CREE--WSJ(5/3): FLORIDA JOURNAL: Heard In Florida: Tennessee Firm's Stock Picks Lead While Its Competitors Lag Behind
05/02/2000
Dow Jones News Services
(Copyright ¸ 2000 Dow Jones & Company, Inc.)
By Kelly Greene
Staff Reporter of The Wall Street Journal's Florida Journal
MEMPHIS, Tenn. -- The country's top stock pickers aren't in New York or Silicon Valley. By one yardstick, they are in Memphis.
Morgan Keegan, the Tennessee firm, trounced the competition in a recent ranking by Zacks Investment Research of 14 firms that maintain "focus lists" of their most highly recommended stock picks.
Focus lists are very important when a firm wants to prove its investment prowess, especially to lure new customers. For the five years through Dec. 31, Morgan Keegan's focus list scored a 596% return, including dividends, racing far ahead of the 220% gain for the benchmark Standard & Poor's 500-stock index. The firm also reported a 66% leap for its picks in 1999.
Of 13 other brokerage houses with focus lists, New York's Lehman Brothers came in No. 2, with a 325% return for the five-year span. Finishing last was Raymond James of St. Petersburg, the only other Southeast firm ranked; it had a 138% gain for the five-year span but an 8% loss in 1999. David Henwood, the firm's chief investment officer, attributes the loss to the firm's small proportion of technology stocks and large chunk of midsize and small stocks, which have been outperformed by the large ones.
First-quarter numbers haven't been tallied but Morgan Keegan figures that its picks rose about 15% in the turbulent quarter. And Raymond James says the tech rout and accompanying small-cap rally helped it turn around its performance.
What accounts for Morgan Keegan's stock-picking success? You might call it the Socratic method turned loose on the stock market.
Instead of compiling a list of its analysts' most glowing recommendations, the chiefs of Morgan Keegan's equity, institutional-sales and syndicate desks grill their analysts on the performance of the list's current stocks in a weekly meeting. Each Tuesday afternoon at 2:15, the group convenes in a fish-bowl conference room just off the trading floor. Then the "pitch battles" begin, says one participant, referring to all the ideas that get pitched.
The idea is to figure out which industries are ripest for a run-up -- then predict which shares in those industries will beat the average, says Stephen Laffey, president of the firm's equity-capital markets division.
Mr. Laffey, who describes himself as the "sole decision-maker," gathers input from everyone in the room but makes the final call on which industries to target, along with which companies within those sectors stay on the list, which get added and which get axed. And sometimes, his calls are the opposite of his analysts'.
That's the way it was intended, says the firm's vice chairman, John Stokes, who started the list in September 1987, shortly after Morgan Keegan had an investing debacle in which many customers and staff invested in Gateway Medical -- a hospital operator unrelated to the big PC maker -- just before it lost half its value. "I decided we needed something to keep the brokers out of trouble," Mr. Stokes recalls.
So Mr. Stokes, who headed the equity division at the time, gathered together a group of top executives "with no axes to grind," not only from research but also in institutional sales -- including a few of the cynics. That way, he figured, there was less chance that the pickers would succumb to pressure from the firm's investment bankers who were trying to drum up business from publicly traded companies.
So, with the stock market swinging up and down so wildly, how are the stock-pickers at Morgan Keegan thriving? Let's look in on a recent meeting:
At 2:15 sharp on April 25, Mr. Laffey puts an end to the group's chitchat over iced tea and cookies. (Oatmeal raisin goes the fastest.) There's the current focus list of 16 companies to catch up on, ideas to dissect -- and another meeting scheduled for the same room in exactly one hour.
First up: Concord EFS, a little-known Memphis processor of ATM, debit-card and credit-card transactions with a stock-market value of about $4.5 billion. The oldest stock on Morgan Keegan's list, Concord has been there since Feb. 9, 1999, when it cost $19.06 a share. It spiked up into the low $30s last November, but now it's down to the low $20s.
First, Concord got hit last year by a tough-to-swallow acquisition of another processor, Electronic Payment Systems. Then came the interest-rate jolt: Concord, which processes 7% of all bank-card debit and credit-card transactions, got hit by interest-rate fears.
But analyst Hal Goetsch tells the meeting that Concord has delivered first-quarter earnings that morning of 17 cents a share, vs. a year-earlier loss of 2 cents a share. And the stock has been trading at roughly 25 times estimated 2000 earnings of 88 cents a share, making it cheaper than a big rival, Atlanta's First Data, he adds.
