Wall Street analysts tend to log a lot of frequent flyer miles to visit the companies they follow.
Not so for the three principals at Callard Asset Management, the No. 1 stock-picker last year, according to one independent analysis. In fact, they rarely travel from their modest office on Chicago's LaSalle Street.
The little-known firm got the top spot on a list compiled by Investars, a subscription service that tracks the buy and sell recommendations from analysts at 26 U.S. firms that track at least 500 companies.
An investor who followed all of Callard's recommendations for the year would have earned an 8.67% return, far outpacing the
, as well as
comparable returns for Wall Street's leading institutions.
Callard's secret? Financial discipline. It evaluates companies using a framework created in the 1950s and revised by firm founder Charles Callard.
Using regulatory filings and other public documents, Callard's principals say they don't need to visit any of the 8,000-plus companies they follow for some two dozen mostly institutional customers.
"It's strictly by the numbers. I can't emphasize enough how much we avoid getting spun by the firms," said Ricardo Bekin, chief investment officer for Callard.
All of their evaluations are made based on cash flow, earnings potential andthe cost of capital, which are plugged into one of two models, a short-term momentum model or a long-term evaluation model.
The framework is based on the return on investment, or what Callard calls the numerator, over the cost of capital, or the denominator, and understanding what drives each.
Callard's best stock recommendation last year was to sell
on Aug. 13, when the stock was trading at $43. Selling the stock short and covering at current prices would have produced a hypothetical 1,505% return over the last year, according to Investars. Callard also advised selling
( GLBX) well before the stock collapsed.
To be sure, Callard's model isn't perfect.
In 1999, one of the best years for many portfolio managers, Callard's recommendations would have lost 7.6%. "We didn't tell people to buy
. We felt left out of the party. But we stuck to our discipline because we couldn't buy into the crazy valuations. We couldn't explain it," Bekin said.
1999 was the only year since 1986 in which the fund underperformed the Russell 2000, Bekin says. Returns have ranged from 2.5% to 49.2% in other years.
Callard's models are weak in valuing companies that aren't yet profitable, for instance, telecom stocks, Bekin said. Cable companies also were problematic because they showed losses into the future, and the models couldn't explain why the market was pricing cable company stocks in 1999 as high as it was.
"We fail when it comes to capturing nuances in each firm. But our strength is crunching large amounts of data and looking at everyone under the same microscope," Bekin said.
Limitations aside, Callard was able to advise clients to sell
when around $65 in early 2000.
"The discipline helps you understand the true valuation of companies. It didn't say Cisco at $65 in February of 2000 would go to $13, but it did show that the stock was overvalued because of its low cost of capital," Bekin said.
Harvey Hirschhorn of Liberty Funds in Boston has worked with Callard's model for years to look at asset valuations. He noted that it involves a lot of work, thinking and loads of data. "It's not easy to use. There's a variety of assumptions to put into place. It's very rigorous and disciplined. Not everyone has that philosophy," Hirschhorn said.
A spokesman for one of the Wall Street firms on Investar's list declined to comment on Callard's research practices. But he insisted that visiting companies that analysts follow has merit and he questioned whether Callard was a one-hit wonder in terms of its No. 1 ranking.
Callard Asset Management has been ranked only since last year; it hit No. 1 the first and only year it has been in the portfolio return rankings. But Bekin said he believes it will continue to participate in the rankings.