Goldman Sachs is the big winner in the inaugural annual Financial Times/StarMine rankings of best equity analysts.
In each region, awards are presented to the top three stock pickers and earnings estimators in each industry, to the top 10 stock pickers and earnings estimators overall, and to the 10 brokerage firms that have won the most individual analyst awards. The Top Global Broker award goes to Goldman Sachs, which racked up the most individual analyst awards across the world.
As the credit squeeze has put investors’ nerves and portfolios under severe strain, research has experienced a resurgence in importance that looked unlikely after the Enron-era research scandals, the FT says. But the very conditions that have given research new-found prominence have also made the analyst’s job more difficult.
A striking feature of the StarMine results is that the US and European analysts who performed best in the changing markets of 2008 were less likely to be from “bulge-bracket” investment banks that have the most financial muscle.
In Europe, for example, six of the top 10 earnings forecasters and eight of the top 10 stock pickers came from independent regional firms, often covering medium and small cap companies.
Indeed, Europe’s top five stock pickers came from CA Cheuvreux, KBC Securities, Natixis Securities, Carnegie Investment Bank and Öhman Fondkommission.
Cheuvreux’s Philipp Bumm, rated Europe’s best stock picker, earned his status with bold calls on Q-Cells, the German solar panel company, and the renewable energy companies CropEnergies and Conergy.
The US displayed a similar pattern, with five of the top 10 stock pickers coming from outside the bulge bracket.
Analysts from firms such as the San Francisco-based boutique JMP Securities, Simmons & Company, an investment bank specialising in the energy sector, and Sterne, Agee & Leach, a century-old privately-held investment bank, outperformed colleagues from household names such as Credit Suisse, UBS and Morgan Stanley.
However, bulge bracket firms took seven of the top 10 spots in the overall US league table, which adds up all the awards won by each firm – a sign that size and breadth of coverage are still an important part of a bank’s research arsenal.
Big banks also dominated the overall table in Asia, a reflection of the fact that the region still lacks a robust breed of independent investment firms.
Nevertheless, Terry Smith, former head of UK research at UBS Phillips and Drew and chairman of Collins Stewart, the UK stockbroker, says the good showing by independent firms is evidence that the tighter conflict of interest rules that followed the Enron-era excesses have “neutered” bulge bracket firms.
“Their greater degree of compliance has cut them off from market intelligence. The bulge bracket also attracts more ‘me-too’ analysts who produce formulaic research,” he says. “[Independent firms] are just clearer about what analysts can do. It’s not that the people in smaller firms have lots of inside information. They are just less hidebound by what they can do.”.
For full details, see the FT’s special online report here, or a PDF of the FT’s print supplement here.
(via FT Alphaville.)
As if Yahoo CEO Jerry Yang didn’t have enough to worry about, Google (NASDAQ: GOOG) has now overtaken Yahoo (NYSE: YHOO) as the most-visited website property, according to comScore.
April saw Google Sites attain the number one spot in the Top 50 U.S. Properties ranking for the first time in its history with a total audience of more than 141 million visitors.
Yahoo Sites ranked second with 140.6 million visitors, followed by Microsoft Sites with 121.2 million visitors.
Superpages.com Network and CareerBuilder both jumped eight spots in the ranking to positions 18 and 30, respectively.
Content categories showing gains in April included job search, career resources, and television sites.
The top-gaining categories in April were Pharmacies and Retail-Food, both up 8 per cent from March.
According to comScore, Google’s unique U.S. audience in April was up 18 percent from the same month in 2007, while Yahoo’s audience grew 7 percent.
However, according to the Associated Press, Yahoo still leads in page views, meaning visitors spend more time there or return more often. Many Google users make a simple search request and quickly go elsewhere based on the results. Yahoo had 33.6 billion page views to Google’s 28.7 billion.
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Hewlett-Packard’s (NYSE: HPQ) planned $12.6-billion takeover of Electronic Data Systems (NYSE: EDS) is drawing mixed reviews.
The $25 a share all cash price represents a 25 percent premium to EDS’ closing sharing price on Friday.
Shares of H-P were down 6.6% in trading Tuesday, following a 4.7% drop in shares Monday, when the news was first reported by the Wall Street Journal.
The rapid revaluation of H-P shares at a level 11% lower than Friday’s close has motivated some analysts to urge investors to jump in, the WSJ reports. “HPQ has lost more market cap over the past 24 hours than the total purchase price of EDS, a clear overreaction,” writes Richard Gardner, Citigroup analyst (the company owns 10% or more of the common shares of HPQ, it should be noted).
