The New Stars of the 52nd Annual All-America Research Team

Every sector has a story.

For midcap banks, it was a regional banking crisis that unfolded in March of this year and culminated in four bank failures. In biotech, it was the debut of a class of diabetes and weight loss drugs called GLP-1s (glucagon-like peptide agonists) that are poised to transform and disrupt more than just health care and obesity rates.

Some narratives started long before 2023 and are less macroeconomic and more business-specific. For restaurants, it is the continued rise of Chipotle after 2015–2016’s food safety scares. For autos, it’s the recognition of Ferrari as more than an auto company. In consumer finance, there was an influx of customer activity to pawn shops during recent inflationary periods.

In all of these stories are institutional investors who need help separating signal from noise, and they turn to sell-side research — including the latest set of analysts to earn their first No. 1 positions on Institutional Investor’s annual All-America Research Team.

Ten analysts from a diverse group of sectors and firms make the cut this year for the first time. No. 2 firm JPMorgan Chase has one analyst newly taking top honors, and third-place finisher Morgan Stanley has two. Jefferies, which moves up one step on the leaderboard, to fifth, boasts two, and ninth-ranked Barclays has one. Impressively, four of the ten spots go to Evercore ISI. The highest-ranked boutique firm also repeats both its fourth-place overall performance and its No. 1 ranking for individual analysts on a weighted basis.

Regardless of the firm, many on this list have made their names during challenging times — from recessions and potential recessions to the crucible of Covid to a myriad of geopolitical concerns. But these respected analysts agree that they — and their clients — are better for having weathered the turbulence.

“When you go through some of these black swan events as an analyst, you end up being really grateful that you actually went through them because it teaches you how to think in a really creative manner,” says one new AART star. “And the goal is really to put yourself in the same position as an investor — they have to get the right answer — and it makes you do better work.”

Getting it right is important — but, according to another new No. 1 analyst, being there for clients “as the clouds roll in” is of even greater value. Read on to find out what these analysts did spectacularly well and what they’ve learned from the misses.

Staying overweight Sherwin-Williams for the past decade (up more than 300 percent). We were early in recognizing that Sherwin’s business is much more than a can of chemicals levered to housing starts and existing home sales. Rather, it is really a business services company that sells chemistry to a professional customer whose focus is less on the cost of the chemistry itself and more on the chemistry being available where and when it needs to be, in the proper quantity and quality, and alongside all necessary equipment. Sherwin’s ability to deliver that value proposition head and shoulders above its competition has provided the company not only substantial market share growth, but also unrivaled pricing power through the cycle.

Upgrading FMC to overweight at the beginning of 2023, just as a massive destocking cycle was getting underway in crop chemicals. We were very out of consensus last year in adjacent fertilizer products (which FMC neither makes nor sells). We thought there would be a significant volume and price correction as our checks were uniform that there had been significant fertilizer overstocking during the price run-up in the second half of 2021 and the first half of 2022. However, we missed that such a hyper stocking cycle had also happened in crop chemicals (FMC’s business), and that such a thing has never happened before in crop chemicals on a global synchronized basis.

Though collaboration is at the forefront of what we do in research at Morgan Stanley, I will generally flex this muscle more during turbulence. Whether it is looking to counterparts in other sectors or peers in other regions, [collaboration] is the best way to gather more-differentiated data points and frames of reference for what is typically a wider range of outcomes than in calmer market conditions. If we collectively can narrow the range of outcomes — particularly in terms of the bear case — it can be helpful for investors.

The best call has been on Arista, where over the years we have been able to look through the noise in relation to spending from the company’s key cloud customers and focus on the long-term drivers of investments toward higher data center capacity. We believe the work we put into understanding Arista’s position in each layer of a data center and with each cloud customer enabled us to appreciate the growth opportunity vis-à-vis the limited risk and recommend a stock that had a favorable outcome for our investor clients — increasing 253 percent since we upgraded in October 2020 versus the S&P 500 tracking only 27 percent higher over that period.

