Could there be a more difficult time to invest in stocks? Confronting markets roiled by war and a wobbling U.S. economy, research analysts face a daunting task. Identifying the rare big stock winners and avoiding the far more commonplace losers have never been tougher - or more critical.
Not everyone has made an easy transition from bull to bear market. Brokerage analysts have been pelted by criticism in the past year - excoriated for investment banking conflicts and mocked for tech-stock cheerleading that continued even after the Nasdaq composite index crumbled. Even so, a number of their less-heralded buy-side counterparts have managed to gain in stature despite - or, more likely, because of - the down market. Working in relative obscurity at such powerful firms as Fidelity Management & Research Co., State Street Research & Management Co. and T. Rowe Price Associates, they’ve counseled their portfolio managers to snap up shares of Affiliated Computer Services, Chevron Corp. and Tenet Healthcare Corp., all of which have defied the market’s downdraft. More important, these researchers were early to sound the alert on names like Cisco Systems, Nokia Corp. and Providian Financial Corp. On the following pages we profile 11 of these analysts.
The leading buy-siders do have certain advantages over their sell-side peers. Their firms control tens or even hundreds of billions of dollars, giving them access to the best quantitative information available anywhere in the world. Many have a breadth of experience and knowledge about market cycles that sell-siders often lack. A sizable number have worked at their current firms for decades, usually covering the same stocks, and have the confidence and security to take a longer-term view. Free of investment banking duties and marketing chores, they can focus exclusively on finding the best stocks - and sidestepping the worst. Says Clifford Krauss, director of equity research for State Street Research & Management, “Once the bubble burst, the importance of having an independent view was reaffirmed.”
Today’s bear market actually plays to the strengths of the best buy-side analysts. They’ve always excelled at the nitty-gritty of assessing risk. “Now there’s a greater emphasis on cash flows and balance statements and asking whether or not a company will actually survive,” says Perry Traquina, director of global industry research at Wellington Management Co. That wasn’t the case during the go-go 1990s, when the roaring bull market encouraged researchers to take ever-bigger risks.
The bear market isn’t the only reason that it’s important for firms to have seasoned analysts. Since October 2000, when the Securities and Exchange Commission enacted Regulation Fair Disclosure to ensure that all investors receive the same information at the same time, the quantity and nature of information has been transformed.
“Reg FD has changed the landscape and caused a lot of anomalies about what’s being disclosed,” notes Krauss. “Some companies won’t even give us generalities like the tone of business.” Now that corporations are more skittish about doling out information, independent researchers who gather and interpret their own data are more valuable than ever.
Aside from giving top researchers a chance to shine, the market downturn has had another tangible impact: Major asset managers are now attracting a larger, smarter crop of job candidates. Once, many of these aspiring analysts wouldn’t consider anything but a highly lucrative sell-side research slot. As recently as two years ago, T. Rowe Price often found itself playing to half-empty rooms when it recruited junior analysts at the top U.S. business schools, says William Stromberg, director of equity research. “Since the bubble burst, we’ve seen bright, bright people. That feels good,” he says. Given the state of the markets and the bad press sell-siders have received in the past year, the era of good feeling should last for quite a while.
To recognize the brightest researchers working for money managers, Institutional Investor asked the Wall Street analysts who received votes for our 2000 All-America Research Team - more than 2,100 of them - to name their best buy-side counterparts. About 475 sell-side analysts from 74 firms responded.
Following are profiles of the analysts mentioned most often in ten broad industry groups. This feature was overseen by Senior Editor Jane B. Kenney and compiled by Senior Associate Editor William Gaston and Associate Editor Emily Fleckner; the profiles were written by Jeanne Burke, Kerry Hannon, Ben Mattlin and Mike Sisk, who also wrote the introduction.
Gordon Crawford
Capital Research and Management Co.
Media
Every cub reporter on the media beat quickly learns Gordon Crawford’s phone number: The 54-year-old analyst, who makes his ninth appearance on this list, is one of the country’s best-known and most highly respected media mavens.
Crawford takes the long view. “What I enjoy best is looking for long-term securities with tailwinds behind them,” he says. Like virtually all Capital analysts and portfolio managers, he takes big positions and hangs on. No surprise, then, that Crawford’s top stock picks don’t change much from year to year.
