Bloomberg News

JPMorgan Top Stock Picker with Equities Out of Lockstep

August 14, 2013

Top U.S. Research Firms

Investors had declared the stock of AllianceBernstein Holding LP (AB:US) a loser. From Jan. 1, 2010, to Aug. 23, 2012, it had declined 43 percent compared with a 33 percent gain for the Standard & Poor’s 500 Index. Nevertheless, on that day, Credit Suisse Group AG analyst Craig Siegenthaler lifted his rating on the New York-based money manager’s shares to a buy.

“Many investors had left it for dead,” Siegenthaler says. “It was a tough stock to even bring up in front of investors. Underneath the low valuation, the company was really in a transformational period.”

Since his call, AllianceBernstein’s shares have outperformed the S&P 500 by almost threefold, with the stock returning 73 percent for the year ended on Aug. 14. In recommending the shares to Credit Suisse customers, Siegenthaler said that the company was cutting expenses and that fixed-income sales were improving, Bloomberg Markets magazine will report in its September issue.

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Siegenthaler’s calls on stocks such as AllianceBernstein helped make him and his Credit Suisse partner, Howard Chen, the top U.S. analysts of brokerage and asset management firms in 2012, according to a ranking of stock analysts by consulting firm Greenwich Associates and Bloomberg Markets.

He currently has buy recommendations on private-equity firm Fortress Investment Group LLC (FIG:US) and Zions Bancorporation. (ZION:US)

Analysts Surveyed

To compile the ranking, Stamford, Connecticut-based Greenwich Associates surveyed 945 buy-side analysts at 190 investment management firms, mutual funds, hedge funds, pension funds and insurers from December to March. The analysts were asked to name the Wall Street research teams they considered their most important sources of advice on investments.

JPMorgan Chase & Co. (JPM:US)’s research unit, under Noelle Grainger, the bank’s head of equity research in the Americas, scored the largest number of highly ranked analysts, making it the No. 1 firm in U.S. equities research for the fourth consecutive year, according to Greenwich Associates. Bank of America Corp. (BAC:US)’s BofA Merrill Lynch Global Research unit was No. 2, followed by Morgan Stanley. (MS:US)

Research directors and analysts say the big news in their field is that the era of correlation -- when stocks move up or down in unison in reaction to macroeconomic events -- is finally ending. Weakening correlation signals that investors are less obsessed with big issues like Europe’s debt crisis, the U.S. fiscal deficit and China’s growth trajectory. They’re looking instead at more stock-specific investment drivers such as earnings, technology innovations and market share, Grainger says.

Adding Value

“In 2012, people started to be willing to put a little more risk on the table,” Grainger says. “It was a year where analysts could add more value based on their industry and company expertise.”

It was also a year in which the tide lifted a lot of boats. More than 300 of the stocks in the S&P 500 index saw returns in excess of 10 percent in 2012, including reinvested dividends. As the index surged, driven by four straight years of profit growth and three rounds of Federal Reserve stimulus, companies’ stocks began to break away from the pack and move up or down on their merits.

“From the stock pickers’ side, two things stuck out in the past year,” says Brett Hodess, the head of Americas equity research at BofA Merrill Lynch. “It was still very important to look at macro events in order to see which sectors would be most favored. Then you had to figure out who the winners and losers would be. That was the way to outperform.”

Calculating Correlation

The correlation among S&P 500 companies fell to an average of 0.59 last year, according to data compiled by Westport, Connecticut-based research firm Birinyi Associates Inc. A reading of 1.0 indicates they’re all moving in the same direction by the same amount. In 2011, stocks had moved in unison by the most since at least 1980, reaching a record correlation of 0.86 in October as prices tumbled, according to Birinyi.

Heather Bellini, a software analyst at Goldman Sachs Group Inc. (GS:US) who ranked second in her industry, started coverage of Salesforce.com (CRM:US) Inc. in July 2011, putting the largest maker of customer-management software on Goldman’s buy list. She saw cash flow rising on the continued success of Salesforce’s Sales Cloud -- its core product -- as well as newer offerings such as the Service Cloud customer-support software. The shares fell after her July 12, 2011, buy recommendation and then gained 66 percent in 2012. The stock is up 6.3 perpercent this year as Aug. 14.

Bellini now has buy recommendations on Facebook Inc. (FB:US) and Oracle Corp. (ORCL:US)

Reassessing Private Equity

Credit Suisse (CSGN)’s Chen took a new look at publicly listed private-equity firms, including Apollo Global Management LLC, Blackstone Group LP (BX:US) and Carlyle Group LP. (CG:US) Investors are still struggling to properly value them, he says.

Private-equity firms lock up investor money for as long as a decade while they buy companies, overhaul them and, if all goes well, sell them for a profit. The firms, which use debt to finance the deals, typically charge an annual management fee of 1.5 percent to 2 percent and keep 20 percent of profits from investments.

Valuing the firms had traditionally consisted of a sum-of-the-parts analysis -- marking the value of investments every quarter, according to Chen. He argued in a February 2012 report to change that metric and judge the firms based on their longer-term cash earnings generated from management fees and profits from investments.

‘False Precision’

“To me, sum of the parts has a false sense of precision,” Chen says. “It doesn’t get to the heart of how these companies create value and why they’ve been so successful.”

Apollo and Blackstone were the best positioned in 2012 to deliver the biggest growth in cash earnings, Chen says. He maintained his buy calls on both firms throughout the year. From Chen’s Feb. 7, 2012, note calling for a new valuation methodology, Apollo returned 129 percent as of yesterday’s close and Blackstone, 46.6 percent.

