Profiles of the professionals
DAVID SMITH, portfolio manager on the small cap growth team at Loomis Sayles & Co ($62 bn under management), was formerly a portfolio manager at Keystone Investments and an analyst with Fidelity Investments.
Co-managing a $150 mn small cap growth fund, Smith starts with the 3,000 US companies between $100 mn and $1 bn in market cap. He reduces that pool to 1,600 $250-$750 mn companies because many smaller company stocks are very illiquid, then narrows it down further to companies with earnings growth of 20 percent - not value plays or turnaround companies, just good growers. That leaves around 500 companies on his radar screen.
'We try to invest in companies that are just starting on their growth. Typically these are companies that have a vision - a Staples early on in its career, maybe a Boston Federal, buying back stock, looking very attractive - companies from just about any industry. I'm a generalist, with broad exposure, generally to companies that offer new products or services. Although we're generally very savvy and interested in technology, we invest in non-tech too. Finally, we want to make sure that our companies have outstanding management, that they're stakeowners too, typically with 5 percent ownership.
One of the biggest jobs I have is to stay focused; I constantly get barraged with calls from the sell-side, saying, We have a report out right now. In earnings reporting period, sometimes I can have simultaneous conference calls going on different speaker phones. It's a challenge going back and forth, trying to ask questions. There's a risk of being drawn from my primary focus on our 50-60 names.'
Pet peeve: Managing whisper numbers. 'As shareholders, we want to make sure our companies continue to beat expectations. But if they don't give adequate guidance on their true growth rate potential, they lose control of the whole process, and the investor is extremely frustrated. Some companies consistently grow 20-40 percent, yet they disappoint and get cut in half because they beat the official numbers but not the whisper numbers. IR has to control that process.'
IR tools: 'Do you have a web page updated daily, not just for institutional but for retail investors too? If they're with Fidelity, Ameritrade or other electronic brokerage houses, they can get a discount on large transactions; clearly more individual investors are going to eventually want to buy your shares directly, circumventing Wall Street. Are you prepared? It's only about two years away.
I have three bullet points when I first look at companies: Will they beat the numbers? Is the management team credible? Is there a big market opportunity? Then I keep score.
URSELA MORAN is a senior research analyst at Sanford Bernstein in New York following specialty hard-good retailers. She began her career 'in the trenches' at Bloomingdale's - a background she says is typical of Bernstein, which tends to hire analysts from the industry they cover.
Sanford Bernstein is a research and investment management firm ($70 bn in assets) that has always been known as a value manager, focusing on down-and-out companies. Moran says that's changing, especially on the sell-side, to encompass more styles.
'Where a portfolio manager is a generalist, I'm a specialist. I have ten companies in my coverage, and ultimately that will be 20 - a far cry from having to worry about hundreds of companies. I get paid to know basically everything there is to know about the companies I cover. For example there is nothing about Staples that I'm not curious about; there's nothing I'm not interested in.'
IR function: 'Many of us see the IRO as a gatekeeper, a provider of information. A good investor relations person can also add a lot to the color, perspective and understanding. But sometimes IR people can be seen as obstacles, as what stands between us and senior management. Ultimately, senior management is the most important position, and it's important the investor relations person trust senior management. If you don't, it's going to come across to the sell-side.'
Do's and Don'ts: 'I want guidance when I call an IRO. It's fair and reasonable. However I do not want an IRO who thinks that I'm going to completely suspend my own judgement or turn off my brain during the conversation. I can't second guess you on some things, but I'm not always going to take what you say as gospel truth. The best kind of conversation is a dialogue, going back and forth and sharing ideas.
I very much value suggestions of additional sources to pursue, whether they're trade sources or any others you might be in contact with, helping you understand your industry and competitors.
Keep analysts informed about important events, especially presentations or big things that are likely to move the stock. That's one of the things we can waste a lot of time on: the stock moves for some reason and people wonder what's going on. It may be something as trivial as a presentation at a conference, and it would just be easier if we knew what was happening. The internet can be used for that kind of information.
Don't fail to follow up: if you say you'll call somebody, do it.
Don't invest energy in trying to sugarcoat bad news: you'll have more credibility if you say it than trying to put the best possible spin on it. Don't assume I'm going to forget you were saying double digits three months ago and now it's low negative numbers - that's a change and I'm going to pick up on it.
No matter what, don't ever lie - we will figure it out soon. I take it as a personal challenge that the less a company will tell me, the more motivated I am to find out. If you say I can't discuss that, I can respect that. It doesn't mean I won't try to find it out. But if you tell me something that's not true, well that's it. Credibility is absolutely imperative in this business. Certainly, if your senior management doesn't understand that, there's just no upside.'
STEVE FRANKEL is managing director and director of research at Adams Harkness & Hill, a Boston-based investment bank with a research strength. AH&H focuses on emerging growth stocks: technology, healthcare and consumer. The firm's research department has 18 analysts covering 100-150 companies.
Frankel points out that the normal portfolio manager has 100-150 stocks in his portfolio. Another 100 he's familiar enough with for the analyst to call him up and say 'You've got to see XYZ Company. It's a great story.' The IR challenge is to get on that list of 'must-sees'.
'Get on that list, be a known entity. Either you're on the radar screen, or your company will crap out and have to earn its way back. Be on that shortlist, and investors can read more, understand more, know more fundamentals. They can get comfortable enough to not sell their stock if bad things happen to buy into those downturns.
Whatever the news is, it's important to get the sell-side analyst in the loop. I've got the salesforce to go out, make the calls, figure out who's going to move the stock. It's a very efficient process.
Manage expectations, but don't micro-manage them. Let's talk about the general shape of the curve, the trends, and let me figure out where the numbers are. I like to say, I own the numbers.
We need to have a dialogue. But there is a problem with whispered earnings estimates: you can't raise your numbers - I won't let you raise your numbers. If you raise your numbers, I'm going to tell the buy-side you don't know what you're talking about.'
Pet peeve: 'Companies that favor analysts with BUY recommendations get their calls returned, their questions answered all the time. But not if you're a troublemaker. What can happen then is you double down your effort and get even better information.'