demand,” says Hosbein, who held $10 mil-lion in Qwest bonds at the time. After asecond warning in April from CarolLevenson, Gimme Credit’s director of cor-porate bond research, he sold. The bonds,which traded around par a year ago, nowtrade at 60¢ on the dollar. “You do yourown research, but then look at Levenson’sreports and say, ‘I must have been asleepduring that part of the [company] confer-ence call,’” he says. Gimme Credit’s plain-talking daily missives now recommendbuying the bonds of SBC Communicationsand ConocoPhillips– which most analystsstill consider too risky.

At times of uncertainty, money man-agers look to these pros to help themnavigate. By mid-January, 2002, TycoInternational Ltd. was on the ropes. TheSecurities & Exchange Commission wasinvestigating the company for fraud, andthe shares were in a free fall. ChiefExecutive and Chairman L. DennisKozlowski was on the defensive, tellinginvestors there was nothing wrong withTyco’s accounting. At the time, institu-tions owned 95% of the stock, and most ofthe 15 or so analysts covering the compa-ny rated it a buy or strong buy. ButTechnimentals’ models suggested themarket wasn’t going to buy Kozlowski’sline for long. By Jan. 18, weekly tradingvolume was five times the average for theprevious 12 months, coupled with asharp price drop to $45. Lane calledabout 70 clients on Jan. 25 telling them tosell at $45. “Everyone thought that wewere crazy,” he recalls.

Sure, Lane would rather have made theTyco call in early January, when thestock was at $60. Even so, the clients wholistened avoided a debacle: Two weekslater the stock hit $30, eventually sinkingas low as $7. Now, Lanes says to shortAutoZone Inc., which he figures could fallto $48 from $78 now, and the drug distrib-utor AmerisourceBergen Corp., whichcould go from $60 to $40 in the next threeto six months. “They’re overloved andoverowned,” he says.

Most money managers hate to admitthey take cues even from the best ana-lysts. On Oct. 27, star stock-picker TomMarsico, manager of the $1.3 billionMarisco Growth Fund, lauded TenetHealthcare Corp., a top holding, in TheNew York Times. The next day, UBSWarburg’s Kenneth R. Weakley released anegative report. A week later Marsicosold. A press release said “new informa-tion” had soured him on the stock.

His coyness is understandable. If youhave a secret weapon, why let everyoneon Wall Street in on it?By Mara Der Hovanesian in New York

FFiinnaannccee

The Best of the IndependentsInvestars.com, an online analyst-

rating service, tracks the re-search of 104 firms, including Wall Street brokerages and bou-tiques. At Business-Week’s request, Inves-tars ranked the top performers among theindependent shops thatmostly offer investmentbanking. To evaluateeach firm’s perfor-mance, Investars cre-ates a hypothetical portfolio, which “buys” or “sells” whenever a stock is upgraded or

downgraded. The number of sharesvaries according to the strength ofthe recommendation–more sharesfor a strong buy, for example, than

for a buy. The final score is a weighted av-erage of returns for allstocks a firm covers forwhich Investars has acomplete history of recommendations. Thebest calls may involvemultiple buy or sell recommendations. Calls and returns are for the 12 months through Nov. 20.

PARENTEAU 19/19 VerisignMontreal Palm

AVALON RESEARCH 50/109 Genesis MicrochipBoca Raton, Fla. Imclone

STANDARD & POOR’S 1,200/ US AirwaysNew York 1,604 i2 Technologies

ANALYTIQ GROUP 37/32 Amkor TechnologyIrvine, Calif. Maxtor

GLOBAL CAPITAL INSTITUTE 3,900/ Cytogen(THOMAS WHITE) Chicago 2,538 H Power

RDEX RESEARCH 25/25 RambusIrvine, Calif. Intl. Rectifier

CORINTHIAN PARTNERS* 10/10 General Growth Prop.New York Bedford Properties

CALLARD ASSET MGMT. 4,000/ AdelphiaChicago 4,474 Enterasys

FULCRUM GLOBAL PARTNERS 135/124 Integrated DeviceNew York ESS Technology

MARKET PROFILE THEOREMS 2,517/ Covanta EnergySeattle 2,652 Level 3

BARRINGTON RESEARCH* 90/85 Univ. of PhoenixChicago Cablevision Systems

STANDARD & POOR’S 500 STOCK INDEX

81.4%

41.2

13.9

13.2

10.4

8.0

7.1

3.2

2.9

1.0

0.3

-21.5%

MAR

ILO

U A

LAR

IE

111144 BusinessWeek / December 16, 2002

*Derives 95% or more of revenues from research

BULL’S EYE: CEOFrançois Parenteau

FIRM/LOCATION

STOCKSCOVERED/TRACKED

BY INVESTARS BEST CALLSAVERAGERETURN

One analyst says he got anonymous threats–presumably from irate investors–after downgrading tech stocks in the late ‘90s

