BEN MATTLIN
INSTITUTIONAL INVESTOR, October 2004
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THE 2004ALL-AMERICA RESEARCH TEAM

The BESTanalysts of theYEAR

…Contributing Editor BEN MATTLIN wrote the [following] sector reports.

 

BASIC MATERIALS

 

Chemicals/Commodity

DONALD CARSON

Merrill Lynch

SECOND TEAM Sergey Vasnetsov

Lehman Brothers

THIRD TEAM P.J. Juvekar

Smith Barney Citigroup

RUNNERS-UP Andrew Cash UBS;

Robert Koort Goldman Sachs;

William Young CSFB

It pays to talk to pesticide retailers. Merrill’s Donald Carson did, and they told him that agricultural chemicals and seed giant Monsanto Co. was about to cut the price of its popular herbicide Roundup. So Carson, 50, the top-ranked analyst for a second consecutive year, upgraded the shares to a buy in August 2003 at 22.69; by mid- September this year, following a drop in Roundup’s price, Monsanto shares had zoomed to 35.42. “Carson is an original value-added researcher, as well as a master stock picker,” says an investor. His June 2004 buy on Lyondell Chemical Co. at 16.08 — based on a limited supply of ethylene, used in auto products such as antifreeze — also proved well timed. By mid-September the petrochemicals and polymer maker had advanced to 20.16. Lehman’s Sergey Vasnetsov rises a notch to second place. A long-term buy on Calgary-based Nova Chemicals Corp., a small-cap petrochemicals producer, enriched his customers. Vasnetsov argued in August 2002 that global economic recovery would boost industrial demand for ethylene. And, as a low-cost ethylene producer, Nova was likely to see more bottom-line benefit than its rivals. The shares improved from 20.49 that August to 26.95 at year-end 2003 before catapulting to 35.43 in mid-September. “He understands the big picture, as well as the nuts and bolts,” declares an advocate. After slipping to runnerup last year, Smith Barney Citi’s P.J. Juvekar again takes third place. Voters say they admire his “honest, independent views” and his “nimble stock calls.” In July 2003, Juvekar recommended diversified behemoth Dow Chemical Co. at 34.35 based on its cost-cutting. In December, after it hit 41.49, he lowered the stock on valuation concerns. Then in mid-August, Juvekar upgraded Dow again, at 38.95. By mid-September it had jumped to 42.40. “He’s not afraid to call ’em like he sees ’em,” says a supporter.

 

Chemicals/Specialty

ROBERT KOORT

Goldman Sachs

SECOND TEAM Robert Ottenstein

Morgan Stanley

THIRD TEAM David Begleiter

Deutsche Bank Securities

RUNNERS-UP Jeffrey Cianci UBS;

John McNulty CSFB; Jeffrey

Zekauskas J.P. Morgan Securities

Before arriving on Wall Street, repeat first-teamer Robert Koort of Goldman Sachs designed factories for Houston-based Vista Chemical Co. “That experience gave me some advantages in understanding the companies I cover,” says Koort. These days the analyst impresses clients with his “formidable stock insights,” as one investor says. Among the 36-year-old analyst’s smart calls: an April upgrade to outperform of Great Lakes Chemical Corp., a maker of adhesives and other consumer products, on its margin improvements and cost-saving efforts. The shares had jumped from 22.87 to 26.09 by mid- September. Investors appreciate, too, a July electronic-chemicals conference Koort organized in San Francisco. “We got to meet actual operating personnel on the cutting edge of the industry, not just the usual CEOs,” comments a grateful attendee. A “global awareness” helps Morgan Stanley’s Robert Ottenstein retain the second seat. Buy-siders highlight a series of “provocative” reports throughout 2003 recommending Praxair, which produces industrial gases and coatings used in turning iron ore into steel, as a beneficiary of China’s ballooning demand for metals; the metals industry is one of Praxair’s primary end markets. The shares soared from 27.71 to 37.75 last year and by this September had reached 42.26, though some of the enthusiasm for China-related plays has cooled. “He didn’t take profits but stuck to his story,” says a grateful client. Advancing from runner-up to third is Deutsche Bank Securities’ David Begleiter. The analyst earns praise for a March upgrade of Cytec Industries, a producer of chemicals used to treat metals employed in manufacturing airplanes, as undervalued at 33.10. By September the shares had skyrocketed to 48.76. “He’s tuned in,” says a customer. Though the sector advanced by 38 percent last year, it was up by only 5.36 percent, on average, in 2004 through mid-September.

