It`s a drama that`s played out daily in executive suites, investors`
offices and newsrooms. Something`s happening at a company, and its stock is moving. Investors want to know if they should dump the stock, hang on to what they have or grab more. Reporters want the inside scoop on what`s really going on in the boardroom. Executives often have their staff issue a terse ”no comment.”
To investors and reporters, ”no comment” isn`t a deterrent; it often just means a detour to the next avenue of information, the stock analyst. And that eventually leads to an angry executive wondering publicly why on earth anybody would rely on an outsider for information about his company. So the analysts–the outsiders–look like the bad guys.
Nonetheless, sometimes the opposite happens: Company executives are wooing and sharing information with those same analysts. In that scenario, the company exeuctives often view the analysts as the good guys.
Which view is accurate?
Both, says Dorothea C. Gilliam, who is a player in both dramas. As assistant vice president and senior insurance analyst for Duff & Phelps Inc., Gilliam`s job is to know what`s going on in the companies she follows. That means she has to be privy to inside information from top-level executives. But her knowledge is sold not to corporations but to investors, who have a right to expect accuracy and integrity.
Describing a stock analyst is sort of like describing an accountant: It`s hard to get beyond ”number-cruncher.”
”My responsibility is to understand the companies I cover and explain what they do to our clients,” Gilliam said. ”First of all, I have to evaluate the quality of that company, and second I look at its stock.”
That`s the brief description. How Gilliam goes about making those evaluations is a much longer story. She constructs financial models of the companies she follows, projecting earnings by projecting premiums, losses and other data.
What is less clear to the public is why anyone would bother. Individuals rarely pay for analysts` services (Gilliam`s company, Duff & Phelps, doesn`t even offer its service to individual investors, Gilliam said.)
The influence wielded by an analyst is sometime subtle. Recently, for example, an analyst unexpectedly changed his ”hold” opinion of one company`s stock to ”sell,” and the stock fell more than $2 within hours. Such market fluctuations almost always are caused when major institutional investors buy or sell a huge chunk of stock, and it`s the managers of such institutional funds who are Gilliam`s bread and butter.
Those managers pay Duff & Phelps, not just for the stock reports and company analyses generated by the staff but also for the right to get quick updates from people such as Gilliam. ”I spend a lot of time on the phone,”
she said. Naturally, she also spends a lot of time on her desktop computer, updating entries for clients who can tap into Duff & Phelps` computer services.
Behind her opinions is a lot of research and experience. Gilliam notes that the insurance industry, besides having its share of unusual jargon and acronyms, also is different from other industries from a financial standpoint. While she uses many of the standard ratios that are taught in basic accounting, for example, she also has to understand such insurance-specific numbers such as premium-to-surplus ratios and combined ratios.
Gilliam had some experience in that area before coming to Duff & Phelps five years ago, because she had worked on the forecasting and analysis staff for an insurance company on the East Coast. ”At least I was familiar with the terminology in insurance,” she noted.
She also was no stranger to numbers; her undergraduate degree, from Newton College of the Sacred Heart (now part of Boston College), is in economics. She has a master`s degree in finance from University of Tennessee and also is a chartered financial analyst.
Duff & Phelps, a Chicago-based firm that does financial analysis, company ratings, investment research and valuations, hired her in 1980 to handle some of the insurance load. The company follows about 15 insurance companies. It was about six months before she was assigned to follow her own companies, faster than the norm, according to executives at other firms that hire analysts.
Then, Gilliam`s immediate superior left, ”so I was it; I had all 15 companies, and I hadn`t been here a year yet.
”It just threw me into the fire. I had to get moving very quickly.”
While Duff & Phelps produces a variety of reports on stocks of companies, Gilliam says basic research is the guts of the job, and she does not like being compared with analysts at brokerage houses, who are more attuned to a buying-and-selling atmosphere. ”Usually when people want to get back to number-crunching, back to basics, they`ll call me up,” she said. ”That is what Duff & Phelps is noted for–basic research, analyzing the ins and outs of the company.”
She recently completed a 70-page basic analysis of American Express Co., for example. (AMEX owns Fireman`s Fund Insurance Co.) ”Most are about 20 pages,” she explained, almost apologetically, ”but American Express is so many companies in one.”
Researching a report such as that means traveling around the country to talk to top management of all the operating units. She values face-to-face meetings as a chance to evaluate top management itself. ”After you get familiar with the company,” she said, ”you know who you like to talk to.
”Of course, there`s always the company line, but that isn`t necessarily lying. I come back and rehash what they`ve said and see if they can do what they say they`re going to do.”
Despite frequent criticisms from companies that analysts talk too freely to outsiders (primarily the press) or are inaccurate, she says she does not get the cold-shoulder when she`s seeking information about a company she follows.
`It`s to the company`s benefit to treat us well, because we are the major liaisons to their major shareholders,” she said. ”That`s one reason we have such good access to the companies.”
Even when she`s been given what she considers bum information, she doesn`t automatically assume she`s been lied to. ”Sometimes, the companies don`t know,” she said.
She cites the big move by the life insurance industry in the 1970s toward interest-sensitive products, such as universal life instead of whole- or term- life policies. She says she ran into some insurance executives who believed universal life was a flash in the pan.
”They may not know they`re missing one whole side of the industry,” she said. ”We had to recognize the companies that were first to see that change and were the first to move to new products, because they were going to be most successful. My job isn`t keeping track of where companies are; what we have to do is keep ahead of them.”
Now, Gilliam sees major changes in the way health insurance is provided, espcially with the rapid growth of health maintenance organizations and preferred provider organizations. ”So that`s what I`m keeping track of now, seeing who does what and how fast and who`s being the most successful at this point,” she said.
Recently, she has seen the money-making opportunity in the property/
casualty field, where financial results have been generally dismal in recent quarters. ”When earnings for property/casualty insurance companies were low, I said buy,” she recalled. ”People said I was crazy. But the stocks were as low as they could go, and it was a good time to buy. It took some convincing. I had to convince people here first of my industry recommendation.”
Eventually her view prevailed. ”I`m the analyst,” she said. ”I`m the one who knows the company best, so my judgment is the one that usually holds. It`s my job to decide which companies within the industry are the most attractive. My logic has to be consistent. If I were way off the mark, it would be caught before it went out to clients, because it`s not my opinion, it`s Duff & Phelps` opinion.
”There were a lot of good buys in stocks, and if you were willing to stick your neck out, you could have made a lot of money. That`s fun.”