for major investment banks andbrokerages, but others labor inobscurity at independent re-search firms that don’t sellstocks or investment bankingservices. Instead, they shop theirinsights to money managers inreturn for commissions ontrades that result from the rec-ommendations. The ace analystsare mostly seasoned vets withRolodexes of industry contacts.They’re early risers and skeptics,detail junkies who bury them-selves in balance sheets andcomplex stock models. In bull orbear markets, they make moneyfor their clients, largely institu-tional money managers who con-sider their reports a must-read.

Fans among hedge-fund andmutual-fund managers, deriva-tives traders, and other pros saythe best analysts often sense troublebefore the company management does.Kevin O’Brien, co-manager of the $4 bil-lion Neuberger Berman Genesis Fund,took a closer look at reinsurer TrenwickGroup Ltd.’s books last summer after V.J.Dowling of Hartford-based Dowling &Partners Securities, known for his nitty-gritty work on insurers, warned that thecompany was overstating earnings.O’Brien said Trenwick executives dis-missed Dowling’s assessment–but hecashed out at about $26 a share anyway.The company has since posted losses,and the stock dived to a low of 46 centson Nov. 14. “Dowling doesn’t care whatanybody thinks,” says O’Brien. “And he’llput it in writing.”The bear market has helped to raise the

best analysts’ profile. Unlike most onWall Street, they have a few qualms aboutbashing popular companies. For exam-ple, Fox-Pitt, Kelton Inc. finance

analyst E. Reilly Tierney downgraded J.P.Morgan Chase & Co. in May, 2001, at $50and remained bearish. The stock nowtrades at $24. “We could care lesswhether stocks go up or down,” he says.“Our clients make money either way.”

A willingness to stand up to manage-ment is a common denominator of thiselite group, Michelle R. Clayman, CEO ofNew York’s New Amsterdam PartnersLLC, a pension fund manager, singles outMorgan Stanley automotive analystStephen J. Girsky as one of the best. Lastyear, Girsky zeroed in on the way FordMotor Credit Co. booked car loans that itpackaged and sold to other investorsusing so-called gain-on-scale accounting.The company was getting a third of itsprofits from such sales, said Girsky, whobelieved the strategy was unsustain-able–because it booked most of theincome from loans up front instead ofover their life. “it was a distortion of the

true results,” he says. He raised his con-cerns with Ford executives at a privatedinner in Dearborn, Mich., then sentthem a summary, which was published inan October, 2001, report. The companycontinued to refute his findings, he says.Two months later, Ford Creditannounced a $297 million loss for thefourth quarter, the first quarterly loss in42 years. This year, Ford Motor Co.’sstock has tanked 37%.

Telling it like it is is usually a thanklessjob. After Stanford C. Bernstein & Co.analyst Paul Sagawa downgraded CiscoSystems Inc. in late 2000, anticipating theend of the telecom boom, Cisco ChiefExecutive John T. Chambers called to“respectfully disagree” with the forecast.Soon after, Cisco’s earnings slumped.“Chambers told investors that no onecould have predicted it; it was a 100-yearflood,” says Sagawa. “I was like, ‘Guys, Ihad this conversation with you five

months ago, and you told me I was out tolunch.’”

Sometimes, telling people what theydon’t want to hear can get downrightnasty. Daniel T. Niles, Lehman BrothersInc.’s semiconductor and hardware ana-lyst, says he received anonymousthreats–presumably from angryinvestors–after downgrading cult techstocks in the late 1990s. “It didn’t matterthat I was right,” he says. Likewise,Bernstein’s phone lines were jammedafter Sagawa panned Cisco in 2000.“Investors were saying that I crashedtheir favorite stocks, and that I wasincompetent, only not using languagethat nice,” he says. “I took a lot of abuse.”