For other analysts, this isn’t enough. Goldman Sachs analysts suggest that this buy “introduces operational risk to what has been one of the strongest and most consistent margin expansion stories in tech,” and Cowen & Co. analysts worry that this acquisition, like the company’s buy of Compaq in 2002, will prove to be a long, frustrating merger that costs plenty of money.
“In order to gain the buy-in from investors, Hewlett-Packard will have to adequately explain how its going to offset the higher percentage of total revenues being driven by lower margin business segments,” UBS analyst Adam Frisch told Dow Jones Newswires.
The Financial Times says the acquisition of EDS could help to push HP into higher-value parts of the services business and help support sales of existing products. “It gives them a place higher up the services food chain, against IBM,” one Silicon Valley investment banker said.
The FT’s Lex is underwhelmed:
Hewlett Packard will find it hard convincing its own shareholders that it can successfully integrate a different business and that it is worth paying a premium in order to try.
The move is a complicated strategic gambit for H-P Chief Executive Mark Hurd, according to The Wall Street Journal. “H-P already is a sprawling conglomerate that is the world’s largest maker of personal computers, with a market capitalization of $115 billion. Now it would have to digest a large company with a starkly different culture than its own.”
Lehman Brothers initiated coverage of H-P on April 21 with an Overweight rating and a target price of $59.
We believe HP continues to have solid momentum in industry standard servers & blades; success is helping HP gain traction in high margin areas like storage & software. We think HP is a winner in the “Utilization Era.”
On April 14, Merrill Lynch added H-P to its “US1” list with a price target of $56.
HP is one of our top picks in the IT Hardware sector because it is a defensive, large-cap, diversified (both geographically and product portfolio) play, with significant margin improvement remaining from ongoing cost initiatives.
Merrill was neutral on EDS on April 25:
While 1Q results were good, we think 2008 is still a transition year with ‘09 starting to look like an inflection point. Given the uncertainties hovering over ‘08 including filling the Verizon hole and tightened IT budgets, we are maintaining Neutral as we expect the shares to mark time pending better visibility.
Likewise, Jefferies and Co was cautious on EDS prior to the deal:
While better bookings are encouraging, headwinds including flat free cash flow and the Verizon contract termination could continue to hinder share performance.
Fitch, Moodys and Standard & Poor’s all reiterated H-P’s debt ratings, following announcement of the deal. Fitch and S&P put EDS on watch positive.
A transcript of H-P’s conference call is available here.
24/7 Wall Street’s Doug McIntyre wonders why Dell (NASDAQ: DELL )didn’t snap up EDS. “It would not be hard to make the case that Dell needs EDS much more than Hewlett-Packard.”
The EDS deal says more about Dell than it does Hewlett-Packard. Under CEO Mark Hurd, HPQ has been opportunistic and nimble. None of that can be said for Dell.
One thing that should not be too much of a challenge: integrating the two companies’ logos, which are almost the same shade of blue.
European venture investors continue to be highly selective as deal activity in the first quarter dropped off considerably while the median amount of capital put into a round shot upward, Dow Jones VentureWire reports.
The number of venture capital investments in Europe fell to 180, the lowest total this decade and the first time it has ever dipped below 200, according to data released today from VentureSource. A year ago, there were 239 deals.
Still, the amount of capital managed to rise slightly to EUR 1.14 billion from EUR 1.12 billion in the year-ago quarter, thanks in part to more money being deployed in later-stage deals. This drove the median amount per round to the highest quarterly total in the decade at EUR 3.23 million, which compared with EUR 2.55 million last year.
The number of deals has dropped each year since 2000, while the amount of investment began to rise in 2004 and hasn’t stopped since.
Indeed, the move by firms to put more money into later-stage deals has had a large effect. In the first quarter, the amount of money invested in later-stage rounds - meaning third round or greater - climbed 8% to EUR 621.6 million from EUR 569.6 million in the year-ago quarter and rose 31% from the fourth quarter total of EUR 469 million. The jump occurred despite there being 29% less deals from a year ago - 58 versus 82.
In a move likely to continue to increase later-stage funding, Index Ventures closed a EUR 400 million growth fund in January. At the time of the fund-raising, Index cited maturing information technology markets and the capital demands of drug-discovery companies preparing to push products to market as spurring the need for the new growth fund, VentureWire said.
The amount of money in seed through second rounds fell 5% to EUR 495.7 million from EUR 520.9 million a year earlier. Likewise the number of these deals fell 23% to 110 from 142.