Sometimes we have focused too much on potential short-term upside from cyclical drivers to the detriment of our analysis of long-term fundamentals. We recommended Corning in 2021, led by the postpandemic peak we were seeing in consumer spending across markets, such as TVs and smartphones, as well as investments in fiber network infrastructure. The momentum quickly turned south, resulting in a significant inventory digestion cycle as expectations for long-term fundamentals in relation to through-the-cycle revenue growth and margins remained below the peer group.

We have tried to remain focused on long-term themes and drivers amid the cyclical volatility. With our “AI Winners in Hardware” report, published earlier in 2023, we helped focus investors on the early- and late-cycle hardware winners against a backdrop of a noisy AI investment cycle, and we received significant appreciation from long-term investors.

When we launched coverage at Evercore in 2019, making Apple one of our three core names to own (Triple AAA Portfolio — Apple, Amphenol, and Arista) was hugely controversial. The stock on a split-adjusted basis was at $40 at that point, versus close to $180 currently. Our narrative was extremely simple but heavily debated: Our view was that Apple has morphed into a consumer staple asset and is no longer just a technology hardware company. Its ability to keep the more than 1 billion captive iOS users intact and focus on monetization of the install base via wearables and services will enable valuation to get toward consumer staple assets (mid- to high 20s), versus a hardware valuation in the midteens. The pandemic helped accelerate the value proposition for Apple and its ability to manage though a disruptive supply chain issue while maintaining strong profits, and free cash flow certainly helped in the rerating of the stock.

Over the past few years, we underestimated the impact of supply chain disruptions to (relatively) smaller companies that weren’t able to get the required components from key semiconductor companies. Although these companies (CIEN, for example) saw backlog strength, they weren’t able to translate this to revenue or earnings per share, creating a sizable mismatch between investor expectations and execution.

Communicate, communicate, and communicate — be it research reports, emails, phone calls, etc. We think our singular focus should be to provide clients insights on any and all topics related to our industry and on how the industry can disrupt the incumbents. This to us has always meant overcommunication — be that publishing primers and deep dives, conducting surveys and channel checks to gauge what is evolving across the tech landscape, or holding unique conferences and events on key topics that investors are focused on. In addition, in volatile and potentially unprecedented times, we think providing detailed scenario analysis and parallels to how things unfolded in the past tends to be extremely helpful for clients.

An effective call we recently made was downgrading the fintech sector. It was partly the notion of “There’s lots of exciting and innovating and growing nuances in fintech.” But one thing we noticed is that there was a big frenzy and that valuations seemed to be outsize, but more important, we noticed some fundamental cracks. The fintechs that I cover are more consumer-facing, and we identified some credit deterioration. We also were following the funding markets, such as the asset-backed securitization markets, which is how a lot of these entities were funding the growth of their business. We noticed that there were destabilizing issues in the funding markets, too. We did a few downgrades in that sector — and you’re better lucky than right, to some degree — but the timing of our downgrades was as good as I’ve ever had. We literally top-ticked it, and they all dropped very quickly and collapsed for the reasons that we had pointed out in our downgrades, largely.

What’s the worst call you’ve ever made?

In 2013–2014, I was really, really bullish on the auto finance sector, and I was arguing for rerating of equities and that there was a lot of earnings upside at the same time from a fundamental perspective. I was wrong, and the stocks underperformed. They underperformed because there was a competitive cycle where underwriting got a little bit loose, so there was credit deterioration despite a reasonably stable economic backdrop. Even though I knew that was going on, because we look at the data, I was still pitching the stocks. They eventually recovered and did okay, but I was just way in front of it. What I learned is that on the sell side, you can’t be stubborn about your call. You have to listen to the market. You want to have confidence and you want to have passion about a call and you want to be a little different than the market to the extent you can be, but you have to be willing to recognize you’re wrong at some point if you are.

What’s the best way analysts can add value when markets are turbulent? 

This may not be an answer that everybody’s going to agree with all the time, but I would say actively reporting. When Covid hit and things became crazy, you would’ve expected consumer finance to have a terrible backdrop of waves of delinquencies and losses. FirstCash Financial was one of the first reports in April 2020 — right when things were just amok — and their loan balance had dropped by like 30 percent. Right away, I realized what was unfolding here was exactly the opposite of what we would’ve expected. The consumer is getting money from stimulus programs and paying down debts. For the next 18 months, credit quality was historically the best ever, because people were flush with cash. You just didn’t expect that when we were bracing ourselves for economic calamity.