In hindsight, the most radical calls looklike common sense–backed by hours ofhomework. Sagawa downgraded NortelNetworks Ltd. and Cisco in September2000, after analyzing trends for big tele-com service providers, their main cus-

tomers. He ran some 40 different ratioson a handful of companies and found thattelecom capital spending had reached36% of sales, which cash flows from oper-ations were less than 20% of sales. Add aheap of debt, and clearly serviceproviders couldn’t keep buying. “It wasentirely predictable, to be honest,”Sagawa says. Improving cash flow and aslow recovery in capital spendingprompted him to turn bullish in April onNortel, Nokia, and Lucent Technologies,before the Street and the stocks’ rally inOctober.

But common sense rarely rules mar-kets–as money managers ruefully admit.When Gimme Credit, a fixed-incomeresearch shop, issued a warning onQwest Communications Internationallast November, Greg Hosbein, a principalat Segall Bryant & Hamill InvestmentCounsel, a Chicago money manager , sattight. “The bonds were in high

FFiinnaanncceeRREESSEEAARRCCHH

A few are willingto rile companies–and investmentpros love them

PacificCare Health Systems Inc.’sstock had been a loser for years.The Cypress (Calif.) health-mainte-nance organization was mired in an

accounting scandal; Medicare plans weresiphoning profits; and top managementhad bailed. “Everything about the com-pany was horrible,” says Michael W.Green, a money manager for Moody,Aldrich & Sullivan LLC in Marblehead,Mass. A former highflier that hit $93 in1999, it had plunged as low as $10.But in late October, Green had a change

of heart. He bought $5 million worth ofshares after getting a hot contrarian tipfrom Kevin P. Lane, chief market strate-gist at Technimentals Research Group,an independent research firm in NewYork. Lane said the new chief executive,Howard G. Phanstiel, had cleaned house,and the company had turned profitable.Hardly anyone on Wall Street hadnoticed. All but one of the 14 analystscovering the company had a sell on it.The next week, the stock soared 40%when PacifiCare surprised analysts bymore than doubling third-quarter profits.Green now expects the $29 stock to dou-ble in the next 12 months. Of Lane,whom he has known for a year, Greensays: “He’s moved to the top of my radarscreen.”

For all the brouhaha about taintedresearch, there are still quite a few ana-lysts like Lane who command the respectof investment pros. Many work

111122 BusinessWeek / December 16, 2002 BusinessWeek / December 16, 2002 111133

The A TeamKEVIN P. LANE

STEPHEN J. GIRSKY

VINCENT J. DOWLING, JR.

CAROL LEVENSONSTEVE WORTMAN

ARAM H. RUBINSONChief market strategist, Technimentals Research GroupRecommended selling both Enron and IBM before theirstocks tanked. Rated PacificCare a buy before itsearnings surprise and 40% runup in November.

Aerospace and defense analyst, Sidoti & Co.Made bullish calls in 2002 on Engineered Support Systemsand Signal Tech, up 52% and 64%, respectively. Now neu-tral on both, but bullish on Herley Industries, down 10%.

Insurance analyst, Dowling & Partners SecuritiesHad sell recommendation on Trenwick Group, down 87%this year, and a buy on W.R. Berkley, up 10%

Automotive analyst, Morgan StanleyPredicted disaster at Ford MotorCredit despite upbeat forecasts fromcompany execs months before it report-ed $297 million of losses in Q4 2001.

Director of corporate bond research,Gimme Credit PublicationsIssued warnings on WorldCom,Lucent, Dynegy, Conseco, and J.P.Morgan Chase months before theirstocks’s steep declines.

Retail analyst, Banc of America Securities LLCDowngraded Home Depot in Feb., 2002, at $50, threemonths before it slid to a $23 low. It now trades at $26.

Telecom-equipment analyst, Sanford C. BernsteinDowngraded Cisco and Nortel in September,2000, when he predicted an impending crashin telecom equipment. Eight months agoreversed his bearish stance.

Analyst, Speciality financeand brokers, Fox-Pitt, KeltonOne of the first to downgrade J.P.Morgan Chase in May, 2001, at $50.The stock now trades at $24.70.

E. REILLY TIERNEY

PAUL SAGAWA

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F K

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LAN

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Data: BusinessWeek

ANALYSTSWHO GET IT

demand,” says Hosbein, who held $10 mil-lion in Qwest bonds at the time. After asecond warning in April from CarolLevenson, Gimme Credit’s director of cor-porate bond research, he sold. The bonds,which traded around par a year ago, nowtrade at 60¢ on the dollar. “You do yourown research, but then look at Levenson’sreports and say, ‘I must have been asleepduring that part of the [company] confer-ence call,’” he says. Gimme Credit’s plain-talking daily missives now recommendbuying the bonds of SBC Communicationsand ConocoPhillips– which most analystsstill consider too risky.

