The truth behind the investment detectives
Trying to find attractive investment opportunities in today's market environment is no small feat. Indeed, as the Dow flirts with the 11,000 mark, fund managers and analysts the world over are digging ever deeper to unearth valuable information on the companies that they follow.
Of course, 'looking past the numbers', 'kicking the tires' and other in-depth research techniques are not particularly new. But in today's highly competitive environment, many investment professionals are stepping up their behind-the-scenes efforts to secure an information edge over competitors.
Some of the in-depth research includes meeting management face-to-face, visiting the factory floor and talking to suppliers and customers. Yet bottom-up investors are raising the stakes on each other, and some are resorting to the type of clandestine measures that were once the hallmark of Cold War spies and James Bond movies. Being a successful analyst in today's world may involve going undercover.
While it's true, or at least presumed true, that analysts are not packing secret pen-cameras, exploding briefcases, or oil slick-producing cars, many professional investors are increasingly keeping tabs on corporate itineraries, weekend activity in the executive suites, and competitors' viewpoints.
Some of the stories floating around the investor relations water-cooler do sound dramatic, though perhaps not quite the stuff suspense novels are made of. Rumor has it, for example, that when UBS and Swiss Bank Corporation were merging, the SBC investor relations team was forced to take combat positions. Over the weekend, they hunkered down in the office to screen incoming calls, avoiding those that came from analysts by monitoring the numbers on the caller-ID display. Because the announcement was planned for the Monday, analysts and journalists were scrambling for any morsel of pre-press release news they might be able to get their hands on.
In another case of counter-surveillance measures, Chrysler executives purportedly hired actors to pose as Korean-looking executives. The actors were sent to the US headquarters of Chrysler in Korean-made cars in order to confuse any spying analysts and throw them off the trail of merger talks with Germany's Daimler Benz.
No show
Unfortunately for Asian-American actors in Michigan hoping for a boom in auto-related assignments, 'Operation Daewoo' was never really hatched. Lutz Detz, director of IR for DaimlerChrysler, insists there were no actors, no Korean cars, and presumably no unmarked vans full of analysts with sophisticated monitoring equipment on hand to record the bogus event. 'We did have some of our executives visit Ford's headquarters,' says Detz. 'And this was to add some confusion for journalists and other interested parties. But there were no Korean actors.'
As for the UBS/Swiss Bank story, Jurg Erissman, director of investor relations for UBS, says it is simply not true. It had become known that preparations for the announcement were under way over the weekend, although the company had made every effort to keep news of the merger under wraps. However, Erissman says, the only people who were calling over the weekend were journalists. 'Analysts don't have my home number, and the news of the merger was released according to plan.'
Digging deep
Still, many analysts and portfolio managers are pushing the envelope when it comes to fundamental investment research. 'When you're doing your own original research it's necessary to get out there and really dig around,' says Heartland Advisors' president William Nasgovitz, who co-manages the firm's Heartland Value Fund. 'You're relying on yourself to get a better handle on the companies.'
Nasgovitz says the companies he invests in tend to be fairly small, with a median market cap below $100 mn. 'We started going to trade shows, for example, a couple of years ago – not the standard investment conferences, but the actual trade shows where you find customers and the competition. We go to the booths and talk to the salespeople. We get a sense of the business by talking to customers, competitors and suppliers. We've gotten a lot of our ideas by talking to suppliers and competition to get an idea of how they admire companies they deal with,' says Nasgovitz.
Searching creatively for investment ideas is nothing new to Michael DiCarlo, co-founder of DFS Advisors and a long-time proponent of intensive fundamental research. DiCarlo says that many of his investment ideas arise from industry sources in addition to in-depth financial research.
'I would say we get at least 70 percent of our investment ideas during the due diligence process, so that looking at one company leads us to another. I think good leads come from everywhere,' adds DiCarlo. 'It's a question of keeping your eyes and ears open.'
Information premium
While the intensive research DiCarlo and Nasgovitz practice is gaining currency among investment professionals, some investors believe the value of information that's available has been cheapened by the advent of the internet. 'I think this has become a market of stories,' says DiCarlo. 'If you look at the stocks that are moving, you realize a lot of it is being driven by the information that is on the internet. Whether the information is good or not is questionable. But people aren't sure if it's good, and they're buying into it anyway.'
DiCarlo says that he hasn't changed his position on the value of original information, however. During the research process, he talks to everyone he possibly can, including factory level employees, customers and suppliers. 'Any credible money management firm pays attention to industry trends and the companies,' he comments.
Aymeric de Villaret, an award-winning French oil analyst with SG Securities, pays attention to the companies he follows with particular zeal. He says getting inside French and other European companies and talking to lower level management can be difficult, but the effort is worthwhile, especially because of the value he places on speaking with a cross-section of employees. 'Many companies will organize field trips for analysts, allowing us to see people at the lower level. Often they're more aware of what's going on, or more willing to discuss certain things. Senior management may just tell you what they think you want to hear,' says Villaret.
But while DiCarlo and Nasgovitz describe most executives as willing to allow them to meet with lower-level managers, Villaret finds this is not often the case in Europe. 'Sometimes, when we go on these industry field trips and meet these people, we'll exchange business cards and then we'll contact them ourselves.'
Counter measures
The question facing IROs is what level of cooperation they should extend to managers. Certainly, in the case of material information, the duty is to ensure that it reaches the market through the appropriate channels.
According to Scott Rosenblum, director of finance at Lycos, most of the questions he receives from investors are fairly standard. However, he does notice more and more investors trying to research other companies through him. 'If there is a public company out there that is supplying us with some form of technology – software or hardware – we definitely have had analysts give us a call to find out how those relationships are going.'
In many cases, IROs may not even be aware of the efforts being made to extract information concerning their company. Ralph Allen, VP and director of IR for ITT Industries, says investors regularly attend trade shows as part of their research, but their work often takes them beyond the shows, including efforts to reach employees. 'I know that some of the better analysts make an attempt to get to know our operating people. Sometimes the attempts are not so above board,' he says.
Allen cautions other IROs to provide educational tips to their people out in the field. 'They may be approached by some person who flatters them and talks to them about the industry very knowledgeably,' he warns. 'These people can extract a lot of valuable information from the uninitiated.'
Then there was the experience of Allen's wife aboard an airliner. 'She was seated next to an analyst who found out she was married to me. The analyst was quizzing her on ITT,' he explains. 'But she knew not to convey the sort of information he was looking for.'
Can IROs, factory-level employees, and spouses ever elude determined analysts or fund managers completely? Michael DiCarlo thinks not. As he points out: 'There's always a way to find out what you want to know.'