But the answer to your question is that we aggressively reported. We would get as many data points as we could and put them in a note in a nonobjective way. The best way you can help people is to provide them unfettered information to help them come to a conclusion about their opinions. If you do that constantly, the risk is you become spam, but if you’re synthesizing and providing the reader information that can inform them about something that they’re uninformed about, that’s really a value-add. The concept of ratings and so forth is an important function of what we do, but it’s substantially less important than giving somebody information that helps them become more educated about something.

Our best call so far is initiating an overweight on Ferrari and sticking with it since the 2015 IPO. Since then, the stock is up eightfold. We viewed Ferrari as a seller of “fine art” rather than an auto company. As such, the multiple has expanded to levels more akin to Hermès/LVMH than an auto manufacturer. Looking ahead, we expect Ferrari’s electric vehicles (from full-year 2026) can be just as profitable as their V12-engine supercars.

Upgrading Carvana to overweight when it was at $263. At the time, the company was gaining significant market share during the Covid-fueled used-car boom. However, that growth proved neither sustainable nor profitable. Then a poorly timed acquisition of a physical auction business saddled the company with loads of debt. The stock trades at about $34 today.

There are always market inefficiencies, but during times of technological and geopolitical disruption, those gaps in thinking can be even larger than normal. Morgan Stanley’s research culture encourages cross-sector collaboration to find information and analytical asymmetries that exist all around us. So gather your facts and tell the story with a reasonable basis. Be willing to be wrong, and don’t hide when you are.

I went overweight on Crowdstrike Holdings post their IPO, at approximately $34 in mid-2019, with the thesis that it would do to the endpoint security market what Palo Alto Networks had done to the network security market — a similar legacy as the next-generation shift years before, despite what was an expensive valuation at the time. The call evolved over the years with a shift in valuation to free cash flow, and more recently a shift to a platform story. We’ve stayed overweight on the stock consistently since then, and it is up approximately 500 percent — compared with the iShares Expanded Tech-Software Sector ETF (IGV), up approximately 165 percent over the same time — so we’ve been very fortunate.

What’s the worst call you’ve ever made?

I went overweight on Carbonite in January 2018, citing it as a “value with a catalyst” call – we thought a perpetual-license part of an acquired business could stabilize and a faster-growth subscription business could offset. In July 2019, the company announced a management change and lowered guide from more competition — we downgraded from overweight to underweight that night, but through that time the stock was down 6 percent while the IGV was up more than 40 percent.

What’s the best way analysts can add value when markets are turbulent? 

SMID software moves are most often driven by sentiment, industry conversations, and the direction of earnings to free cash flow, so being active in each of these, I think, can add value. I also think remaining grounded in the long-term fundamentals of our companies’ end markets is key to helping look through some of the short-term volatility and spot opportunities for disconnects.

I upgraded Etsy in September 2019, when the stock was trading at approximately $60, on the following thesis: a) Etsy should realize the benefits on its top and bottom lines from product innovation, which was really the low-hanging fruit that the then relatively new management team (which was about two years in) had been working on — for example, offering free shipping and scaling the company’s advertising business; b) it should see some upside post integrating its then-recent acquisition of Reverb; and c) [it should realize the] benefits of network effects from new product and marketing initiatives impacting purchase frequency. The stock rallied, to approximately $120, one year from the upgrade and peaked in the fourth quarter of 2021, at approximately $300. It’s worth noting, however, that my upgrade was pre-Covid (and, of course, no one knew that the world was going to experience a pandemic), which clearly benefited Etsy in a very meaningful way for the two years following. That brings me to my second call on Etsy — a tactical underperform in November 2022, at $125 per share — which was a three- to six-month call based on the thesis that consumer spending would start getting pressured, consumer sentiment was turning negative, and one of Etsy’s key growth catalysts — purchase frequency — could deteriorate in the near term. Also, Street estimates seemed aggressive and not fully derisked, and valuation seemed rich against our estimates for Etsy. By May 5 — after Etsy’s first-quarter print and six months from the call — Etsy was trading at $90 (down 28 percent, versus the S&P 500, which was up 3 percent).