 

Metals & Mining

MICHAEL GAMBARDELLA

J.P. Morgan Securities

SECOND TEAM Anthony Rizzuto Jr.

Bear Stearns

THIRD TEAM Peter Ward Lehman Brothers

RUNNERS-UP Wayne Atwell Morgan

Stanley; Daniel Roling Merrill Lynch;

John Tumazos Prudential Equity

Metals stocks shone last year, gaining 75 percent, in part because of massive demand from Chinese companies and state agencies. For “sticking with the winning names,” Michael Gambardella of J.P. Morgan claims the top slot for a third consecutive year. In August 2003, Gambardella, 47, upgraded Century Aluminum Co., an aluminumreduction holding company, from underweight to overweight at 8.90, convinced that the Monterey, California–based company would benefit as aluminum became an attractive alternative to steel, whose price had already skyrocketed. In February, when the analyst reduced the shares to neutral on valuation, they were at 27.55. The stock fell to 23.81 by July, at which point Gambardella again upgraded because of Century’s pending purchase of a new refinery. By mid-September the stock had climbed back to 25.72. (Metals stocks had fallen by 2 percent in 2004 through mid-September.) The analyst also wins praise for his February endorsement of Allegheny Technologies, a producer of specialty steels, on its proposed purchase of J.&L. Specialty Steel. The stock catapulted from 10.55 to 19.64 by mid-September. Anthony Rizzuto Jr. of Bear Stearns takes second for a third year running. He impresses clients with his detailed supply-and-demand analyses. He named Freeport-McMoran Copper & Gold his top pick for the year in January 2003 on rising copper and gold prices and Freeport-McMoran’s status as the world’s lowest-cost copper miner. The shares had jumped from 18.88 to 37.22 as of mid-September 2004. An early bullish view of copper prices also helps push Lehman’s Peter Ward up a notch to third. The analyst is especially commended for a May 2003 upgrade of copper producer Phelps Dodge Corp. as a bargain at 31.24. By September 2004 the stock had climbed to 83.15.

 

Paper & Forest Products

MARK CONNELLY

CSFB

SECOND TEAM Chip Dillon

Smith Barney Citigroup

THIRD TEAM Richard Schneider UBS

RUNNERS-UP Peter Ruschmeier

Lehman Brothers; Mark Wilde Deutsche

Bank Securities

Repeat first-teamer Mark Connelly of CSFB impresses clients by “not recommending too much,” as one constituent puts it. Last year he was surely tempted as paper and forest products stocks surged by nearly 31.96 percent, outstripping the S&P 500 index by 5.57 percentage points; this year through mid-September, they were down 0.39 percent, versus a 1.5 percent gain for the benchmark. Clients were especially pleased with the the 41-year-old analyst’s downgrades of newsprint producers Abitibi-Consolidated at 7.00 and Bowater at 41.50 this May and June, respectively, on softness in the newsprint market. By September they had fallen to 6.09 and 37.20, respectively. “He never hypes the companies,” says a customer. One buy-sider appreciates Chip Dillon’s “vast knowledge,” and another touts his “unusual perspective.” The Smith Barney Citigroup analyst, who repeats at No. 2, “suggests ideas we weren’t thinking about,” says a fund manager. He first tagged Kimberly-Clark Corp., a toilet- and tissue-paper maker, in December 2002 at 46.60 based on the appointment of a new management team. Dillon continued recommending it, and by September 2004 it had climbed to 66.62. Investors also laud Dillon’s “detailed analyses” of Louisiana-Pacific Corp., a homebuilding supplier he has favored since December 2000 at 7.75, when it started to cut its heavy debt load, leading to steady increases in earnings. In mid-September 2004 the shares were at 25.50. Keeping clients “ahead of events,” as one investor puts it, helps boost UBS’s Richard Schneider from runner-up to third. In October 2003, Schneider pushed corrugated packaging and forest products company Temple-Inland at 50.65 on improving box and lumber volumes. By September 2004 the stock had leapt to 65.79. “He sees the forest for the trees," quips a client.

