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The All-America Research Team: Rising Stars

As part of the fortieth anniversary of the All-America Research Team, we asked money managers which of the newer breed of research analysts show the most promise.

From Locked ranking

Steven Fleishman can still vividly recall the excitement and trepidation he felt when, at the tender age of 24, he became the lead utilities analyst at Kidder, Peabody & Co. Fleishman, now 42 and covering the industry for BofA ­Merrill Lynch Global Research, knew that being promoted so early in his career would either make or break him.

“It was a perfect opportunity for me to crash and burn,” Fleishman told Institutional Investor in October, the same month in which the ten-time top-­ranked analyst was inducted into the All-­America Research Team Hall of Fame. Fortunately, he had luck on his side; his promotion neatly coincided with industry deregulation: “Suddenly, being new wasn’t such a bad thing, because the sector was now new to everybody.”

Fate rarely intervenes to level the playing field for analysts just beginning to publish research. Instead, in addition to keeping abreast of changes in markets, macroeconomic environments, industry regulations and corporate strategies, these novices have to overcome client skepticism about their abilities and level of understanding. For some, the process can take years; others display a talent that catches the attention of money managers almost immediately. Each year when II asks investors 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.

This year’s class is particularly noteworthy because many of them began their publishing careers when the financial world was imploding. The summer and fall of 2008, when we were polling for that year’s survey, was hardly an optimum time for anyone to step up and say, “I want to publish equity research!”

Nonetheless, that expression sums up the feelings of Hunter Keay, an airlines analyst with Wolfe Trahan & Co. who published his first report in September 2008 — the same month in which Lehman Brothers Holdings collapsed into bankruptcy, sending world markets into a tailspin from which they have yet to fully recover. “My director of research at the time basically told me, ‘You don’t have to do this if you don’t want to’ — and I said, ‘No, no, this is my shot at being a senior analyst,’” recalls the 33-year-old Keay. “I wasn’t about to pull the ripcord.”

After graduating from ­Lewisburg, Pennsylvania’s Bucknell University with a bachelor’s degree in finance, Keay worked as an aerospace and defense industry consultant for four years at Pricewaterhouse­Coopers in New York and Washington. He moved to Legg Mason in 2004 — the following year Citi sold the Legg Mason capital markets operations, including research, to Stifel, Nicolaus & Co. — and labored three years as an associate analyst.

In the fall of 2007, Keay was deemed ready for prime time and began work on his first report. The process did not go smoothly: Oil prices, which have a dramatic impact on airlines’ costs and thus profitability, soared from $80 a barrel when he began compiling data to $147 the following summer. Every increase in price made the sector less appealing to investors, prompting Keay to revise his still-­unpublished report.

Petroleum prices had fallen below $100 a barrel by September 2008 (and would drop to a low of $30 that December), and the volatility ultimately helped shape Keay’s outlook. He says he “gained some perspective on what the guardrails are of this industry” and learned that “high and volatile oil prices benefit an industry that’s incapable of fighting the urge to grow.”

Despite the turbulence of the past few years, the analyst is positive on the sector. “I’m bullish, but over the next two to three years, there are going to be winners and there are going to be losers,” he says. “A certain amount of capacity has to come out of the system, but I’m optimistic about the industry’s ability to stay disciplined, as long as fuel prices remain worrisome to airline executives.”

Money managers first identified Keay as a rising star in 2010, when he was with Stifel Nicolaus; in March he joined Wolfe Trahan.

Herman Leung is also in his second year as a rising star — and also changed firms between last year and this. Leung, who turns 36 this month, graduated from ­California Polytechnic State University in San Luis Obispo with a bachelor’s degree in finance, then joined San ­Francisco–based Thomas Weisel Partners Group as an investment banking analyst.

“In 1999 and 2000 we did so many deals and we were making so much money — and then it all went to zero,” he says. “During the ’08 to ’09 time frame, I started to think back to the first bubble I went through, and I don’t think this time was as bad, because we survived and things sort of went down to the bottom but came back up. In 2000 a lot of the technology was just too early for its time.”