Mr. Laffey cuts to the quick: "Are we beyond this overpromising?" he asks, referring to Concord's missed earnings after last year's Electronic Payment acquisition. And Elkan Scheidt, who manages a Morgan Keegan mutual fund, chimes in that investors are zeroing in on profit margins -- which is not good for Concord, whose gross margin shrank to 25% in the first quarter from 27.5% in the fourth.
Still, Concord stays on the list. "It's going to take three months to take off -- that's my bet," says Mr. Laffey. "We know it better than anybody."
The group then comes to its second source of conflict: Cree of Durham, N.C. Added to the list in September at $34.885, it skyrocketed in March to $202, then fell back to the $145 range. Using proprietary technology, Cree cooks up a material called silicon carbide that it then slices into chips used to light up blue digital number displays and green traffic signals.
There's a new risk, reports analyst Tavis McCourt: Cree is planning to shift its production process later this year so it can make 3-inch wafers instead of its current 2-inch model. Although the move would boost capacity, he worries that any glitch could throw off sales.
Mr. Laffey's query: "Is there going to be a glut" of Cree's product? But Mr. McCourt's confidence wins out. He predicts that a glut would be "hard to imagine."
Soon, the group has moved on to delivery firms, namely Atlanta-based United Parcel Service and Memphis-based FedEx. Rising gasoline prices are the group's big concern.
But analyst Art Hatfield explains that the carriers have spent the past few months slapping on fuel surcharges and increasing their hedging activity against the price increases. The higher prices "hurt them on the upside, but they will make money [on the surcharges] coming down," he contends.
Still, the group -- like many individual investors -- struggles to predict the impact that increasing interest rates could have on the business. "The biggest risk is if the Fed goes too far and the economy slows down," says Mr. Hatfield.
Next up: Tech Data of Clearwater, Fla., which distributes computer hardware and software, both to retailers and resellers. Although it's a "bad industry going through margin compression," Mr. Laffey says, "we're renting this one," meaning the firm hopes clients will benefit from holding the stock for a brief time. It was added to the list March 30 at $29.886 a share, and now trades above $40.
The attention moves to a few more technology picks. But it soon turns to analyst Brent Rakers, who rushes into the room with good news for the list's oil-industry stocks: The federal government has just approved the building of two 400-mile oil pipelines in the Gulf of Mexico. And two companies that are likely to benefit from the increased construction business are on the focus list: Global Industries of Lafayette, La., and Horizon Offshore of Houston.
Mr. Laffey is practically giddy. "That's good, man," he tells Mr. Rakers. "You get a cookie and get out."
A few minutes later, when the group votes on which three picks to emphasize to Morgan Keegan's brokers that week, the two pipeline builders get two out of the three votes. The third goes to QLogic, a Costa Mesa, Calif.-based supplier of semiconductor products whose big thrust now is fiber channel interfaces, which speed communication for the network servers driving e-commerce Web sites.
Sometimes, the list gets a major makeover after the Tuesday meeting. But on this particular Tuesday, nothing new strikes Mr. Laffey's fancy. The list stands.
---
Beating the Odds
Memphis-based Morgan Keegan's focus list of stocks has outperformed 13 other major securities firms, along with a few stock indexes, for the past five years. Here are the numbers:
CHANGE FROM CHANGE FROM
12/31/94- 12/31/98-
12/31/99 12/31/99
Morgan Keegan 596% 66%
S&P 500 220 20
Russell 2000 102 20
Note: Figures include price changes, dividends and hypothetical trading commissions of 1%.
Source: Zacks Investment Research
---
Making the List
A look at the Southeastern picks on Morgan Keegan's focus list of stocks from last week
DATE PRICE PRICE ON CHANGE
COMPANY ADDED WHEN ADDED 5/1/00 IN PRICE
(HEADQUARTERS)
Concord EFS
(Memphis, Tenn.) 2/9/99 $19.063 $21.875 15%
Cree
(Durham, N.C.) 9/28/99 34.885 146.000 319
FedEx
(Memphis, Tenn.) 3/16/00 34.881 37.125 6
United Parcel Service
(Atlanta) 4/6/00 59.034 64.250 9
Tech Data
(Clearwater) 3/30/00 29.886 43.625 46
Source: Morgan Keegan
(END) DOW JONES NEWS 05-02-00 |