AOL Time Warner remains a special darling, despite the fact that media stocks have been hammered of late. Except for one year, 1983, when he dumped the stock after the company’s Atari group blew up, Crawford has owned a stake in AOL Time Warner (or its precursors, Time and Warner Communications) since 1974. “AOL Time Warner has the assets. They have great management and a strong balance sheet. What more could you want?” says Crawford.
For years he has been a strong believer in two narratives of the media business: vertical integration and globalization. For that reason, he likes companies that both manufacture and distribute entertainment and information. That roster includes Walt Disney Co., News Corp. and Viacom, as well as AOL Time Warner.
A 1969 graduate of Wesleyan University, Crawford earned his MBA in 1971 from the University of Virginia’s Darden Graduate School of Business Administration. That same year he headed west to Los Angeles, where he has lived ever since.
From his first days at Capital, Crawford has followed media and entertainment companies. “I love the business because people are thirsty for information and entertainment. I never wanted to stray.”
One Wall Street analyst who knows Crawford well says that many researchers look up to him. “Gordy’s seasoning and wide range give him a unique perspective,” she says, adding, “Even better, Gordy calls you back.”
Eric Wong
Angelo, Gordon & Co.
Macro
In a soggy market for U.S. equities, the $199 billion convertibles sector took off last year as companies turned to the class as a welcome source of new capital. New issues totaled $60 billion, up from $44 billion in 1999. For the first nine months of this year, new convertibles totaled $74 billion. Investors have been attracted by a host of new features, including call options, at-par zero coupons and contingent conversions, known as “co-co” convertibles. “It’s been the hottest new-issue market,” says Eric Wong, 31. “You have to stay on top of your game.”
One of a relatively small group of players in the convertibles market, Wong has been refining his own moves since he signed on as an analyst with Los Angeles-based TCW Asset Management Co. four years ago. In May he moved to Angelo, Gordon & Co., an alternative-asset manager in New York.
At Angelo Gordon, Wong specializes in convertibles arbitrage. “With convertibles arbitrage I can limit my exposure to either the equity or the fixed-interest component, or both if I like,” he explains. “I’m also now able to take short positions, which means I can trade more freely and more often than when I was involved in traditional convertibles mutual funds.”
A New York native with an MBA from UCLA, Wong isn’t afraid to break with the pack. “We disagreed about a company called Carriage Services,” recalls one analyst, referring to the Houston-based funeral home chain. Wong felt Carriage Services was undervalued. “Eric stuck with his convictions.” The stock dropped 71 percent in 2000, but this year it’s up 325 percent through October 1. Though Wong enjoys his investment freedom at Angelo Gordon, he misses attending Lakers games and running and biking in the mountains near Los Angeles. “Now I run around the Central Park reservoir and watch the Yankees,” he says.
Bruce Glazer
Wellington Management Co.
Technology
“Whenever I’m going to meet management, I call six or seven of the top buy-side analysts to see if they want to come along,” says one sell-sider. Bruce Glazer’s name is always on the list.
After graduating from Cornell University in 1990, Glazer cut his teeth as a health care analyst at Kidder, Peabody & Co. and Montgomery Securities. But he never liked the investment banking responsibilities that went with the job. So he went back to school, earning his MBA from the University of Pennsylvania’s Wharton School, and joined Wellington four years ago. “I wanted to get to the buy side,” says Glazer, 33. “The buy side is all about picking stocks and making money.”
That he does. Says one brokerage analyst who knows him, “He’s got great valuation discipline when it comes to buying and selling stock, and he’s willing to take intelligent risk when modeling is difficult but he believes valuations are depressed.”
Glazer, who covers about 100 names, is not afraid to reexamine the assumptions behind his buys and sells. “He knows why he likes a stock, and he knows why he might be wrong,” says one fan. Although “you need conviction” as a stock picker, Glazer says, “you also need to know the pressure points and critical variables so you can react quickly. Always questioning your investment thesis is healthy.”
Analysts point to a stellar Glazer call on the outsourcing company Affiliated Computer Services. Last fall, Glazer says, investors underestimated Affiliated’s prospects at a time when two sluggish parts of its business, ATM processing and information technology staffing, were being sold off so the company could focus on its business-process outsourcing. Glazer added to his position in the summer of 2000, when the stock was trading in the mid-30s. It sold recently for 81.
Denis Walsh
State Street Research & Management Co.
Energy
As a father of four children between the ages of 7 months and 7 years, Denis Walsh knows how to juggle competing claims on his time. Somehow he manages to work, coach Little League and still field the 200 e-mail messages that come into his office every day.