 

CAPITAL GOODS/INDUSTRIALS

 

Aerospace & Defense

Electronics

STEVEN BINDER

Bear Stearns

SECOND TEAM George Shapiro

Smith Barney Citigroup

THIRD TEAM Joseph Campbell Jr.

Lehman Brothers

RUNNER-UP Heidi Wood Morgan Stanley

In September 2003, Bear Stearns’ Steven Binder suggested that investors be “sanguine” about the U.S. defense budget: Despite projected cutbacks, military spending would remain high enough to keep contractors busy for at least the next couple of years. “Though stocks were down, he said to stay with the better defense names,” recalls one client. The 46-year-old analyst, a first-teamer for six years running, was on target. Defense spending held, and the subsector ended 2003 up by 5.6 percent before rising by an additional 15.7 percent this year through mid-September. Binder’s top defense pick was DRS Technologies, a smallcap surveillance electronics supplier that he recommended in January 2003 at 26.75 because of rising revenues and a solid book of business. By mid- September 2004 the shares had surged to 38.79. Binder, however, mostly missed the huge rally in aerospace stocks during 2003 — the group rocketed 46 percent higher, then climbed an additional 13.3 percent this year through mid-September. Threetime second-teamer George Shapiro of Smith Barney Citi impresses one customer as “honest and experienced.” Still, Shapiro’s bearish view of aerospace stocks, owing to pervasive airline industry weakness, and defense shares (he believed that public support for defense spending was softening) didn’t pan out last year. Shapiro’s more recent selection of Lockheed Martin Corp. has paid off, however. He contended that a “trading rally” would help the advanced-technology suppliers’ undervalued shares. From his March call at 45.50, the stock had jumped to 54.67 by mid-September. Lehman’s Joseph Campbell Jr. advances from runner-up to third place. Investors hail his series of reports favoring United Defense Industries, a maker of combat vehicles and artillery, partly for its steady cash flow. Recommended at 20.00 in January 2002, shortly after its initial public offering, the stock soared last year from 23.30 to 31.88; it reached 40.00 by mid-September 2004. Campbell possesses “the experience that adds value,” says a client.

 

Airfreight & Surface

Transportation

EDWARD WOLFE

Bear Stearns

SECOND TEAM James Valentine

Morgan Stanley

THIRD TEAM Scott Flower

Smith Barney Citigroup

Bear Stearns’ Edward Wolfe is “fair and independent,” says an investor. And he’s certainly not swayed by the firm’s investment bankers. In December 2003 the 38-year-old repeat first-teamer advised clients to steer clear of tanktruck operator Quality Distribution’s initial public offering — which Bear Stearns had underwritten the previous month — because he thought the stock was overvalued at 19.41 relative to its peers, particularly in light of its small capitalization. He further downgraded the shares in February at 18.67 after the company took a $16 million charge and said it would restate three years of earnings when it publicly alleged that a former manager of its insurance unit had improperly collected premiums on lapsed policies. In May the shares dropped to 9.24, at which point Wolfe upgraded them. But in August he downgraded again, at 10.66, when Quality missed quarterly earnings estimates for a third straight time. By mid-September the stock had plunged to 6.20. “I have always prided myself on independent, unbiased work,” Wolfe says. Climbing a rung to second is Morgan Stanley’s James Valentine, who is credited with first-rate access to management; several respondents cite last fall’s CEO dinner cruise in Chicago where investors met industry leaders “in a relaxed, informal setting,” recalls one attendee. Others single out Valentine’s long-standing endorsement of Canadian National Railway Co., which consistently ranks at the top of his shippers survey. Originally pegged in May 2002 at 33.33, the shares sagged before taking off — chugging from 27.70 in January 2003 to 47.35 by mid- September 2004. “He’s a full-service analyst,” says a client. Smith Barney Citi’s Scott Flower advances from runner-up to third. Customers prize his “savvy stock picking.” After backing Union Pacific Corp. in March 2003 at 51.34 based on its free cash flow, he downgraded the U.S. railroad in January, locking in a nice profit for investors at 69.29. By mid- September the stock had sunk to 59.26.