Leung left Thomas Weisel and worked for a year as an investment analyst focused on late-stage-growth software companies at TeleSoft Partners, a tech-­focused venture capital fund headquartered in Foster City, California, and then as a product specialist in search-engine marketing at price-­comparison website Nextag in nearby San Mateo. He joined Deutsche Bank Securities in 2005 as an associate analyst on the firm’s Internet team and began publishing research in 2008. In May he moved to Susquehanna Financial Group, an institutional brokerage headquartered in suburban Philadelphia that has been rapidly expanding since the crash, swelling its ranks with analysts who departed bulge-­bracket firms. Leung is the firm’s senior Internet analyst, and he sees opportunities in the space.

“Online dollars are going to continue to gain share from offline dollars in both the e-­commerce and online media sectors, but I view e-­commerce as a more attractive opportunity because it’s a more sustainable, ­longer-term model with a less fickle audience,” explains Leung, who works out of San Francisco. “It’s the Amazon consumer versus the Myspace, Facebook, ­Friendster ­consumer.”

Institutional investors are far from fickle when it comes to their support of Noah Poponak and Sameer Rathod; they are among the analysts who have appeared on the ­Rising Stars roster in each of the past three years.

Poponak, since March 2009 the lead analyst covering aerospace and defense electronics at Goldman, Sachs & Co., worked as an intern at ­Salomon Smith Barney in Columbus, Ohio, while earning a bachelor’s degree in finance at Ohio State University. From there he joined Thomas Weisel as an associate analyst in aerospace and defense. Two years later, in 2006, Goldman came calling.

The 29-year-old gravitated to research because “it provides you the opportunity to just learn a ton,” he says. “You have to master the basic, fundamental building blocks of financial statement analysis, valuation analysis and company and sector analysis.”

One of the first moves Poponak made after being promoted to senior analyst was to publish contrarian recommendations, flipping ­Goldman’s outlooks for aerospace and defense — going positive on the former and negative on the latter. “I said, ‘It can’t get any worse in aerospace, and the defense cycle is at a peak.’ In hindsight it was great timing. It was loud and splashy and different from what everybody else was thinking.”

Poponak has maintained those views ever since. With regard to aerospace, “it’s early in the cycle. The long-term growth story is pretty clear. You’ve got a few next-generation products that are just starting and you have some high-quality companies with good management teams. That’s really why we’ve been positive.” On defense he is still negative.

Rathod, 29, knows all about market negativity. The engineering and construction analyst published his first report at the beginning of September 2008, just as the financial world was on the brink of collapse.

“It was very humbling,” Rathod recalls. “Every day waking up and seeing your stocks are in free fall — it was unbelievable because I had just launched and had buy ratings on all these stocks.”

A graduate of Pittsburgh’s Carnegie Mellon University with a bachelor’s degree encompassing four majors — computational finance, economics, information systems and statistics — Rathod began his career as a research assistant at Citi. In April 2008, Macquarie Securities offered him an opportunity to be a senior analyst, and he accepted. Since then he has learned things about real-world market dynamics that can’t be found in any college textbook.

“The macroeconomic environment beyond your sector is the principal driver of what’s going on, and it’s been that way for the past three-and-a-half years,” he says. “Before that I would be very much in the weeds — looking at different project awards and what have you. But if you don’t know your macro, the microanalysis isn’t as meaningful.”

These days, Rathod favors companies that are focused on building oil and gas facilities, rather than heavy construction outfits that are more at the mercy of government budgets. “I’ve been recommending companies with exposure to liquefied natural gas and oil production because oil fields are depleting assets,” he explains. “Even if the world does take a pause in growth, you still need to invest in ­production.”

Connecting the big picture to the bottom line is also what attracted Shibani Malhotra to research. The 38-year-old received a master’s degree in medical microbiology from University College ­London, then worked as a market strategist at U.K.-based Procter & Gamble Pharmaceuticals. She moved to the U.S. and earned an MBA at Tuck School of Business at ­Dartmouth College in Hanover, New Hampshire, before joining Easton Associates, a health care consulting firm headquartered in New York. In 2006 she joined the world of sell-side equity research as an associate supporting pharmaceuticals, first at Piper Jaffray & Co. and then at Morgan Stanley.