At times of uncertainty, money man-agers look to these pros to help themnavigate. By mid-January, 2002, TycoInternational Ltd. was on the ropes. TheSecurities & Exchange Commission wasinvestigating the company for fraud, andthe shares were in a free fall. ChiefExecutive and Chairman L. DennisKozlowski was on the defensive, tellinginvestors there was nothing wrong withTyco’s accounting. At the time, institu-tions owned 95% of the stock, and most ofthe 15 or so analysts covering the compa-ny rated it a buy or strong buy. ButTechnimentals’ models suggested themarket wasn’t going to buy Kozlowski’sline for long. By Jan. 18, weekly tradingvolume was five times the average for theprevious 12 months, coupled with asharp price drop to $45. Lane calledabout 70 clients on Jan. 25 telling them tosell at $45. “Everyone thought that wewere crazy,” he recalls.

Sure, Lane would rather have made theTyco call in early January, when thestock was at $60. Even so, the clients wholistened avoided a debacle: Two weekslater the stock hit $30, eventually sinkingas low as $7. Now, Lanes says to shortAutoZone Inc., which he figures could fallto $48 from $78 now, and the drug distrib-utor AmerisourceBergen Corp., whichcould go from $60 to $40 in the next threeto six months. “They’re overloved andoverowned,” he says.

Most money managers hate to admitthey take cues even from the best ana-lysts. On Oct. 27, star stock-picker TomMarsico, manager of the $1.3 billionMarisco Growth Fund, lauded TenetHealthcare Corp., a top holding, in TheNew York Times. The next day, UBSWarburg’s Kenneth R. Weakley released anegative report. A week later Marsicosold. A press release said “new informa-tion” had soured him on the stock.

His coyness is understandable. If youhave a secret weapon, why let everyoneon Wall Street in on it?By Mara Der Hovanesian in New York

FFiinnaannccee

The Best of the IndependentsInvestars.com, an online analyst-

rating service, tracks the re-search of 104 firms, including Wall Street brokerages and bou-tiques. At Business-Week’s request, Inves-tars ranked the top performers among theindependent shops thatmostly offer investmentbanking. To evaluateeach firm’s perfor-mance, Investars cre-ates a hypothetical portfolio, which “buys” or “sells” whenever a stock is upgraded or

downgraded. The number of sharesvaries according to the strength ofthe recommendation–more sharesfor a strong buy, for example, than

for a buy. The final score is a weighted av-erage of returns for allstocks a firm covers forwhich Investars has acomplete history of recommendations. Thebest calls may involvemultiple buy or sell recommendations. Calls and returns are for the 12 months through Nov. 20.

PARENTEAU 19/19 VerisignMontreal Palm

AVALON RESEARCH 50/109 Genesis MicrochipBoca Raton, Fla. Imclone

STANDARD & POOR’S 1,200/ US AirwaysNew York 1,604 i2 Technologies

ANALYTIQ GROUP 37/32 Amkor TechnologyIrvine, Calif. Maxtor

GLOBAL CAPITAL INSTITUTE 3,900/ Cytogen(THOMAS WHITE) Chicago 2,538 H Power

RDEX RESEARCH 25/25 RambusIrvine, Calif. Intl. Rectifier

CORINTHIAN PARTNERS* 10/10 General Growth Prop.New York Bedford Properties

CALLARD ASSET MGMT. 4,000/ AdelphiaChicago 4,474 Enterasys

FULCRUM GLOBAL PARTNERS 135/124 Integrated DeviceNew York ESS Technology

MARKET PROFILE THEOREMS 2,517/ Covanta EnergySeattle 2,652 Level 3

BARRINGTON RESEARCH* 90/85 Univ. of PhoenixChicago Cablevision Systems

STANDARD & POOR’S 500 STOCK INDEX

81.4%

41.2

13.9

13.2

10.4

8.0

7.1

3.2

2.9

1.0

0.3

-21.5%

MAR

ILO

U A

LAR

IE

111144 BusinessWeek / December 16, 2002

*Derives 95% or more of revenues from research

BULL’S EYE: CEOFrançois Parenteau

FIRM/LOCATION

STOCKSCOVERED/TRACKED

BY INVESTARS BEST CALLSAVERAGERETURN