The breadth and diversity of Walsh’s research sources account for much of his success, say brokerage analysts. “Denis is never too wedded to his own thinking to consider other points of view,” says a sell-sider familiar with his work.
This comprehensive approach includes a combination of top-down and bottom-up research that starts, Walsh says, by “trying to get the macro scenario right.” Once he’s comfortable with his macro outlook, he digs into the fundamentals of 40 individual stocks.
That system worked especially well in February, when demand for natural gas was running at unseasonably low levels, while inventory buildups, which usually don’t begin until April 1, were surprisingly high. “We became concerned that natural-gas prices were going to come under pressure,” Walsh recalls. As a result, in March he reduced his recommended weightings for exploration and production stocks as well as for oil services shares, both of which would be affected by declining natural-gas prices. He adopted a defensive strategy emphasizing large integrated companies, which have a more diversified revenue stream.
The switch paid off. The average integrated oil and gas company’s stock outperformed the other groups handily in the six months before September 11. Chevron Corp., for instance, edged up 9 percent, while the Standard & Poor’s 500 index fell by the same amount. “His contrarian viewpoint has been about the only way to make money in energy lately,” asserts a Wall Street fan.
Walsh, 41, also saw that natural gas was losing market share to nuclear power and coal. “People weren’t thinking about competing fuels at all,” says a sell-side analyst. What tipped Walsh off to the rise in coal and nuclear consumption? “In the spring a number of coal companies visited our offices about doing their IPOs, and they were telling us they were burning 6 percent more coal this year than last year,” he says.
Arthur Cecil
T. Rowe Price Associates
Consumer
During his 30 years as an equity analyst at Baltimore-based T. Rowe Price, Arthur Cecil has developed “a visceral, intuitive way of knowing what moves stocks and a tremendous ability to frame what is actually important,” explains one sell-side counterpart. He doesn’t get lost in the details that can overwhelm a newly minted MBA. “He keeps a distance from what is minutia and unimportant,” the Wall Street researcher adds.
For Cecil, 59, who has an MBA from Loyola College, the key is understanding management. “If I’m able to make correct judgments on what they’re up to and whether they’re on the right track, that’s a good part of being right on the investment conclusion,” he explains.
Cecil’s deep knowledge and insight allow him to step away from the crowd. When shares of Clorox Co. were pummeled in January and February of this year, after the company said that it would miss its earnings target for the quarter and for fiscal 2001, many analysts focused on the gloomy sales and earnings forecasts for the consumer-products manufacturer. But Cecil knew that Zwilling J.A. Henckels, the German producer of high-end knives, had owned 27 percent of Clorox’s shares since 1974; he figured that if Henckels held on, the stock would soon find a bottom. It did. Shares bottomed out at about 31 in March and traded recently in the high 30s. “Art had a completely different angle from other analysts, but he was focused on what was going to move the stock,” says a Wall Street analyst.
Anna Dopkin
T. Rowe Price Associates
Financial institutions
Soon after she joined T. Rowe Price in 1996, Anna Dopkin issued a major buy recommendation on Mercury Finance Co., an auto finance company. The call blew up in her face when Mercury understated losses and eventually filed for bankruptcy. “It was a costly mistake,” she recalls, “but I learned at that point that you’ve really got to understand the numbers.”
Indeed. Today Dopkin, 34, is renowned for her own quantitative modeling, which relies largely on original research and is distinguished by its attention to detail. “She’s a great mix of detailed research and trading sense,” says one Wall Street fan.
A 1989 graduate of the University of Pennsylvania’s Wharton School who went on to structure and trade collateralized mortgage obligations at Goldman, Sachs & Co., Dopkin is devoted to her models. “Some of my best research calls have been off of heavy-duty bottom-up research, poring over the 10-Q and 10-Ks,” she says. Case in point: Dopkin put a sell rating on Providian Financial Corp. this summer because she was sure that the company’s quality of earnings was deteriorating. She sold most of her shares in the 40s and 50s before other analysts downgraded the stock, which closed in late October at 3.94.
Sell-siders say Dopkin often calls them to ask for numbers she can plug into her new models. In general, she keeps her Wall Street colleagues on their toes. “Anna makes me want to be a better analyst,” says one sell-sider. “She knows so much, you have to be well prepared.”