Information technology took the biggest hit in deal count with 80 deals compared to 142 in the previous quarter and 153 in the first quarter of 2007. The deal count was the lowest since at least 2000.
Money manager BlackRock (NYSE: BLK) earned the top spot in Barron’s list of top performing companies. No. 2 on the list is Blackberry-maker Research in Motion, (NASDAQ: RIMM) followed by two oil businesses National Oilwell Varco (NYSE: NOV) and Schlumberger (NYSE: SLB).
The Barron’s 500 (subscription required) ranks the 500 largest (by sales) publicly traded companies in the U.S. and Canada based on their successs in boosting their sales and cash flow.
This year’s No. 5, discount broker Charles Schwab, (NASDAQ:SCHW) managed to prosper despite the turmoil in financial markets, or perhaps because of the resultant surge in trading, Barron’s said. Like BlackRock, Schwab has no capital-markets operations, and therefore suffered none of the billion-dollar write-offs of bigger brokerages that made huge credit-related bets.
Five years ago Charles Schwab was nearer the bottom of the Barron’s 500 than the top. Barron’s says “The company owes its comeback — operationally and on our list — in part to the efforts of Charles Schwab himself, the brokerage’s 70-year-old founder.”
Ethics, integrity, consistency and the way we’ve treated our clients over many years has led people to understand this is a safe place to do business - Charles Schwab.
Audit Integrity recently sounded a note of caution about Schwab, including it on a its list of companies with concerns over its governance. Schwab was tagged as “Aggressive” under Audit Integrity’s Accounting and Governance Risk rating , which takes into account such factors as share repurchases and insider sales. Barron’s does not take such factors into account in its rankings, though it does exclude companies that have restated earnings.
The Barron’s 500 is prepared annually by Credit Suisse Holt, a unit of Credit Suisse Group. It compares companies on the basis of one-year sales growth and stock-price performance, three-year cash-flow return on investment, or CFROI, and one-year change in CFROI for the most recent fiscal year. It grades them A through F, using the percentage change in one-year cash flow to break ties and determine rankings.
For some, future gains could be harder to come by, at least in the near term, Barrons says.”Goldman Sachs, No. 1 last year and No. 2 in 2006, has seen its stock fall 17% to 187.72 in the past 12 months, though it ranks a respectable No. 19 this year. Apple, No. 3 in 2007, is still on a tear, however. Its shares are up 76% to 185.06, and this year it’s No. 11.”
Just as the Barron’s 500 identifies well-managed companies, it also pinpoints those that fail to generate sufficient returns on investment. Near the bottom of the latest ranking are home builders such as KB Home and Pulte Homes, also Eastman Kodak and Fannie Mae.
Throw a frog into a pot of boiling water and it will jump out. Put that frog in a pot of cold water and heat to boiling and the frog will stay in the pot until it is cooked as it doesn’t notice the gradual but catastrophic increase in temperature. Or so they say. Whether or not this is true, it makes for an appealing analogy.
It can be applied to the to all manner of ills in the financal and economic world, from the subprime crisis to global warming.
Another candidate for the boiling frog theory is corporate responsibility and management integrity, where the water appears to be getting warm enough for people to start taking notice.
This was evident in Research Recap’s most popular post of the week, based on an Audit Integrity report identifying stocks with questionable management integrity. Audit Integrity Chairman Jim Kaplan says the ratings are “cause for concern that the companies may be intentionally deceiving their shareholders to mask serious problems,”
Meanwhile, Sir Evelyn Rothschild, former chairman of NM Rothschild & Sons, laments the decline in ethical behavior in the financial sector, in a commentary in today’s Financial Times. “Financial services and banking should set the very highest standards for ethical behaviour, ” he writes.
Ethics is not only a question of acting correctly. It is a matter of not trying to avoid regulation even if one thinks one can get away with it.
“This must be taught at a very early stage and demonstrated in the way a firm is managed. I passionately believe that this is something that has deteriorated in the past few years,” he concludes.
Corporate behavior was also a theme of another popular post, on Berkshire Hathaway’s annual shareholder meeting. In the words of Berkshire’s Charlie Munger, “It’s a crazy culture of greed and overreaching and overconfidence in trading algorithms.”
Signs of improved corporate responsibility were evident in our post on Climate Counts’ latest ranking of companies’ commitment to fighting climate change. A cynic might say that the improvements registered over the past year represent a commercial calculation rather than a sudden ethical awakening. But the outcome is what matters, not the motivation.