 

Machinery

DAVID RASO

Smith Barney Citigroup

SECOND TEAM Gary McManus

J.P. Morgan Securities

THIRD TEAM Joel Tiss Lehman Brothers

RUNNERS-UP David Bleustein UBS;

Ann Duignan Bear Stearns; John

McGinty CSFB

Smith Barney Citi’s David Raso “will go to any length to uncover values,” says one appreciative investor. Last spring the four-time first-teamer flew to Germany to sit down with two construction-equipment suppliers, Demag Cranes & Components and Schaeff- Gruppe, to verify that they could generate the cash flows promised to make their acquisition by Connecticut’s Terex Corp. work. Convinced, Raso in April upgraded Terex at 12.36. By mid-September 2004, Terex shares had more than tripled, to 40.05, in part owing to gains made through the purchases. A survey of distributors that Raso conducted in summer 2003 suggested that auto components maker Eaton Corp. would see a nice uptick in demand, so Raso, 34, put a buy on the stock at 43.97 that August. By September 2004 it had jumped to 62.68. In an era when sell-side analysts’ stockselection skills are widely derided, “Raso’s good at picking moneymakers,” says another client. Gary McManus of J.P. Morgan advances a rung to second, aided by his counterconsensus downgrades. For example, he stepped back from Navistar International Corp., a truck builder, in March at 46.49, based on investors’ declining confidence in the economy plus the prospect of higher interest rates; he had backed the shares in May 2001 at 26.38 as undervalued. Navistar shares were at 37.69 in mid-September. Grateful readers also compliment McManus’s “comprehensive” 164-page “Global Truck Outlook.” Making his category debut (he was No. 2 in Packaging in 2000), thirdteamer Joel Tiss of Lehman earns praise for a March 2003 upgrade of Parker Hannifin Corp., a control-systems colossus, at 36.46 on valuation. By mid-September 2004 the shares had climbed to 58.42. Tiss also gave buy-siders an early heads-up in February that China’s voracious demand for heavy machinery was beginning to wane as the government put the brakes on the surging economy. “He was right,” recalls an investor.

 

Packaging

GEORGE STAPHOS

BofA Securities

SECOND TEAM Ghansham Panjabi

Lehman Brothers

THIRD TEAM Amanda Tepper

J.P. Morgan Securities

RUNNERS-UP Mark Connelly CSFB;

W. Edings Thibault Morgan Stanley

BofA Securities’ George Staphos, who advances to the top rank for the fifth time after slipping to No. 2 last year, is prized for his accessibility. “He’s even given me his home number,” explains one buy-sider who tries not to use it too often. Staphos has favored rigid packagers, especially can maker Ball Corp. at 23.00 in July 2003 on its growing earnings and discounted valuation and Owens-Illinois, a glass-container producer, at 11.33 this February because of its planned acquisition of European competitor BSN Glasspack. By September 2004 the stocks had jumped to 36.43 and 15.65, respectively. The 39-year-old analyst is “extremely knowledgeable and competent,” says one client. When Ghansham Panjabi, who climbs a rung to second, launched sector coverage in November 2002, he named Pactiv Corp., a specialty- and flexiblepackaging manufacturer, as his top pick at 20.00. The Lehman analyst has backed it ever since as underpriced because of investor concerns about the impact of rising oil prices on its raw materials costs; by this September it had bubbled to 23.68. Customers commend his weekly e-mail brief as a “quick read,” and a timepressed client says his occasional voice-mail messages are “well organized and never exceed one minute.” Debuting in this sector at third is J.P. Morgan’s Amanda Tepper, who started monitoring packaging stocks last December. Also ranked No. 2 in Environmental Services, she’s a “quick study,” says an investor, who hit the ground running with an overweight on can supplier Crown Holdings (formerly Crown Cork & Seal Co.) at 8.63 on its pricing power. By September the shares had popped to 10.01. A July nod to Silgan Holdings, a metal- and plastic-container provider, on a price dip also proved timely; it had risen from 39.50 to 45.83 by mid-September. Tepper “zeroes in on what’s important,” insists a customer.

