University and an MBA at Glendale, Arizona’s American Graduate School of International Management (now the Thunderbird School of Global Management), began his career as a consultant with Computer Sciences Corp., an information technology and outsourcing services provider headquartered in Falls Church, Virginia. His clients included Seattle’s Boeing Co. and Lockheed Martin of Bethesda, Maryland.
“That’s where my interest in the field began,” the 35-year-old says. It’s also where he realized the hazards of specialization. “Some of these guys had been sitting in the same functions for the past 30 years. It made me realize that you can get stuck in the weeds in the industry on one program within one big company and never really get the chance to step back to see the forest. I felt like equity research would give me the opportunity to see that forest in aerospace and defense.”
Bondada made the leap from consultant to equity research associate in April 2008, when he joined Macquarie Capital (USA), and in July 2010 moved to RBC.
The New York–based analyst is upbeat about the sector’s prospects over the long term but sees some near-term turbulence. In July he downgraded Hexcel Corp., a manufacturer of industrial fabrics and structural adhesives that is headquartered in Stamford, Connecticut, from outperform to neutral, at $24.63, primarily on valuation. Since then the stock has barely budged, ending October at $25.56 — for a gain of 3.8 percent that lagged the sector’s 4.6 percent advance.
Benchmarks are important not only for stocks but also for analysts. Bernstein’s Dowd encourages his up-and-comers to compare themselves to established researchers and ask, “Am I ramping up at the same rate as someone who became a rock star, or am I ramping up at the same rate as someone who just did okay?” Money managers who participated in the All-America Research Team have already answered that question with regard to this year’s Rising Stars. The spotlight awaits. • •