Fubo. I launched on the name with an outperform rating in April 2021, when the stock was at approximately $22. It is at about $2 today, and we downgraded it late (in February this year), when it was at around the same level as today. I should have paid closer attention to the company’s debt and cash levels against its losses. Fubo went public in 2020, when top-line growth was still very much rewarded over profitability. The environment clearly changed post-Covid, with rising inflation and interest rates and greater focus on profits over growth.

In turbulent and volatile markets, when uncertainty rises and daily stock moves — especially in SMID internet — could have relatively large swings, a few things that I believe analysts can do to add value are: Dive deeper into the models to identify if there are any investment opportunities being created from large stock moves; work on thematic and deep-dive notes that could shed light on companies’ mid- and long-term growth prospects, competitive positioning, improving (or weakening) trends from leading indicators, to name a few; and be at the forefront of key risk factors and industry debates (top-of-mind topics) across individual names and the overall sector.

The most important stock call in my career has been McDonald’s, which has been our recommendation in all but one year since 2003. We launched with a buy when it was at $20 per share. However, the best call in recent years has been our upgrade of Chipotle to outperform, at $405 per share in October 2018. The key to the call has been — and continues to be — recognizing the company’s earnings growth potential (and upside to consensus). Initially, this earnings upside was a result of a healing brand as food safety perception improved following food safety scares in 2015 and 2016. Leadership under new CEO Brian Niccol, who joined in March 2018, also recognized Chipotle had good operational bones, with a “second make” line dedicated to expanding digital orders. The company has leveraged this capacity by leaning in on digital capabilities that were already improving under CTO Curt Garner. Chipotle has also used additions like queso, carne asada, and the “Chipotlane” format to reach new consumers — particularly suburban families. Of course, its digital capabilities would become particularly critical during Covid, but digital sales had already been growing — causing the stock to double in the year before the pandemic. Today we still rate the company outperform. We now see significant earnings upside to consensus being partly fueled through increasing labor productivity and throughput — a result of focus and improved kitchen equipment.

Allthough we have gotten Wendy’s stock right at times, we missed huge parts of its run from $5 in 2012 to $20 in 2019. The move has been a learning experience in how growth in free cash flow per share can drive stock upside. Under CEO Todd Penegor and previous management, the company restructured through refranchising and reduced general and administrative spending. These changes, together with increased debt leverage, allowed for aggressive cash return to shareholders in the form of share repurchases. Free cash flow per share rose from $0.20 to nearly $1.00 from 2011 to 2019. Looking back, we perhaps put too much importance on systemwide sales growth. For us, the rise in free cash flow was partly obscured by Wendy’s relatively low 3 percent systemwide sales growth (2 percent average same-store sales growth and 1 percent unit growth) during this time.

During periods of market turbulence, we often increase our contact with the industry. By telling investors what is really happening with the consumer, we can often find opportunities in stock volatility. Importantly, these industry insights allow us to engage in dialogue with top investors so we understand consensus — something that is valuable when navigating short-term stock action. In addition, there are times when we can lean on Evercore ISI’s outstanding industry analysts and macro team to garner lateral insights, which is something we did quite a bit during the early stages of the Covid crisis. Last, sell-side analysts can be helpful by presenting scenario analysis during a choppy period. At times, it helps to simply lay out the new risk-reward that has resulted from a demand shock or sharp stock moves.

We initiated on Citizens Financial with an outperform rating in late 2014, shortly after the spin-off from Royal Bank of Scotland. Our constructive and nonconsensus call was based on our expectation that Citizens’ discount valuation would abate over time as management focused on improving the bank’s lagging profitability. Over the course of the next two years, Citizens made noteworthy progress in right-sizing previously subscale, but higher-return, businesses while also extracting efficiency gains across an underperforming branch franchise. Steady improvement in Citizens’ return on equity, business mix, and growth profile through year-end 2016 supported substantial upside to the stock — which gained 47 percent over this period and outperformed the Nasdaq Bank Index by 21 percent.

