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The Sunday Times: Stock pickers of the year

June 10, 2007

Small independent brokers have held their own against the big investment banksMatthew Goodman

WHEN Shell admitted in 2004 that it had repeatedly misstated its oil reserves, the fallout was huge. Billions of pounds were wiped off the company’s market value and several executives were forced to resign.

But the ripples from the scandal helped Joe Brent, a Citi analyst who follows construction and commercial services companies, to one of his best recommendations of 2006 and made him the stock picker of the year in the UK and Ireland in an annual survey of analysts carried out by Starmine, the research firm.

Brent’s best call of 2006 was a “buy” recommendation on RPS, the environmental consultancy, which has a business that identifies and quantifies oil reserves. Brent judged that in the wake of the Shell scandal, the division would come into its own, a decision that proved very astute.

“That division was not especially well understood or appreciated by the market, which was undervaluing the opportunity,” said Brent. Since he tipped RPS, its share price has climbed 43%.

Brent’s other good recommendations included buying Mouchel Parkman, the support-services company, which rose 41%, and selling both Interserve and Johnson Service Group, which fell 24% and 22%, respectively.

The survey is produced each year by Starmine and evaluates equity research analysts according to two skills – their ability to judge whether stock prices are likely to rise or fall and their accuracy at predicting company earnings.

The results are based on the performance of companies in Britain and Ireland during the calendar year 2006. To qualify, analysts must have covered at least five companies in their sectors.

While Brent came top in the annual survey, many of the other top 10 stock pickers are analysts from smaller, independent broking firms.

Liam Igoe, who covers food and household products for Goodbody, the Irish stockbroker, clinched the runner-up spot, in part thanks to an inspired call on C&C Group, the maker of Magners cider. He maintained a buy recommendation for the whole of last year and saw the shares soar 154%. He continues to rate the stock a buy, insisting there is more upside to come, particularly if test marketing in Spain and Germany proves that cider can go international.

Third in the overall table was Richard Rose, of Oriel Securities, who was the top stock picker in the energy sector and made a profitable recommendation on Antrim Energy, which was up 103%. He also had a “buy” on Premier Oil for almost 11 months as it gained 59%.

In the survey of those analysts who most accurately forecast earnings, the pack was led by Colin Crook, who follows diversified industrials at UBS.

His colleague Polo Tang, a UBS media analyst, is in second place. Bridgewell’s industrial analyst, Jonathan Hurn, came third.

Oriel Securities delivered argu-ably the most impressive performance overall. It had nine analysts cited in total in the survey, putting the firm in joint first place with UBS, the investment bank.

What makes these analysts so good at forecasting how stocks are going to perform? There does not appear to be a simple answer. Nick Webster, who covers diversified industrial companies at Numis, said it was vital to spend time getting to know the management teams. “You can pore over the numbers, that’s an important part of it, but you need to understand the people involved and get to know the business more intimately than seeing companies as a spread-sheet and a report and accounts.”

Richard Smith, head of European company research at Deut-sche Bank, argues that another key criterion is breaking with the consensus – but doing it at the right time. “You need to be very astute and have a good understanding of what the market thinks about a stock and how your view may be different from that of the market.”

The survey again highlights the strong performance of smaller broking firms that have performed well against the big banks. Oriel, Bridgewell, Numis and Teather & Greenwood are all in the top 10.

But opinion is divided on why this should be. A senior figure at one smaller broking house, who preferred not to be named, said: “Over the past couple of years, we have seen some of the bulge-bracket banks question the economics of their research departments, with the result that some of the older, more experienced analysts have been encouraged to move on.”

Many of these experienced analysts have been snapped up by the smaller houses, which have been only too happy to get them on board.

Eithne O’Leary, head of research at Oriel, argues that it is those older, more experienced analysts who are more likely to have the confidence to deviate from the consensus view, which can often be crucial for producing good recommendations.

Others argue that the smaller houses tend to be freer of the politics and potential conflicts of interest that could cause problems at the big investment banks. Mark Brumby, who has left Oriel to join Blue Oar Securities, said: “[When you are ata smaller broker] you tend not to be overburdened by the politics of who you act for and who you don’t act for.”

But these arguments are strongly resisted by those operating at the bulge-bracket organisations. Nick Pink, the head of European equity research at UBS, said: “We’ve taken the opposite view, having invested over the past 18 months, adding 6% or 7% to our head count globally, mainly in emerging markets but also key home markets such as the UK. Clients want to pay for high-quality research and that means having brokers who pick stocks well or who have differentiated views.”

It is a view shared by many other big investment banks, which refute the notion that their research departments suffer as a result of conflicts of interest, whether actual or perceived.

One theory for the strong performance of the smaller houses is that they focus more on smaller companies, which can suffer from a so-called “neglect effect” – being largely ignored by the bigger brokers.

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