October 2019

The Results Are In – Institutional Investor All-American Research Poll

Every year, thousands of investment professionals (nearly 4,000 to be exact) vote to determine the top equity research analysts — and firms — on Wall Street. This year RBC Capital Markets had their best performance ever, placing #7, with 20 ranked analysts across 22 sectors. We sat down with six of those analysts to discuss the changes impacting the industries they cover – and how they’re adapting to disruption in their own industry.

Lori Calvasina, Head of U.S. Equity Strategy

 

Best call you’ve ever made?

Our bullish call on the S&P 500 in 2019, which we put out in late Nov 2018 and reiterated in January 2019. We noted that it was rare for equities to fall two years in a row, that the buyback outlook for stocks was brightening, investor sentiment appeared to have bottomed in December, that a more dovish Fed was supportive of valuations, and that if a recession was looming, most of the pain that one would expect in the stock market had been put in place at the December 2018 low.

Worst call you’ve ever made?

We’ve had a preference for Value over Growth for the past year and a half, which hasn’t started to work until very recently. We think this could be the turning point in the trade, and have developed a better understanding of the fundamental drivers of the trade.

How is the role of a strategist changing?

Government policy matters more to market direction and sector selection than it has in the past. Also, when I started in the business in the early 2000’s, strategists were looked to as both a source and interpreter of market data. Today market data is plentiful, and our job is more focused on interpretation and figuring out which data is relevant than providing it.

If a client needed to know one thing about your area of coverage, what would you tell them?

The economy isn’t the only thing that drives the stock market. It’s an important driver, but not the only driver. Valuations, positioning, policy (both Washington and the Fed), cash deployment (buybacks, dividends, M&A), and money flows are all important drivers of price action in the market. You need to keep an eye on all of these to understand where the stock market is headed.

How are the clients you cover being disrupted?

My clients are primarily long-only portfolio managers, who run actively managed funds. They are being disrupted by ETFs/passive investing. Helping our clients understand how this is affecting the stock market, and the performance challenges that it creates for active managers, is an ongoing discussion.

In your view, what is RBC doing differently than other shops on the street?

We have a very collaborative team in the research department. Both a high quality product and a willingness to work together. This has allowed us to work our industry analysts’ views into our top down view of markets and sector recommendations. Their willingness to collaborate has also allowed us to put together reports quickly that help our clients navigate big issues that arise like the tariffs on Mexico in deeper way than most strategy products.

Joe Spak, Lead US Auto & Auto Parts Analyst

 

Best call you’ve ever made?

MBLY was a stock that was deeply polarizing among bulls and bears and it straddled the auto and tech investor bases. Many were overly bearish on the company’s ability to hold market share but we did a lot of bottoms up work on their technology and competitive positioning and understood auto award/production cycles. The stock was eventually acquired by Intel for $15 billion, a double from when we initiated on the name.

Worst call you’ve ever made?

Generally when I get too focused on low valuations despite “broken” stories. Holding on to an Outperform rating on DLPH was a good example of this.

How is the role of a stock analyst changing?

I don’t think the role is changing too much. It’s always about been about providing value to our clients. But because competition is more intense than ever, the onus is on the analyst to find new ways to differentiate.

If a client needed to know one thing about your area of coverage, what would you tell them?

A stock can have a great company specific story and that can work, especially on a sector relative basis. But, one must be cognizant of that “micro” story in the context of the broader automotive/macro picture which is often an overwhelming force.

How is the industry you cover being disrupted?

Between electric vehicles, autonomous driving, and transportation network companies, technology is really changing the future mobility landscape.

In your view, what is RBC doing differently than other shops on the street?

RBC continues to have a singular focus on providing high quality, high integrity research. We are increasingly providing more differentiated thought leadership that is critical for our clients’ investment processes.

Dr. Brian Abrahams, Senior Biotechnology Analyst

 

Best call you’ve ever made?

Sage Therapeutics (SAGE) was one of our best calls. Leveraging the scientific and clinical expertise of our team as well as my neurology background, we performed a deep dive on the prior data and mechanism for their novel depression drugs, and we concluded they had a high likelihood of success that wasn’t reflected in the stock’s valuation. Their drug candidates have looked effective and safe so far, and the stock has doubled since our initiation.

Worst call you’ve ever made?

I downgraded ZymoGenetics to Underperform in late-2009, my thesis primarily being that shifts in the hepatitis C space away from injectable therapies would make it challenging for them to develop their lead pipeline drug, pegylated-interferon lambda. Less than a year later, the company was acquired by Bristol-Myers Squibb for a significant premium. While our thesis on the changing treatment landscape ultimately proved correct, we underestimated how resilient interest would be in that class of drugs, as well as the value being placed on the company’s marketed product.

How is the role of a stock analyst changing?

It’s not just about having the right call on a stock – analysts need to be ahead of the curve in assessing what key debates are going to emerge and shape their companies and sector. In expanding sectors like biotechnology, where buy-siders can be increasingly spread thin, providing timely, accurate, creative, and objective analysis and feedback to help guide their investment decisions has never been more important.