We were constructive on SVB Financial’s discounted relative valuation heading into the March–April 2023 deposit run and the subsequent failure of the bank. Our view had been that though unrealized losses amassed in the securities portfolio were significant and limited management’s funding flexibility, the bank had substantial sources of off-balance-sheet liquidity to offset deposit pressures. We had also expected that any future actions to sell portions of the securities book would likely be conducted at a measured pace. However, our outlook underestimated the impact of SVB’s highly concentrated and social media–savvy depositor base, which resulted in deposit outflow gaining steam at an unprecedented pace. This, paired with a steeper-than-expected move in rates, necessitated a larger bond restructuring than anticipated, which left the bank short of capital as the related equity offering faltered. Our goal during this period shifted to helping investors understand the options SVB was now facing as the situation became dire, and more important, the implications for other banks with similar interest rate risk and deposit pressures.

What’s the best way analysts can add value when markets are turbulent?

The best way to support investors amid turbulence is by providing insight, data to help in analyses, management access, and market color to help navigate the uncertainty. There may not be a better example than the regional banking crisis of March–April 2023. Many investors had exposure to the banks that either failed or were in a tailspin given similar deposit and unrealized loss dynamics. What became evident was that clients assigned utmost importance to our team’s availability to discuss sector developments as they unfolded, rather than sifting through our and the Street’s rationales supporting pre-existing investment theses. Investors found value in the insight we provided regarding bank exposures across the sector, market perceptions of balance-sheet positioning, and noteworthy shifts in investor and depositor sentiment. Sell-side analyst stock recommendations are a vital piece of the value we add, but being there for clients to make sense of real-time developments as the clouds roll in has proven to be of even greater value during times of stress.

I don’t know if this is the best in terms of return, but it was the most satisfying for me: We made Alexion our top pick during the pandemic. I like that call because it was a combination of everything that makes a great stock call: luck, timing, and then having something differentiated from a research perspective. The luck was that everything had traded down during Covid. The S&P 500 had fallen off a cliff, so we had a chance to initiate when the stock was $85 to $90, where it had never been historically. No. 2 was timing: Alexion was a value trap stock for many, many years. We also initiated right when that legal case against Amgen was starting. The last thing is that we try to do our own analysis. We had an edge where we found a U.S. patent office ruling that suggested Alexion was going to win the trial outright — and we actually had that piece of information for a few months, which is very rare on Wall Street. They had a bullish settlement with Amgen, and then the company sold a few months after that. It was $85, going to $170 in a large-cap biotech stock in less than a year.

The worst call was this year. I was neutral on Lilly, with this whole GLP-1 weight loss drug mania, and I was wrong in two ways. One is we had made a valuation call where basically we said the stock was about $300. Today it’s over $500. I think I learned, for a large-cap pharma analyst, the importance of a narrative and how that can often be so much more powerful for investors to get attracted to than me and my fancy model with a million other things that I’m telling people to pay attention to. Obesity’s the greatest elevator pitch in the world. Half of Americans are obese. You have a drug that actually can have a transformative effect in patients. Until there’s a reason not to own those stocks, you have to be involved. I think I misunderstood what the scale of the opportunity was, but the more damning thing was I was also wrong on my scientific call.

In my view, and I tell this to my team all the time, it is a privilege to fail. The important part is that we need to constantly put ourselves in a position where we either look right and really smart or we look stupid. What we can’t do is avoid the scenario entirely and just kind of play both sides. You have to make a call because that’s what your investors are demanding that you do. You need to have the courage to make that call if you’re going to have integrity as a research analyst.

Covid is a really interesting case study. I covered BioNTech from its IPO, and this was one of the companies that developed one of the vaccines. One of the mistakes that biotech analysts and pharma analysts make in particular is that we are so siloed in our bubble. Science is political and drugs are political, and they have an effect on humanity. We need to think about problems through a wider aperture. The year of Covid was one of the biggest years for my team and my career because we didn't just understand the efficacy of the vaccine; we also attempted to create our own model to track where the virus was headed and take on a larger percentage of the problem. All of these problems are so much bigger than any one person can understand, but the wider your aperture, I think, the more useful you are.

• The 2023 All-America Research Team

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• All-America Research Team: 2023 Finance Stars Q&A