As much as she enjoyed the strategy side of consulting, she says, “there’s very little focus on the actual impact of these strategies on the bottom line. You rarely ever see the big picture at the corporate or macro level, and that was something I was much more interested in.”

She takes a long-term view on generic pharmaceuticals and recommends companies that “will be successful given the global dynamics in the sector” — namely, the need to focus on low-cost manufacturing, underpenetrated markets and broad portfolios, she says. As for specialty pharmaceuticals, although those share prices tend to be driven by catalysts rather than broad trends, “recently you’ve been seeing macro issues impacting some of the stocks, with almost indiscriminate selling of anyone exposed to Europe, because of fear of the debt market.”

Malhotra has been publishing research since December 2008, when Goldman Sachs offered her the job of lead analyst covering specialty pharmaceuticals; she held that post for about a year and a half before taking a comparable position at RBC Capital Markets. This year marks her first appearance among the Rising Stars of Wall Street Research.

Another analyst making his Rising Stars debut is ­Smittipon ­Srethapramote, who covers the alternative-­energy space for Morgan Stanley. ­Srethapramote, 35, who has a master’s degree in economics from Tufts University in ­Medford, Massachusetts, and an MBA from Ithaca, New York’s Cornell University S.C. Johnson Graduate School of Management, spent eight years as an analyst at Fidelity Investments in Boston before joining the sell side in October 2009.

­Srethapramote says he made the switch partly because, at Fidelity, it was “a little bit frustrating in terms of trying to figure out whether or not we should invest in a company after spending just one hour with the management team on the initial public offering road show.” Now, at Morgan ­Stanley, he’s able to do the “primary research that you don’t get to do oftentimes on the buy side” and is getting to know much more about a smaller group of companies — ten to 12, versus the 25 to 40 names he covered at Fidelity.

He is negative on solar companies because pricing has collapsed for the subsector. For the picture to improve, bank financing has to rebound and some companies need to close. “There’s too much capacity right now chasing too little demand,” he explains.

Adding ­Srethapramote to its analyst roster is a feather in Morgan Stanley’s cap. “The benefit to us is that he knows the management, having been on the buy side,” explains Michael Eastwood, associate director of North American equity and fixed-­income research. “He knows the companies very well, having bought and sold their equities.”

Eastwood is a deft hand at spotting talent: Morgan ­Stanley ties for first place (with Sanford C. Bernstein & Co.) for the most analysts dubbed Rising Stars this year: nine. The firm has been expanding its recruiting focus to find candidates with more varied experience, rather than hiring laterally (that is, poaching from other banks).

“Our preference is to either grow talent internally or seek the depth of knowledge you get from an industry candidate, or go to the buy side, where you get someone who understands the excitement and pain of trading shares,” he says.

Sanford C. Bernstein has long understood the importance of industry and consulting experience for potential candidates, according to ­Robert van Brugge, global director of research. “Our philosophy is very much that we over­emphasize industry experience over equity research experience,” he explains. The firm values the knowledge that industry insiders bring and views it as a major competitive advantage. “You can talk to clients and say, ‘The management team may put up a fancy PowerPoint presentation about its strategy, but let me tell you how hard it is to execute those strategies and tell you what it’s like within those organizations,’” van Brugge says. “It’s hard to see from the outside in unless you have experience from the inside and are able to handicap whether a management team can do what it says it’s going to do.”

Bernstein hires have a year to launch coverage, which is rare on Wall Street. “We give them up to 12 months’ time to not only learn how to become an equity analyst but also develop their industry theses,” van Brugge explains. This gives each analyst the chance “to step back from it all and do really in-depth analysis of the industry and think about what is going to happen over the next three to five years.”

The disadvantage is that the analyst doesn’t generate any revenue during this prelaunch phase. “It’s a big investment that we’re making, so we want to make sure we hire absolutely the right person — because the cost of failure is extremely high,” van Brugge says.

In the end, hiring decisions often involve a balancing act that aims to achieve an appropriate mix of backgrounds, such as those possessed by this year’s Rising Stars of Wall Street Research. “Effectively, what we’re doing is spreading our risk,” concludes Morgan ­Stanley’s Eastwood. “We are bringing in people with different insights and different skill bases who can provide a lot to our clients.” • •

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