A crisis doesn’t make new stars. It reveals them.
This year half a dozen analysts joined the First Team for the first time. Whether covering a struggling sector like oil or pandemic-boosted technology companies, they delivered the insights clients needed — and made names for themselves in the process.
Meet your new favorite analysts.
Jonathan Chappell, Evercore ISI
Capital Goods/Industrials — Shipping (No. 1)
What’s the best call you ever made?
A complete 180-degree shift to a bullish stance on oil tankers on June 1, 2004 — right on the verge of the best five-year market since the Onassis fortune was made [in the] 1960s. But if you’re looking for something more current, like in the last decade, I think our call that the non-consensus tanker trade is over in early May 2020 was extremely well-timed and saved investors a lot of money by exiting before the rate/share price collapse of the last several months.
What’s the worst call you ever made?
A lot to choose from here, but we were way too early with the product tanker cyclical recovery call in 2017–2018 — especially since we’re still waiting for it to fully play out.
What’s the biggest challenge facing your sector?
The biggest challenge facing shipping equities today is diminutive market caps, vast volatility, and institutional apathy. Quick megaspikes in rates/earnings/cash flow are great if you time it perfectly, but it is hard to invest when the downturns are so much longer.
The industry itself has an immediate challenge in changing overextended crews amid the pandemic, while the longer-term challenge will be finding an economic propulsion source that aligns with global climate goals.
What’s the biggest way your job has changed since the pandemic started?
Marketability through research. The old methods of marketing — in person, airports to airplanes to hotels — is obviously on hold, and could be changed forever, but this provides us with greater opportunities to “market” through more frequent and actionable research calls. Client interactions by phone/video are far more efficient in terms of time spent, freeing up more time to pursue value-added ideas and to market them to a broader audience.
If a client needed to know one thing about your area of coverage, what would it be?
For shipping specifically, cycles are exhilarating, but liquidity is all that matters. For an industry with a legacy of overextended balance sheets and dilutive equity offerings, you can either trade the cyclical torque or invest in an entity that manages its capital structure prudently and efficiently throughout all periods of the cycle. Only when the potential for an equity blindside is off the table can an equity truly be investable over a sustainable period of time.
Philip Gresh, JPMorgan Chase
Energy — Integrated Oil (No. 1)
What’s the best call you ever made?
Contrarian downgrade of Occidental Petroleum to underweight in August 2019 at $45, following its expensive and debt-laden acquisition of Anadarko Petroleum, with the view that its dividend and balance-sheet combination were unsustainable. Quarterly dividend was cut to one cent per share, and the stock is now [at about] $10.
What’s the worst call you ever made?
Upgrading Delek Holdings to overweight in May 2018 at $48, during the Permian Basin differential blowout hype. While the stock went to $60 in a matter of days, that ended up being peak sentiment, and we ultimately downgraded to neutral at $37 in December 2018. We subsequently downgraded to underweight at $33 in December 2019, and the stock is now trading at $12.
What’s the biggest challenge facing the sector you cover?
The [impact] of Covid-19 on supply-and-demand dynamics, coupled with increasingly negative sentiment toward fossil fuels, which could lead to a continued de-rating of traditional energy stocks relative to alternative energy stocks.
What’s the biggest way your job has changed since the pandemic started?
Analysis in the energy sector has become much more focused on macro scenarios lately, as investors try to figure out what will survive in what could end up being a protracted down cycle.
If a client needed to know one thing about your area of coverage, what would it be?
While the boom/bust nature of commodity industries like energy can last for a long period of time, we still believe that mean reversion can be a powerful force when it happens.
Edward Kelly, Wells Fargo Securities
Consumer — Food Retailers (No. 1)
What’s the best call you ever made?
Probably upgrading Safeway to outperform on a breakup thesis that the company ultimately ended up pursuing when pushed by an activist.
What’s the worst call you ever made?
Downgrading Longs Drug Stores to underperform — the day before they were bought by CVS.
What’s the biggest challenge facing the sector you cover?
Dealing with a competitive landscape that’s evolving toward more of an omni-channel offering, and figuring out how to do it profitably.