Admirers applaud two of her recent calls: Fannie Mae and Freddie Mac. The stocks came under pressure last year when both competitors and customers complained that the agencies wielded too much power and several politicians questioned whether they should retain their ties to the government. Dopkin believed the political risk was modest; she took huge stakes in both stocks in the summer of 2000. Both are up substantially.
“If I gave my own money to any investor, I’d give it to Anna Dopkin,” says one investment banking researcher. That’s the ultimate Wall Street compliment.
Clifford Ransom II
State Street Research & Management Co.
Capital goods
With 30 years of experience and more than 100 companies in his territory, Clifford Ransom has an enviably deep and broad perspective on the capital goods sector.
“A meeting with him is always an energetic dialogue,” says one Wall Street analyst. “It’s a search for the truth, in a way.”
When Ransom meets company managements, he doesn’t stop at the top. He visits plants and attends division meetings to chat with regional and local management teams. “He tries to burrow in and see what’s going on,” notes one admirer. Ransom, who has a BA from Princeton University and an MBA from Loyola College, explains that talking to the second and third layers of managers allows him to “double- or triple-check” that the plans of top management are being executed. “They’re also the people who will be running the company in five years,” he says.
Known for his snow-white beard, colorful shirts and ebullient personality, Ransom, 55, covers a broader range of industries - from electrical equipment and machinery to aerospace and defense - than his sell-side counterparts do. “If you bash or bend metal, I’m probably interested in your company,” he quips. He puts his knowledge to use selecting stocks for State Street’s analyst-run mutual funds. “We do write tickets and have decision-making responsibility,” Ransom says.
One of his best picks was Danaher Corp., a toolmaker that he first started buying ten years ago at about 2. Since then the stock has outperformed the Standard & Poor’s 500 index by more than 800 percent, recently trading at 55.
Two years ago Ransom relocated from a luxury condominium overlooking Boston Harbor to a 44-foot motor yacht anchored in the harbor. “I’m not a swashbuckling guy,” he says. “It’s a protest against real estate prices.”
Steven Calhoun
Fidelity Management & Research Co.
Consumer
Like other buy-side analysts, Steven Calhoun publishes research reports for companywide use. Unlike many of his colleagues, he also plays his hand as a stock picker. For the past two years, he’s managed Fidelity’s $55.5 million Select Retailing Portfolio.
Calhoun focuses on about 25 large-cap food and drug retailers and oversees four analysts assigned to specialty retailers and restaurants. In a tough market his fund returned -16.7 percent for the year ended September 30, compared with -20.4 percent for the Standard & Poor’s 500 index.
The analyst describes his investing approach as “growth at a reasonable price.” He’s looking for turnaround stories as well as the best concept creators among the retail group. “I’m not pigeonholed into one style,” he says.
Calhoun joined Fidelity in 1993, right after graduating from Dartmouth College. After only two years in the consumer-goods sector, the 30-year-old has impressed his sell-side counterparts with his willingness to keep an open mind. “He’s detail-oriented,” says a Wall Street analyst. Explains a second sell-sider: “When a company is out of favor but has a positive rate of change, he will step out on a limb, even if the name is unpopular to own. He’s willing to make relatively controversial decisions.”
Of course, it never hurts to be a nice guy. Says a sell-side fan: “Steve Calhoun is approachable and amiable. He’s not impressed with himself.”
Tee Taggart
Wellington Management Co.
Basic materials
Few American analysts know any Hanyu, a Mandarin dialect favored by Chinese businessmen, but Harriet (Tee) Taggart of Boston-based Wellington Management Co. has mastered 3,500 of its 10,000 characters. “It’s quite helpful for doing business in Shanghai,” she says.
The 53-year-old Taggart, who helps manage several Wellington sector funds, actively monitors 200 chemicals and environmental services companies and claims to keep tabs on 400 more. “Our mandate is to know every company and every country in our industry assignment,” she says. An 18-year buy-side veteran, Taggart worked in venture capital, public finance and banking before settling at Wellington in 1983.
“The greatest opportunities lie in companies that are becoming either materially better or materially worse and it’s not reflected in the stock price,” she says. To find opportunities, the Harvard University and Massachusetts Institute of Technology graduate pursues a process she describes as “foraging and hunting.” It’s fundamental, bottom-up research: She visits plant sites, and she talks with a company’s customers and suppliers as well as its managers.