If a client needed to know one thing about your area of coverage, what would you tell them?

Buckle up! Biotech stocks can be volatile, and the significant valuation swings on data points and sentiment shifts can be a surprise to investors new to the space. So can the complex interconnectedness biopharma companies have with one another, which makes it critical to maintain a holistic view and not just look at companies in a vacuum. That being said, it usually comes down to the basics: stick with undervalued stocks, promising science, and strong management teams, and you’ll win most often in the end.

How is the industry you cover being disrupted?

The intense scrutiny on drug pricing nowadays – a reaction to the rampant price hikes and emergence of high-cost specialty pharmaceuticals in the past decade – is by far the most disruptive force pervading the sector, and still keeps a number of investors on the sidelines especially approaching the 2020 election. Still, given the large amount of capital infused into the sector and significant scientific progress, one should not underestimate the degree of disruptiveness that emerging, innovative technologies like gene therapy and precision oncology can have on the drug development industry in a positive way.

In your view, what is RBC doing differently than other shops on the street?

RBC has a high focus on differentiated research that leverages collaborative viewpoints across the platform, unique events and access that provide forums for idea generation, and forward-looking leadership in dynamics that shape the future of investing. Collectively, this enables RBC to provide high-touch, high-value service to our clients.

Nik Modi, Lead Consumer Staples Analyst

 

Best call you’ve ever made?

10 years ago, I upgraded Estée Lauder to Buy. The stock was at $20/share and traded at 12x P/E. A new CEO took over from outside of the beauty market named Fabrizio Freda (he used to run Pringles—the snack food company). We did a lot of due diligence on what Fabrizio was able to accomplish at Pringles and believed that he could made considerable change at Estée Lauder. Since then, the stock has gone up by 10x.

Worst call you’ve ever made?

Newell Brands. What did we miss? We placed too much weight on the track record of their management team with very little consideration on some of the challenges they could face as they integrated Jarden. I learned a lot from that experience.

How is the role of a stock analyst changing?

I have been doing this job for about 20 years and I would argue the role of the stock analyst has not changed. The job is pretty simple: know more about the companies and industries you cover than your competitors and clients to help them identify the best money making opportunities. With that said, I think the general environment we are in (with technology, ETFs, etc.) is making is clearer who is valued by the market and who is not.

If a client needed to know one thing about your area of coverage, what would you tell them?

Big brands can still survive and thrive. However, the management of those brands is becoming increasingly important.

How is the industry you cover being disrupted?

As we wrote in our Imagine 2025 report, the consumer space is facing tons of disruption due to technology, advancements in science, more transparency on supply chains, consumer feedback and more clarity on what we should or should not be eating based on DNA tests that you can buy at a drug store.

In your view, what is RBC doing differently than other shops on the street?

Continuity. I have been at several bulge bracket firms before coming to RBC and I can say that continuity in the people and leadership is the biggest difference. Also, the firm really believes in research and supports it—even when times are tough. This is not the case at our competitors.

Jonathan Atkin, Lead Information Technology, Real Estate and Communications Services Analyst

 

Best call you’ve ever made?

Rackspace during 2009-2010, which outperformed peer companies in the Internet and hosting sectors.

Worst call you’ve ever made?

Downgrading Clearwire to sell ahead of consolidation in the sector through Sprint and Softbank.

How is the role of a stock analyst changing?

I find that clients are increasingly seeking global perspectives on their sectors vs. earlier regional or country-level views

If a client needed to know one thing about your area of coverage, what would you tell them?

Taking a global view, we are still in the early innings of investment in many areas of Communications and Data Infrastructure.

How is the industry you cover being disrupted?

There is increasing involvement from private capital sources.

In your view, what is RBC doing differently than other shops on the street?

We have a strong tie-in amongst analysts covering adjacent sectors e.g., software, technology, real estate, telecommunications.

Randall Stanicky, Specialty & Generic Pharmaceuticals Analyst

 

Best call you’ve ever made?

Our generic peak cycle call. We identified a historical cyclicality to the sector based on margins and made a bearish call that we were able to capture in a single chart. That chart had us early on the right side of a sector downturn for more than 2 years.

Worst call you’ve ever made?

Our generic recovery call close to three years later. It was a humbling reminder that excessive leverage and litigation overhangs can be really difficult to get past.

How is the role of a stock analyst changing?

Analyzing numbers and reporting the news no longer adds value. There is a need to challenge evolving business models and the management teams and Boards that are driving them whether or not that is popular with corporate management teams

If a client needed to know one thing about your area of coverage, what would you tell them?

To bring a seat belt. It’s a very volatile sector.

How is the industry you cover being disrupted?

The generic sector is under attack from opioid litigation across the US, price fixing litigation by DOJ’s and bipartisan political pressure on the pricing model from Washington. It draws a need for legal, scientific and financial expertise. And while that creates both uncertainty and volatility, at the end of the day this sector still manufactures roughly 90% of the drugs consumed in America.

In your view, what is RBC doing differently than other shops on the street?

Looking further into the future to understand what that means for strategic change today.