What’s the biggest way your job has changed since the pandemic started?
It’s become much more research-focused — like real, grassroots research–focused.
Historically, the sell-side analyst job was pretty dynamic: There was management access, marketing, that type of stuff — which was how you were winning the hearts and minds of your client base. When Covid hit and we were all stuck at home, the market became very uncertain. It came down to this: You got to produce great product and you had to dig into the issues that people really cared about.
In food services there was a lot of concern around whether these companies were going to make it through this, because they have exposure to restaurants. There was so much uncertainty around what the future would look like, so there was a lot more focus on the underlying research product.
If a client needed to know one thing about your area of coverage, what would it be?
Despite structural headwinds, there’s always a way to make money in food retail.
Sean Meakim, JPMorgan Chase
Energy —Oil Services & Equipment (No. 1)
What’s the best call you ever made?
Our secular bear thesis on the group over the past five-plus years.
We launched in the spring of 2015 with a bearish call on the sector. Our key insight then was that the upstream had exited a demand-driven cycle and was entering a supply-led one.
I would often quote J. Paul Getty: “In times of extreme change, experience can be your worst enemy.” Our prior limited exposure to the sector was a benefit as we weren’t mentally anchored to what others experienced in the prior ten to 15 years. The next key insight came a year later, when we came to realize there was a secular deflationary force led by technology that would allow cost per barrel to continue to fall, even as upstream activity recovered. We stayed bearish when most on the buy and sell sides turned bullish in 2016. It was painful for much of that year, but ultimately the stocks reversed in 2017 and have made new cycle lows for seven consecutive years, now sitting [about] 90 percent below their 2014 peak.
What’s the worst call you ever made?
In a sector with fundamentals this challenged, we’ve found the timing of exiting longs really difficult. We were early and contrarian [on] upgrading TechnipFMC to overweight in early 2017, as we overcame our initial skepticism of the merger of FMC Technologies and Technip and became convinced that the combination would lead to an outsize order cycle for the company’s subsea equipment. It took some time for the market to come around to this view, but the stock was a big outperformer for much of 2019.
In hindsight, when the company reported a blowout quarter for awards in the second quarter of 2019, we were too committed to the thesis and all the other ancillary parts that hadn’t fully played out. The stock peaked that week and has been one of our worst overweight performers since. Some of the positive catalysts we saw (like spinning out its engineering and construction segment) were ultimately taken very poorly by the market. Today we view TechnipFMC as the most dislocated valuation in the coverage, but the road to redemption is admittedly a long one.
What’s the biggest challenge facing the sector you cover?
The business model in the oil services sector is to lower the cost per barrel for exploration and production customers. During the “cycle of scarcity” — 2003 to 2014 — in which the marginal cost per barrel was increasing, business was good and the sector was the best-performing in energy. [After] the upstream cracked the code in unconventional shale and ushered in the “cycle of abundance” post-2014, cost per barrel continues to fall, squeezing margins and returns for the supply chain. In other words, the sector’s success has been its undoing.
Now a confluence of events in 2020 has meaningfully accelerated public and private plans for energy transition away from hydrocarbons, threatening long-term demand growth for crude. The recovery in oil demand and its ultimate trajectory post-pandemic [are] the key risk for oil services equity valuations going forward. The engineering-heavy parts of the sector are going to try to pivot to these new channels — but history suggests most will not succeed in reinventing themselves.
What’s the biggest way your job has changed since the pandemic started?
I feel quite fortunate that equity research is a job that can be performed remotely, and it’s long been part of my routine. It’s certainly strange that I haven’t been to my office in midtown Manhattan in six-plus months or even on an airplane, but my team has done a tremendous job of putting out compelling content — wherever we are — and connecting with clients to help them make good investment decisions regarding energy services. Considering how hard I was running for the past five years, I’m grateful the forced grounding has allowed me to see my wife and four kids literally every day for months and experience so much at home I had missed in prior years. As a family we try to focus on these silver linings in what’s a difficult time for so many, but I know the window is limited. In this virtual working world, I think we are benefiting from the tailwinds of in-person interactions in recent years, and eventually we’ll need to get back to some proxy of the prior travel cadence to connect with our clients and industry contacts.