“Tee is extremely smart and well plugged into her companies, and she always has a fresh point of view,” says one Wall Street admirer, citing a recent discussion with Taggart about the shift from glass to plastic bottles. Although the sell-sider anticipated growth potential in plastic beer bottles, Taggart was able to explain that beer is more light- and oxygen-sensitive than soft drinks and thus requires a stronger, less permeable plastic, which is still under development.
Whether the subject is beer bottles or the current bear market, Taggart takes the long view. She notes that most of the companies she follows were ignored in the late 1990s frenzy for New Economy names and now benefit from a renewed interest in old-line manufacturers, despite the fact that they are especially vulnerable to a recession. “Clearly, they are very GDP-sensitive,” Taggart says.
Robert Gensler
T. Rowe Price Associates
Communications
During seven years of playing the risk arbitrage game at Salomon Brothers, Robert Gensler developed an instinct about stocks that has stayed with him. “I lived on the trading desk, and it gave me a deep sense of the market,” the analyst says.
His sell-side fans heartily agree. “I find there’s no question he can’t answer about the companies he covers,” says Bear, Stearns & Co.'s Barry Cohen. “He knows the business and the people and understands the trends. He puts it all together.”
Although Gensler, who rides herd over an $800 million portfolio, didn’t start following telecommunications service and equipment companies until 1995, he clearly has a grasp of his subject. Morningstar gives his Media & Telecommunications Fund five stars: The fund is down 14 percent year-to-date through late October, compared with a 52 percent decline for the Nasdaq telecommunications index.
After receiving his undergraduate degree in business from the University of Pennsylvania’s Wharton School, Gensler spent a year at the London School of Economics and earned his MBA at Stanford University. Before arriving on Wall Street, he spent two and a half years as a Peace Corps volunteer in Botswana, helping to set up small businesses.
The 44-year-old Gensler spends about 120 days a year on the road. “That’s what it takes to get the big picture,” he says. “I think I’m smart, but I’m not that smart. I know a lot of people, and they don’t get a lot by me. This is a people business.” A well-regarded Wall Street telecom researcher concurs. “He just knows how to ask the right questions, and he has a global perspective on the telecom industry.”
Last year, of course, the correct perspective was deeply pessimistic, and Gensler was more bearish than most. He boasts that his fund never owned Cisco Systems, down 62 percent so far this year, or Nokia Corp., down 61 percent. Among Gensler’s large holdings, Western Wireless Corp. fell 17 percent, Millicom International Cellular declined 50 percent, and Sprint Corp. jumped 29 percent. “The smartest thing I’ve done all year is to be cautious,” Gensler says. “I got out of emerging carriers and stayed away from broadband.”
Norman Fidel
Alliance Capital Management
Health care
When Norman Fidel took his first job as a health care analyst, doctors still made house calls and no M.D. had heard the word “capitation.” Some 32 years later Fidel, 56, boasts a historical perspective on the U.S. health care system that is virtually unrivaled on the Street.
“He’s seen it all,” says one observer. “There are few people left on Wall Street with his skills for critical thinking. He has trained a lot of people and is so hands-on himself that he creates a way of doing things. It’s old-fashioned research, meeting management and plain hard work.”
Today, Fidel says, “reimbursement is the name of the game. It touches so many things in health care and is the key to the future of the industry.
“Tenet Healthcare is a perfect example. I bought it two years ago when it was trading in the teens. It’s now hovering at 60 a share. Revenue per admission has soared from 2 percent to 10 percent. And managed-care providers are allowing longer hospital stays.” Tenet Healthcare Corp., in fact, is one of Fidel’s longtime holdings.
Health care stocks as a group have turned in just an average performance in 2001: down 16 percent year-to-date, compared with 16.3 percent for the Standard & Poor’s 500 index.
But baby boomers are starting to age, and that means increased revenues for health care providers in coming years, Fidel says. “It’s about demographics.”
A Connecticut native, Fidel graduated from Babson College in Massachusetts and earned his MBA at New York University. He joined the former Irving Trust Co. in 1969 and moved to Eberstadt Asset Management 11 years later. When Alliance Capital acquired that firm in 1985, he stayed on board. Today he’s the lead health care analyst and primary health care fund manager, with responsibility for $20 billion in assets.
From his early days as an analyst, Fidel has had a soft spot for well-managed companies that have for one reason or another fallen on tough times. “I do like companies that have stumbled,” Fidel says.
He’s never been a big trader. Typically, he’ll hold a stock for 12 to 18 months. “I buy a stock because of where it can go down the road,” says Fidel. “I buy for the future.”
