The Best Pickers in the Pack

Among the best, there's always that subset of the very very best.

We've identified that superb group - the creme de la creme -- of the analysts who scored best in stock picking in our Analyst Rankings -- Equity 2000 survey.

Using data provided by I/B/E/S International, we scored analysts on their stock recommendations for the 12-month period ended Feb. 15, 2000.

The Winners

By name By category By firm Best stock pickers Best firms

Of the 63 analysts who topped their peers, five absolutely blew away the competition. Their performances were far, far better than those of the second-ranked stock pickers in their industry categories. Here, we talk to those five hot hands about what they look for in a stock, and what they're liking right now.

How do they do it? Well, one thing these analysts have in common is that they tend to support the stocks of companies for which their firms have done underwriting and other investment-banking work. While those links are often regarded as a recipe for conflict, for these stock pickers the familiarity with their client firms seems to have provided more stock-picking insight. (For more on the conflicts analysts face, please see our related story on the state of the analyst industry.) Here, then, the winners:

Front-runners by a Mile
Analyst	Firm	Category	Return on I/B/E/S Portfolio	Next-highest Return	Overall Survey Rank
Tim Dolan	Deutsche Banc Alex. Brown	Systems Software	661%	425%	4
James Henry	Bear Stearns	Alternative Carriers	725%	373%	2
David Hilal	Friedman, Billings, Ramsey	Internet Software & Services	800%	466%	6
Jeffrey Lipton	Chase H&Q	Semiconductors	1136%	648%	7
Daren Marhula	U.S. Bancorp Piper Jaffray	Health Care Distributors & Services	217%	124%	5

Tim Dolan

Deutsche Banc Alex. Brown, Systems Software

Dolan, 26, covers "customer relationship management" and e-business applications. He joined Alex. Brown in 1996, having done investment banking and equities research with the First Albany-META Research team. Dolan received his B.S. in accounting and investments from Babson College.

What He Looks for

Dolan looks to fundamentals more than valuation when it comes to picking hot stocks. "What generally moves stocks over the longer term is beating estimates and having estimates get raised," he says. He looks for potential multibillion-dollar market opportunities that are still wide open, where multiple vendors can enjoy hyper-growth that doesn't have to come at the expense of rivals.

"Many of the vendors I follow are growing at 100% to 500% a year, which makes management execution extremely key," Dolan said in an email. "I look for companies that are able to attract and retain management personnel that have experience building large, rapidly growing software companies. A differentiated product with a sustainable technology or functionality lead over competitors is important, but it is often sales and marketing execution that leads to the ultimate winners in the enterprise software markets rather than simply the company with the best product."

What He Likes Now

Dolan currently covers nine companies. Dolan's top picks among "traditional" software companies making the move into the e-business market include Siebel Systems(SEBL), Peregrine Systems(PRGN) and Xchange(EXAP). (Alex. Brown has done investment banking work for Peregrine and Xchange.) With respect to "pure plays" in the e-business applications market, top picks include Vignette Corporation(VIGN) and Eprise(EPRS). (Alex. Brown was the lead manager for Eprise's private placement and recent IPO.)

Like his top stock-picking peers, Dolan doesn't see the investment banking link with his top stock picks as a negative. "Deutsche Banc Alex. Brown has always been considered to have a top-notch franchise in the enterprise software space, going back to our firm's relationship with Microsoft(MSFT), Oracle(ORCL) and Computer Associates(CA).

"Our firm tries to pick the industry sectors where we believe there will be tremendous growth for an extended period of time, and then we focus on picking the top companies within each of those market segments to develop long-term investment banking relationships," Dolan said in the email.

"In certain circumstances, I will pick up research coverage of noninvestment-banking clients that I consider critical to my research franchise. However, the end goal is that these companies would eventually become investment banking clients if I am able to become a top voice on their stock. The bottom line is that our firm wants to be associated with the best vendors in the software industry."

James Henry

Bear Stearns, Alternative Carriers

Henry, 28, covers competitive local exchange carriers (CLECs) and Internet service providers (ISPs). Henry joined Bear Stearns in 1997, after working as a research associate at Alex. Brown. He received his B.A. in psychology from Connecticut College.

What He Looks for

Henry considers five areas crucial when evaluating a company. In order of importance, they are:

• Management team: "The single most important thing," he says.
• Equity (venture capital) sponsorship: "They don't bring just capital. They bring critical experience, expertise and stewardship," he says.
• Strategic relationships
• Access to capital: "Capital is the lifeblood of this industry."
• Results: financial and operational -- revenue growth, quality of revenue, margins, underlying profitability over time.

What He Likes Now

Henry's top picks among CLECs are Covad Communications Group(COVD), Intermedia Communications(ICIX), and MGC Communications(MPWR).