If a client needed to know one thing about your area of coverage, what would it be?
Oil services is an earnings revisions sector, and we believe the most important thing to get right is the rate of change of following fiscal year EBITDA revisions. In other words, over the course of a calendar year, changes to consensus EBITDA estimates for the year ahead will correlate well with stock performance.
The Street has been preternaturally too optimistic in the out years — “a watched pot never boils” — so even in the recovery last cycle [from 2017 to 2019], following fiscal year EBITDA across our coverage was consistently revised lower [by] 20 to 30 percent per year, and the sector underperformed the market [by] 30 to 40 percent per year.
Brian Nowak, Morgan Stanley
Technology, Media & Telecommunications — Internet/Large-Cap (No. 1)
What’s the best call you ever made?
There have been multiple times over the course of my career where we’ve done in-depth work looking at the intricacies of Amazon’s operational model as well as the way they were expanding into new markets — and the way that all impacts valuation. The Amazon deep-dive work is something that I have the most pride in.
What’s the worst call you ever made?
In the last few years, we underestimated Snap’s turnaround. We were underweight the stock while the company was making a lot of changes on the advertising side — and we were wrong. We underestimated the impact of low-hanging fruit and even larger changes that we were seeing.
What’s the biggest challenge facing the sector you cover?
One of the hardest things they all have to navigate through, given their size, is a constant need to innovate, to create new user experiences and user offerings, and to come up with ways to drive engagement. They also need to innovate to find ways to monetize that.
Given the size of these businesses, there is a high bar and necessity around investment in innovation. Overcoming the laws of large numbers is something they need to focus on.
What’s the biggest way your job has changed since the pandemic started?
I see my kids a lot more, which is a great thing!
I’ve become a lot more focused on macro data and quant data. I always paid a decent amount of attention to our macro economist’s views, but what this pandemic has forced us all to do as fundamental analysts is have a firmer understanding of macro factors around the world. How do the closing and reopening affect each of these companies? How do we think about the future of interest rates, and how does it impact companies? There’s a greater necessity to have a macro view.
If a client needed to know one thing about your area of coverage, what would it be?
The importance of scale has never been higher, but the importance of continued innovation is even higher than that. It’s important when you’re investing in any of these companies for multiple years that you understand not just what’s driving the near-term earnings power, but what’s going to for the next one, three, five years.
Alex Zukin, RBC
Technology, Media & Telecommunications — Software/Mid- & Small-Cap (No. 1)
Technology, Media & Telecommunications — Software/Large-Cap (No. 3)
What’s the best call you ever made?
The best calls I made this year were DocuSign and our upgrade of Zoom. For both, we used not just channel work but also data. This was during the height of pandemic, before people knew how Covid-19 was changing consumption.
We got very bullish on DocuSign in April, and actually upgraded Zoom in very early June or late May. That’s been a home run call for us this year.
What’s the worst call you ever made?
Two come to mind: We were pitching Anaplan very long in the beginning of the year, driven by channel work, and we were dead wrong. They ended up missing that quarter, and the stock went down.
Our insistence on being long Dropbox since the IPO — that’s also been a tough call.
What’s the biggest challenge facing the sectors you cover?
The biggest challenge is dealing with accelerating innovation and growth at scale in the face of very high valuations and multiples. Increasingly, companies are trying to become platforms rather than just products and tools.
What’s the biggest way your job has changed since the pandemic started?
The analyst job is typically very personal and relationship-oriented, and with the move to virtual we’ve had to figure out new ways to be valuable while maintaining that relationship equity. We’ve started hosting calls with clients every other week, which enables us to be there for clients on a continuous basis.
If a client needed to know one thing about your area of coverage, what would it be?
Bad and good news are rarely in the stock. Valuations typically follow the fundamentals, and those are relative rather than absolute. We tend to make our best calls when we focus on how well a company is doing and whether they can keep it up, rather than whether they are cheap or expensive.