 

MEDIA

 

Cable & Satellite

RICHARD BILOTTI

Morgan Stanley

SECOND TEAM Aryeh Bourkoff UBS

THIRD TEAM Vijay Jayant

Lehman Brothers

RUNNERS-UP Niraj Gupta Smith

Barney Citigroup; Raymond Katz

Bear Stearns; Craig Moffett Sanford

C. Bernstein; Douglas Shapiro

BofA Securities; Lara Warner CSFB

Adetailed and provocative July report on cable operators’ return on invested capital, says an investor, is typical of the “thinking person’s analyst,” Richard Bilotti. The Morgan Stanley researcher’s 278-page tome, “Show Me the Money,” argued that Cox Communications, for one, would do well to return excess capital to investors through dividends or share repurchases. Bilotti, 42, who ruled the Cable sector for six years before winning this combined category last year (he’s also No. 2 in Entertainment), had favored Cox since May 2000 at 39.81, only to see it fall to 28.15 in July 2004 despite having paid down its debt. But in August, Cox’s majority shareholder, Cox Enterprises, got with the program: It initiated a $32-a-share buyback offer, and by mid-September the stock had improved to 33.08. UBS’s Aryeh Bourkoff, a veteran fixed-income analyst who added equities to his coverage in 2002, climbs from runner-up to second for providing a “broad perspective on every company’s capital structure,” says a customer. His bond expertise informs his equity views: Seeing Charter Communications’ bonds trading at a steep discount to fair value, Bourkoff in July advised selling the stock; it fell from 3.49 to 3.04 by mid- September. Clients also praise Bourkoff’s August 2003 analysis of cable companies’ competition against regional telecommunications companies. “His analyses give the complete picture,” says an investor. Vijay Jayant, who moved to Lehman in May 2003 from Morgan Stanley (where he was No. 1 in the thenseparate Satellites category in 2000), takes third. In June 2003 he upgraded DirecTV Group (then Hughes Electronics Corp.) at 12.78, citing cost and capitalexpenditure reductions. The stock sailed to 18.20 in late May before slipping to 16.75 in mid-September. “He held on too long,” says a client, “but his arguments were sound and might still prove right.”

 

Entertainment

JESSICA REIF COHEN

Merrill Lynch

SECOND TEAM Richard Bilotti

Morgan Stanley

THIRD TEAM Spencer Wang

J.P. Morgan Securities

RUNNERS-UP William Drewry CSFB;

Raymond Katz Bear Stearns; Anthony

Noto Goldman Sachs; Thomas Wolzien

Sanford C. Bernstein

In early 2004 a lot of investors bailed out of Pixar shares when the digitalanimation pioneer revealed that it wasn’t likely to ink a new distribution deal with Walt Disney Co. However, Merrill’s Jessica Reif Cohen, who first backed Pixar in December 1997 on the box-office prospects for its sequel to megahit Toy Story, told her clients to sit tight with Steven Jobs’s company. After dropping from a January 30 high of 69.00 to as low as 60.60 on February 5 (even at that level a pretty fair return on Cohen’s original call at 22.00), Pixar broke through to 79.97 in mid-September. Tops for the tenth consecutive year, Cohen, 48, explains that Pixar is worth holding on to because it has “an amazing track record in the most profitable portion of the entertainment business.” Cohen also is praised for a seminar series last spring that gave clients “access to key operational people” at entertainment companies. “These are sources we don’t get from anyone else,” says an impressed investor. For the fifth year running, Morgan Stanley’s Richard Bilotti comes in second. (He’s No. 1 in Cable & Satellite.) “He’s always got something interesting to say,” says a portfolio manager. Backers point to a June report, “Why We Are Not Overweight Viacom,” for highlighting the media company’s poor returns on invested capital. Rated equal weight since February 2003 at 37.35, Viacom had dropped to 34.46 by mid-September. An investor raves about the “creative proprietary research” of Spencer Wang, a J.P. Morgan analyst debuting on the third team. Wang’s semiannual survey of America Online users suggested that consumers would pay up for broadband service, “which ultimately led to the conclusion that AOL’s broadband strategy is viable,” says a client. Wang has stuck with his endorsement of AOL parent Time Warner since July 2002. It had gained about 20 percent by mid-September 2004.