On the ISP side, which includes Web hosting, he likes Digex(DIGX), Data Return(DRTN) and PSINet(PSIX).

Bear Stearns has done investment banking work for all six companies. But Henry insists that doesn't taint his picks. To the contrary, he sees research as a driver of what business the investment banking arm picks up.

"Of the 30 companies that I cover, we have banking relationships with the vast majority," he says. "The Bear Stearns research franchise is well recognized, and has attracted a lot of companies that want to do business with us. You will find that we have a disproportionate number of 'buy' ratings."

"It's really a sector bet, an industry bet. We will not take a piece of any sort of corporate finance business if research is not supportive. For every deal we do that you hear about, there are 10-plus that we don't do."

David Hilal

Friedman, Billings, Ramsey, Internet Software and Services

Hilal, 29, specializes in Internet "enabling technology." Prior to joining Friedman Billings in 1997, Hilal was a manager at American Management Systems(AMSY), a global information technology consulting firm. Hilal received both his M.B.A. in finance and his B.S. in mechanical engineering from the University of Notre Dame.

What He Looks for

Hilal takes a top-down approach when evaluating companies. The most important criteria he considers are:

• Market size and market growth: Is the market saturated or still in its infancy?
• Technology: "I view that as the barrier to entry. Companies that have their own intellectual property tend to do better competitively."
• Differentiation: He looks for unique relationships with OEMs, or partnerships, not what he calls "Barney" relationships, the "I love you, you love me" deals.
• Management: "Management must be able to change the direction of the ship. You can't put it on autopilot."
• Business and revenue models: "If they're not making money today, do they have a revenue model where they can?"

What He Likes Now

Hilal currently covers nine stocks. His top two picks are Inktomi(INKT) and Ariba(ARBA). Hilal says the two companies both have a dominant position in their space and attractive revenue and business models. Another favorite of Hilal's is WebMethods(WEBM). Though not yet cash-flow positive, WebMethods has a recurring revenue model that Hilal likes. (Friedman Billings had a venture capital investment in WebMethods and also underwrote the company's IPO.)

"My relationship with public companies is solely research," says Hilal, explaining that he isn't part of investment banking decisions involving public companies. (The firm has investment-banking relationships with three of the companies that Hilal covers.) Still, as a limited partner in Friedman Billings' venture capital investment division, Hilal does participate in decisions regarding investments in private companies, like the investment in WebMethods.

Jeffrey Lipton

Chase H&Q, Semiconductors

Lipton, 34, covers broadband components, including optical networking, and communications chips for Chase H&Q. Lipton joined Hambrech & Quist in 1996 after having worked as a management consultant at A.T. Kearney. He received a B.S. and an M.S. from Lehigh University and an M.B.A. from Univeristy of California -- Los Angeles' Anderson Graduate School of Management. He is a registered professional engineer and a member of the Institute of Electrical and Electronics Engineers.

What He Looks for

Lipton has a long list of criteria that he uses to evaluate a business, including:

• Long-term fundamentals
• Quality of management team
• Quality and defensibility of intellectual property: "Especially in optics, intellectual property is important."
• General ability to focus, execute and manufacture
• Quality of acquisitions and the ability to digest acquisitions, in an industry that is very acquisitive
• Level of innovation

What He Likes Now

Lipton currently covers 12 stocks. His two favorite picks are SDLI(SDLI) and PMC Sierra(PMCS). He cites their fundamentals and potential upside in the models.

Lipton also likes Broadcom(BRCM), JDS Uniphase(JDSU) and New Focus(NUFO). (Chase H&Q has done investment banking for SDLI, PMC Sierra, Broadcom and New Focus, and for two companies that JDS Uniphase acquired.)

"Banking relationships are often viewed as a negative, but I view that as a positive. You get to learn about the company, and establish strong relationships with the management team. Our banking and research team sits down and we decide which deals we do," he says.

Daren Marhula

U.S. Bancorp Piper Jaffray, Health Care Distributors and Services

Marhula, in his late 20s, covers information-driven health care, software and Internet services to the health care industry for Piper Jaffray, which he joined from Wessels, Arnold and Henderson. He received his B.A. from the University of St. Thomas, where he double-majored in accounting and finance.

What He Looks for

Marhula cites four crucial qualities he considers when sizing up a company. They are, in order of importance:

• Solid business model that contains some sort of value proposition for the industry
• Management team
• Proof of concept: Does their product work?
• Distribution strategy that shows how they're going to get their product to their customers

What He Likes Now

Marhula covers 11 stocks. His four favorites are Cerner(CERN), Data Critical(DCCA), Medical Logic (MDLI) and Allscripts (MDRX). (Piper Jaffray has done underwriting for two of the companies that Marhula covers: Data Critical and Medical Logic.)

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