Chen today has buy recommendations on IntercontinentalExchange Inc. (ICE:US) and asset manager State Street Corp. (STT:US)

The top analyst of large-cap banks in the Greenwich Associates/Bloomberg Markets ranking is Betsy Graseck of Morgan Stanley. In one of her best calls, she saw bad news for JPMorgan as good news for investors.

‘Double Down’

On May 18, 2012, eight days after the biggest U.S. bank by assets announced a $2 billion trading loss in the firm’s London chief investment office, Graseck published a note telling investors to “double down” on the shares, which had plunged 27 percent from their March 2012 peak. The trading losses were attributed to Bruno Iksil, known in the market as the London Whale, and ultimately totaled at least $6.2 billion.

“We pounded the table post-Whale,” Graseck says. “The view was that management had the skills to be able to work with the Street and get the portfolio risks reduced.” JPMorgan stock returned 67.6 percent from her May report to yesterday’s close.

Another Graseck winner was Atlanta-based SunTrust Banks (STI:US) Inc., which she upgraded to a buy on July 2, 2012, after digging into data that showed a recovery in the housing market in the Southeastern U.S. SunTrust is the biggest lender in Georgia and has branches in Florida, Maryland and North Carolina. She also saw that SunTrust would benefit from a new wave of refinancing following the extension of the federal Home Affordable Refinance Program, which allows Americans with little home equity to refinance. Shares of SunTrust rallied 42.9 percent from her call to Aug. 14.

Trade Routes

Graseck’s Morgan Stanley colleague Bill Greene ranks No. 1 in transportation. One of his best calls was a sell in March 2010 on Expeditors International (EXPD:US) of Washington Inc., which assists companies in shipping goods across international borders. Most of Expeditors’ business is on trade routes across the Pacific Ocean, especially between China and the U.S. Greene predicted that the company’s growth would stumble as freight flows shifted to emerging markets -- between China and Vietnam, for example. In addition, companies were increasingly near-shoring, or relocating factories and offices closer to headquarters, resulting in fewer international shipments.

“All of these factors were head winds to growth,” Greene says.

Starting in the fourth quarter of 2011, Expeditors’ profits (EXPD:US) missed analysts’ estimates for six straight quarters, sending shares down 2 percent in 2012. They’ve returned 3.2 percent this year as of yesterday.

One-by-One

While judging stocks one by one has become easier, what hasn’t changed since the financial crisis is investors’ demand for research on global investment themes. Analysts now collaborate across industries and regions in order to produce comprehensive reports that identify worldwide trends.

“Companies are competing across traditional lines,” Goldman software analyst Bellini says. “One thing that’s important for us is to make sure we break down the silos that are set up due to the way the industries are covered. This lets us present portfolio managers with research that’s more unified and consistent.”

Bellini teamed up with William Shope Jr., Goldman’s technology hardware analyst, who’s tied for third in his group in the Greenwich Associates/Bloomberg Markets survey, and Michael Bang, a Seoul-based analyst at the firm, on a December report that noted how Apple Inc. (AAPL:US), Samsung Electronics Co. (005930) and Facebook would all benefit from changing trends in how consumers use smartphones and tablets.

Defying the Crisis

Stephen Penwell, Morgan Stanley’s director of North American equity research, says his firm did a report that featured companies whose profit margins had risen even as global economic events such as the European debt crisis had intensified. They included discount chain Dollar General Corp. (DG:US), Dunkin’ Brands Group Inc. (DNKN:US) and Web services firm Rackspace Hosting Inc. (RAX:US)

“Good old-fashioned stock picking is coming back in vogue,” Penwell says. “Clients are beginning to make more bets and bigger bets.”

If investors are looking to make a big bet on AllianceBernstein, Craig Siegenthaler says they’re late to the party. On July 3, he concluded the shares would no longer outperform relative to other asset managers and downgraded them to a hold.

How We Crunched the Numbers

To create rankings of the top U.S. analysts by industry, Bloomberg Rankings worked with Greenwich Associates, a consultant to financial services firms. From December through March, Greenwich Associates interviewed buy-side analysts who use Wall Street research, asking each respondent to list the 10 firms they regarded as the most important sources of information on the industries they cover.

About 60 percent of these discussions were in person; the balance were conducted online. Greenwich Associates interviewed a total of 945 analysts at 190 institutions, including banks, insurance companies, investment management firms, mutual funds, pension funds and hedge funds.

These accounts represent an estimated total of $4.7 billion in commissions, or an average of almost $30 million in commissions per buy-side institution. Participating institutions were placed in seven tiers based on the commissions they generated. The responses of top-tier accounts received the greatest weight.

Greenwich Associates received responses for 58 industries, and we included in the ranking the 34 industries that had at least 45 responses. For the final ranking, Bloomberg Markets researched and added the names of the sell-side analyst or analysts with prime responsibility for tracking each industry.

Commission Weighted

Greenwich Associates listed as many as five winning firms for some industries and as few as two for others. The number of firms selected was a function of their commission-weighted share of the institutional vote. Statistical ties occurred when the difference between weighted shares was small. When the difference between the second- and third-ranked firms was substantial, no No. 3 firm was named.

To contact the reporter on this story: Inyoung Hwang in London at ihwang7@bloomberg.net

To contact the editor responsible for this story: Michael Serrill at mserrill@bloomberg.net.


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Companies Mentioned

  • AB
    (AllianceBernstein Holding LP)
    • $26.14 USD
    • -0.15
    • -0.57%
  • FIG
    (Fortress Investment Group LLC)
    • $7.24 USD
    • -0.18
    • -2.49%
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