 

Publishing & Advertising

Agencies

LAUREN RICH FINE

Merrill Lynch

SECOND TEAM Alexia Quadrani

Bear Stearns

THIRD TEAM William Drewry CSFB

RUNNER-UP William Bird Smith

Barney Citigroup

In a lackluster period for newspaper advertising and circulation, Merrill’s Lauren Rich Fine earned investors’ gratitude — and a second consecutive first-place finish — by rightly remaining cautious on the group. Last year newspaper stocks gained 10 percent but lagged well behind the S&P 500 index’s 26 percent rise; this year through mid-September, publishers have lost 5 percent versus the broader market’s 1.5 percent gain. Fine, 44, who has tracked the industry since 1988 and held the top spot for five years in the formerly separate Advertising Agencies & Marketing Services category, has turned out to be a “good stock picker,” says a client. Her astute recommendations include Washington Post Co., because of its diverse revenue sources including Newsweek Magazine and the Kaplan test-preparation business. At 891.90 in mid-September, the stock had risen 55 percent since her March 2002 call. She was also on target with a January downgrade of Torontobased business-information publisher Thomson Corp. at 36.37, after it had climbed from 26.73 at the start of 2003. In September it was down to 34.14. Leapfrogging from runner-up to second, Bear Stearns’ Alexia Quadrani is “incredibly well plugged in,” asserts an investor. Example: a July note reiterating support for radio ratings company Arbitron at 34.58, despite its loss of a big client, Infinity Broadcasting Corp. Quadrani argued that “a new contract is achievable,” and sure enough, a month later the two rejoined. Arbitron had surged to 37.63 in September. Quadrani has “the courage of her convictions,” says a follower, citing her March warning about “poor financial controls” at ad agency Interpublic Group of Cos. The shares had dropped by a third by mid-September. William Drewry of CSFB, who slips a step to third, “hung on to newspapers too long,” says a client. Only in July did Drewry lower ratings on New York Times Co. and Knight-Ridder, after 12 months of flat performance. On the upside, he pushed financial data company FactSet Research Systems in March at 40.41; it had risen to 44.70 by mid-September.

 

Radio & TV Broadcasting

VICTOR MILLER IV

Bear Stearns

SECOND TEAM William Meyers

Lehman Brothers

THIRD TEAM Andrew Marcus

Deutsche Bank Securities

RUNNER-UP Paul Sweeney CSFB

Broadcasting stocks tend to rise every four years in anticipation of the improved television viewership that accompanies the Summer Olympic Games and the U.S. presidential elections. But timing the rally isn’t always easy. Three-time winner Victor Miller IV of Bear Stearns has had an outperform on the group since September 2002, catching the phenomenal 31 percent rise in TV stocks and 26 percent gain in radio in 2003. Through mid- September 2004, however, Miller has remained a bull as those groups have lost 26 percent and 27 percent, respectively. That doesn’t trouble the investors who most value the 40-year-old analyst’s “experienced, long-term perspective,” says a buy-sider. They also applaud his long-standing endorsements of radio broadcasters Cumulus Media, on its rising free cash flow, and Radio One, which targets African-American audiences and is expanding into cable TV. Cumulus rose nearly 50 percent in the 12 months through January, only to drop into the losing column by mid-September; Radio One had a nearly identical early run and was flat by mid- September of this year. William Meyers of Lehman climbs a place to second with “hype-free, fact-based opinions,” says a client. Meyers downshifted in July 2003 after radio broadcasters had advanced by 12 percent on average for the year, because advertising was slow to recover and companies’ return on invested capital was poor. “That was early, but now it seems prescient,” says a customer. By mid-September 2004 his radio group had plunged 16 percent. Deutsche Bank’s Andrew Marcus, who slips one rung to third, is “fearless in the pursuit of long-range quality,” observes a client. He’s praised for sticking with his 2002 downgrades of TV network Paxson Communications Corp. at 3.39 and local-station operator Granite Broadcasting Corp. at 2.20 because of their burdensome debts. Paxson was down to 1.81 in mid-September 2004; Granite, delisted from the Nasdaq small-cap market on August 5, 2004, had slipped to 21 cents.