Most hedge fund investors have a bearish outlook for 2008, but they still expect more than $200 billion to flow into the industry, according to Deutsche Bank’s sixth annual Alternative Investment Survey. Much of that money is likely to end up in emerging markets.
“Hedge fund investors’ prediction that the Middle East and North Africa will be the top performing region in 2008 indicates a clear redistribution of capital towards emerging markets,” according to Sean Capstick, London-based Co-Head of Deustche’s Hedge Fund Capital Group.
The survey also shows that the number of early stage investors has fallen by 25 percent in the past year, making 2008 a more challenging environment for startup funds.
“Hedge fund investors are cautiously poised, as shown by their increased focus on risk management and plans to allocate to strategies which are not sensitive to equity market risk,” said Maarten Nederlof, New York-based Co-Head of the Hedge Fund Capital Group.
Other Highlights of the Alternative Investment Survey:
- 80% of investors are bearish; however, investors are more optimistic for next year: 40% expect the global economy to pick up in 2009.
- For the first year since the survey has been conducted, investors have added Risk Management as a major manager selection criteria, in addition to Investment Performance, Investment Philosophy and Manager’s Pedigree.
- Cash levels are high as investors take a “wait and see” approach to hedge fund investing. However, 53% of investors holding cash now plan to eliminate their cash holdings over the next 12 months, suggesting a renewed focus to make allocations to hedge funds.
- Hedge fund investors predict that Macro, Distressed, and Equity Volatility will be the top performing strategies for 2008.
- 70% of hedge fund investors do not currently use or apply leverage to their portfolios; 30% are actively leveraging their portfolios, including 6% through structured products.
What’s a climate-conscious hipster to do? Nonprofit Climate Counts suggests they eschew iPods and iPhones due to Apple’s lack of commitment to saving the planet from global warming. They better put on their Climate Counts-approved Nikes and run over to console themselves with a venti latte (made with Stonyfield Farms milk) from Starbucks. While there they might want to use Google to shop for a GE washing machine and Tide detergent from Procter and Gamble. Just make sure to have it shipped by DHL. Then head home and enjoy a Bud from Anheuser Busch while applying for a job at IBM.
Climate Counts encourages shoppers to patronize these companies, which scored highest in their respective sectors. But they should stay away from Wendy’s, Darden’s Red Lobster, YUM Brands‘ Pizza Huts, Burger King and Jones Apparel, which all earned a score of zero on Climate Counts’ scale.
Climate Counts has updated its Scorecard, first issued last June. “The new Scorecard shows a real shift towards greater climate commitment across most industry sectors — with 84% of scored companies improving their Climate Counts scores. Looking at the companies that showed the most improvement—Google, Levi Strauss and Anheuser-Busch—shows the diverse kinds of great American companies committed to paying attention to global climate change.”
The average overall Climate Counts score jumped 22% to 39 (from 30). That number, 39 out of 100, also shows that there is still a lot of work to do.
Climate Counts uses a 0-to-100 point scale and 22 criteria to determine if companies have:
- MEASURED their climate “footprint”
- REDUCED their impact on global warming
- SUPPORTED (or suggest intent to block) progressive climate legislation
- Publicly DISCLOSED their climate actions clearly and comprehensively
Climate Counts believes the Scorecard motivates both companies and consumers to step-up their efforts on climate change.
The full interactive Scorecard is available here.
Today’s New York Times examines the extent to which the US housing market is dependent on Fannie Mae (NYSE: FNM) and Freddie Mac, (NYSE: FRE) and wonders whether a further decline in house prices could put the government-sponsored enterprises in deep trouble.
News today of much-worse-than-expected first-quarter numbers at Fannie Mae and a plan to raise $6 billion in capital only adds to the concern. However, the company’s stock price actually rose, as the Office of Federal Housing Enterprise Oversight said it will lower requirements for surplus capital to 15 percent from 20 percent once the money is raised, enabling Fannie Mae to buy more mortgages, Bloomberg reports.
Portfolio.com’s Felix Salmon is critical of Fannie Mae, but observes that “As long as the capital markets are willing to inject new capital into the GSEs, that means the federal government doesn’t have to.”
As home prices continue their free fall and banks shy away from lending, Washington officials have increasingly relied on two giant mortgage companies — Fannie Mae and Freddie Mac — to keep the housing market afloat, the Times reports.
But with mortgage defaults and foreclosures rising, Bush administration officials, regulators and lawmakers are nervously asking whether these two companies, would-be saviors of the housing market, will soon need saving themselves.
