US: Winners steer steady course through troughs and peaks

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The difficult task of picking stocks and estimating earnings was made that much more demanding last year with the US equity markets staging one of their sharpest turnrounds of recent times.

Following a 39 per cent fall in 2008, the S&P 500 index ended last year 24 per cent higher and 65 per cent above its low in March.

The US markets entered 2009 still reeling from the collapse of Lehman Brothers, the Wall Street investment bank, in September 2008 and shocked by the scope of the government’s intervention in the financial system. Commentators were arguing that the financial world had entered a new era, a “new normal”.

When asked what this new era might look like, most seemed certain only that the outlook was very uncertain.

“It took a leap of faith to make stock recommendations while the world was melting down,” laughs Gabe Moreen, remembering the time. “One questions one’s sanity.”

The leap of faith paid off for Mr Moreen, an analyst at Bank of America Merrill Lynch, as his calls outperformed their benchmark by 26.4 per cent, ranking him the top US stock picker in this year’s StarMine awards.

His most successful call last year was the year-long “buy” rating on Targa Resources Partners, a provider of midstream natural gas services, that gained 264 per cent over the period and outperformed its benchmark by 242 per cent.

Similarly, his calls on DCP Midstream and MarkWest Energy outperformed their benchmarks by 204 per cent and 160 per cent respectively.

Mr Moreen, who covers gas utilities and master limited partnership (MLP) stocks, says a combination of attractive underlying fundamentals, low exposure to commodities prices and relatively minor capital needs helped them weather the seizure in the capital markets. This persuaded him to recommend the stocks to his clients in late 2008, even as the equity markets were tumbling.

Although Mr Moreen’s three most successful individual calls were all “buy” recommendations, he also had “sell” recommendations on a significant number of stocks in his ratings distribution.

With the markets rallying as much as they did last year, it is perhaps a little counterintuitive to see this, notes William Herkelrath, director of research proposition at Thomson Reuters whose subsidiary StarMine compiles the rankings.

But, he says: “You couldn’t win the award by just being indiscriminately bullish last year. You had to differentiate, have a mix and find names that would go down as well as up.”

A similar logic is evident at the broker level. Bank of America Merrill Lynch analysts won more stock picking awards in the US this year than analysts from any other broker, while having a higher proportion of “underperform” recommendations than any other bulge-bracket broker.

Peter Ward, who took second place in StarMine’s overall stock-picker rankings and was its number one stock picker in the metals and mining sector, says his 16 years in equity research were crucial to outperforming his benchmark by 24.8 per cent.

“Prediction is a very humbling occupation and everyone makes mistakes. Through experience, you learn not to repeat a lot of them,” says Mr Ward, a metals and mining analyst at Barclays Capital, formerly at Lehman Brothers.

His most profitable call was a year-long “overweight/positive” on Freeport McMoRan Copper & Gold , which outperformed its benchmark by 171 per cent.

“We have long had an above-consensus bullish view on copper,” he says. “We felt there was far too much of a sceptical outlook for copper discounted in the share price.”

Happily for his clients, copper was one of the year’s best performing commodities, with its price more than doubling, and Freeport’s stock price soaring 229 per cent higher.

Barclays Capital has the distinction of being the only broker with more than one top-10 rated stock picker.

Jim Harmon, who has covered energy stocks for almost 20 years and was also formerly at Lehman, won seventh place and was the top rated stock picker in the gas utilities sector.

Extensive experience and breadth of perspective are crucial, says Mr Harmin, whose team has covered the diversified natural gas sector since 1991.

Mr Harmon says: “Over this period, we have seen economic, energy price and regulatory cycles giving what we believe to be a broad backdrop to make valuation comparisons and relate them to cyclical events.”

His most successful call last year was a year-long “underweight/neutral” recommendation on Piedemont Natural Gas, which underperformed its peers by 42 per cent.

Given that the Top 10 stock pickers list is dominated by analysts covering commodities-related stocks, Lauren Torres’ third place particularly stands out. Covering the global beverage sector at HSBC, last year she outperformed her benchmark by 21.4 per cent and was number one ranked stock picker in the beverage sector in the US.

Ms Torres, who has covered the sector since 2002, says: “I think there is a lot of opportunity for growth in the sector, particularly when looking by region. The consumer was actually quite strong in some countries last year.”

One of those countries was Brazil, where AmBev, a beer and drinks group and Pepsi distributor, holds a dominant market position.

“AmBev was in the right market, had the right brands and was managing costs effectively. We saw a good opportunity in terms of relative valuation,” Ms Torres says. She had a year-long “overweight” rating on the stock, which outperformed its benchmark by 109 per cent.

The highest ranked analyst from a small brokerage was Michael Ward of Soleil-Ward Transportation Research, who covers auto and auto component stocks. He came fifth overall, having outperformed his benchmark by 19.1 per cent.

Simon Leopold, who covers telecommunications equipment stocks at Morgan Keegan, was the highest rated earnings estimator overall in the US, as well as in his sector. He spent 12 years in the telecommunications industry before becoming an equities analyst.

The accuracy of Piper Jaffray’s Bob Napoli in analysing financial stocks won him three top spots this year – the number one stock picker and earnings estimator in consumer finance, as well as the number one stock picker in diversified commercial services.

“This is remarkable, given the sheer number of analysts that compete in this space and the overall interest level that the finance space tends to command in the market,” says Mr Herkelrath.

Lasan Johong at RBC Capital Markets also stood out for his dominance in the independent power producers and energy traders sector, coming first in the earnings accuracy and stock picking categories.

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