Rick Sherlund, who tracks software for
, is famous for his close connections to software giant
, which he has followed since before its 1986 initial public offering. But, Sherlund -- one of the "most connected" analysts in
Analyst Rankings -- Equity 2000
survey -- relies on more than his ties to management.
His most important call on Microsoft this year, in fact, came about despite what his company connections were saying, Sherlund recalls. Back when the company launched Windows 2000 on Feb. 17, officials said that the company would make its numbers for the quarter. Again in March, top Microsoft executives, including the chief financial officer, expressed their optimism.
But Sherlund was skeptical. "Sometimes it's what they don't say as much as what they do," he says. "I quickly checked with my sources and it became evident that we should be nervous." In early April, Sherlund cut his quarterly revenue estimate for the company by $200 million. It turned out that Microsoft came up $300 million short. "Right on the money," says a Sherlund fan.
In a world where fortunes can ride on a detail, Sherlund's experience shows the importance of using legwork to assess companies and industries. For Wall Street analysts, staying ahead means staying connected.
Connected analysts maintain close relationships with management, but never rely on management to tell the whole story. They penetrate layers of a company, and they develop sources of information among suppliers, distributors and consumers. They look for inconsistencies -- and keep digging until they get an answer.
"Others were sniffing down the same trail," says Sherlund of his Microsoft 2000 experience, "but our sources were more varied and deeper."
Largely because of his wealth of contacts, Sherlund is widely regarded as "the ax" on Microsoft, the one analyst whose views on the company matter most. (See our
related story in this series on axes.) In
Analyst Rankings - Equities 2000
, voters identified Sherlund and a handful of other analysts as particularly "well connected," namely, that they have "broad, deep relationships with quality sources."
Lori Appelbaum, Banks
is Lori Appelbaum, Goldman Sachs' bank analyst, who is praised by a voter for her "in-depth and useful information." In this notoriously tight-lipped industry, Appelbaum takes advantage of her longstanding banking industry sources. And she puts a lot of time into grass- roots research to test rosy management forecasts. "It's not a good sign when I visit a branch and nobody says a word to me," she says.
Such contacts helped Appelbaum provide an early warning on the problem loans plaguing major banks recently, she says. "It's a virtuous circle. In a business of information, the more you're in the flow and the more you have, the more you get." Appelbaum also swung into action when a mid-May
conference call generated speculation that the company was about to acquire
; after tapping her sources, she quickly dispelled the rumor. To date no merger has been announced.
Ivy Zelman, Building Products
Meanwhile, Ivy Zelman, who covers the building industry for
Credit Suisse First Boston
, says she has a "skeptic's view of things." Eager to see everything for herself, Zelman casts her information net wide. She contacts distributors, retailers, private building firms and other related companies -- such as kitchen and bathroom equipment suppliers -- to gauge the health of her companies. Often, she says, a company will raise prices and not announce it to Wall Street. But calls from irate sources will clue her in.
Zelman, who is lauded by voters for being "very tough with management," also likes to question retailers about changing preferences. She then goes back and confronts company officials with the sales data. "If the company says it's not true, I go back to the retailer and ask again," she says. "It's a good check."
Dana Telsey, Apparel Retail
For her reality check,
apparel analyst Dana Telsey shops. "It's the only way to know retail," she says. When Stockholm-based
Hennes & Mauritz
made its first foray into the American retailing scene by opening a flagship store on Fifth Avenue, Telsey braved the crowds to assess H&M's staying power and impact. "I only went 16 times," she says with a laugh, before deciding that the Swedish import would find a niche in the discount market. "Nobody outworks her," says a voter.
Doug Terreson, Integrated Oil & Gas
Then there's Doug Terreson, the integrated oil and gas analyst at
Morgan Stanley Dean Witter
, whose biggest -- and riskiest -- call came after intense discussions with oil company executives. In February 1998, Terreson published "The Era of the Super-Major," predicting that his slow-moving industry was about to hit the consolidation rapids. Six months later
merged to form
, the market value of the two companies quickly rose by $50 billion and the consolidation frenzy was on.
"When I first came out with the concept," recalls Terreson, "there was a lot of controversy and criticism. But I had talked to the CEOs of all the companies about how powerfully economic value would be released and I didn't get resistance. Even so," he adds, "I spent a lot of sleepless night before I published."
Terreson made a similar out-of-consensus and prescient call this past November when he argued in "The Perfect Cycle" that refining margins had bottomed and that 2000-2001 would bring substantial fundamental improvement with rising stock prices.