The companies, which say fears that they might falter are baseless, have recently received broad new powers and billions of dollars of investing authority from the federal government. And as Wall Street all but abandons the mortgage business, Fannie Mae and Freddie Mac now overwhelmingly dominate it, handling more than 80 percent of all mortgages bought by investors in the first quarter of this year. That is more than double their market share in 2006.
The Times draws attention to concerns over changes in accounting that have helped boost the GSE’s numbers: “The regulator’s report also noted that Freddie used accounting choices that gave it an immediate $1 billion capital increase. While those and other tactics are technically permitted, the regulator said, they deserve scrutiny.
“Companies can make assumptions that cause very large differences in what they report,” Mr. Lockhart said in an interview. He has repeatedly said that the companies are making good progress and have fixed many of their problems. But at least one accounting choice, he said, “concerns us.”
Both Fannie and Fredddie have also recently changed their policies on delinquent loans, which they previously recorded as impaired when borrowers were 120 days late. Now, some overdue loans can go two years before the companies record a loss, the Times says.
Some analysts are bullish on Fannie Mae, or at least they were prior to today’s announcements. On April 8, Lehman Brothers upgraded the company to Overweight from Evenweight, “because their political standing, ability to deploy capital, and high return investment options have all improved significantly in recent weeks, which we believe should cause the shares to gradually return to historical valuations of 2x-3x book once credit costs peak in ‘09.”
Morgan Stanley on April 25 initiated a small long position in Fannie Mae:
Our thesis is that the market is missing several revenue growth drivers that will help generate above-consensus EPS in 2009.
Both Standard & Poor’s and Fitch today put some of Fannie’s ratings on Negative watch, but both affirmed its senior rating. S&P gave similar treatment to Freddie.
Moody’s downgraded the outlook on Fannie’s financial strength rating to negative while affirming all other debt ratings.
A transcript of Fannie’s earnings conference call is available here.
The burgeoning US prison population is having deleterious economic as well as social consequences and is rapidly becoming fiscally unsustainable. As a result, reforms that reduce the incarceration rate are inevitable, according to Oxford Analytica.
- The US accounts for approximately 25% of the global prison population, despite possessing less than 5% of the world’s population.
- There are 2.3-2.5 million prisoners in the US — one in every hundred adults is now in jail.
- The US incarcerates 751 per 100,000 members of the population, compared with 63 in Japan, 88 in Germany and 151 in the UK.
- Russia comes closer to the US figure, with a count of 627 per 100,000.
- The current US figure is also a major departure from the country’s historic incarceration rate; between 1925-75 only 110 per 100,000 US citizens faced imprisonment.
OxAn runs through the factors behind these startling figures, including the war on drugs, the “three strikes” rule and welfare policy reforms.
Unsurprisingly, many former felons fail properly to reintegrate into society following release. Prison rarely provides the kind of rehabilitation and job training necessary for labour market success — a weakness of prisons in most societies but a chronic one in the US.
Collapsing housing prices have hit state budgets particularly hard, which will make it difficult — if not impossible — to expand the prison system at the current rate, OxAn says. “The unaddressed problems with the current harsh incarceration policy — particularly its effect on the country’s political economy, deprivation of the franchise from a very large number of ex-prisoners, and lack of preparation it affords parolees for the job market — have begun to attract political attention.”
Current US prison policy has many deleterious economic and social effects, and is fiscally unsustainable. Despite the resistance of entrenched interests and political lobby groups, reform — principally in the form of a reduced rate of incarceration for non-violent offenders — is inevitable.
Despite or perhaps because of these trends, analysts see a strong outlook for the leading private prison operator, Corrections Corporation of America (NYSE: CXW).
Avondale Partners in April noted that “with budgets still constrained at the federal, state and local government levels, it is not palatable to cut funding for healthcare, education, etc. to build a prison. With the aggregate domestic jail and prison population of 2.1 million individuals growing in excess of 2% annually, however, incremental beds are needed.”
The private prison sector is in an excellent position to step in and meet this need. With only 7.2% of domestic prison beds currently privatized, a small increase (1%-2%) in penetration could drive meaningful growth for the sector. CCA, with a 50% share of this market, should benefit disproportionately given its facility ownership model.
Avondale rates CCA Market Outperform with a price traget of $35. Lehman Brothers in February reiterated its Overweight rating with a price target of $34, based on CCA’s expansion plans. CCA is trading at around $27.
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