This Analyst Wants to Know How Old a CEO Is — and Other Stock Picking Criteria You Wouldn’t Expect
Barron's
Apr 20, 2019
Everyone on Wall Street needs an edge—a way to consistently identify moneymaking opportunities. Research analysts usually try to generate that edge by covering one industry in incredible detail—by knowing more about an industry or a stock than anyone else.
That’s one way to do it, but there are other, less traditional ways. Some analysts focus on mergers. Others focus on factors such as sales growth or management turnover. Gordon Haskett analyst Don Bilson takes an even less traditional approach. He calls his research “event driven,” although other investors prefer the term “special situations.”
Bilson, 49, has spoken with Barron’s many times by phone. Recently, we met up with him over questionable K-cup coffee in his midtown Manhattan office. He looked relaxed, if a little tired, which might have something to do with the fact that he wakes up before 4 a.m. each day to start his work.
Bilson is a journalist by training, and we imagined him working the phones to get sources on the record for his daily research product. We were mistaken: Read an edited version of our conversation to see what makes his process so unusual—and successful.
Barron’s: You call your product event-driven research. What does that mean?
Don Bilson: I’m looking for events that can move a stock more than 10%: mergers and acquisitions and corporate restructurings, including spinoffs. Management change is a big one. Another is changes in the shareholder roster. That usually comes after a series of missteps, and can be a turnaround opportunity. Shareholder activism is in there, too, and occasionally, environmental matters.
You must rely on a large network of sources.
You’d be surprised—there’s not a lot of networking. Everything we do is traceable to publicly available information. We’re not really dealing so much in innuendo, but what, exactly, are companies saying on conference calls? And by exactly, I mean that we parse the adverb. If the adverb changes from quarter to quarter, we’re the ones to amplify that. Corporations stick to scripts. When they change the script, it means a lot. And it’s overlooked. If you’re not paying close attention to it, you’ll miss the important pivots that companies are telling you [about] without really telling you.
We watch price action pretty closely—which stocks are moving; why are they moving. What’s the volume behind these moves? Who owns the stock? We have a little mosaic that we try to build with each of our stories, and are looking at certain intangibles that other people just aren’t looking at.
Like what?
CEO age is important. Older CEOs are dangerous CEOs. Older CEOs are the ones who make moves. So we pay very close attention to 62-, 63-, 64-year-old CEOs, especially those without succession plans. Those are the people who make news.
Where do you find information about CEO succession plans?
Sometimes, it’s obvious—say, a promotion to chief operating officer made by a 64-year-old CEO. That person is going to be the CEO in two years—or six months. Sometimes, it’s three years. Sometimes, the successor is pretty obvious. Other times, it’s not. You have to use a little guesswork.
Who generates better investment returns—CEOs who come from within the company, or those brought in from the outside?
Well, the rule of thumb is that if a company brings in an external CEO, that probably takes the company off the market as a sale candidate for several years. That’s not a hard-and-fast rule. Nielsen[ticker: NLSN], for instance, just hired a new CEO; they’re in an auction right now. But, by and large, if you make a commitment, bring a new guy to a new city and set him up with a new [pay] package, that company is not going to be sold for X amount of years. So, in a sale situation, I’d much rather an internal promotion.
What other factors do you use to identify investment ideas?
I go into it with a different approach than a traditional sell-side analyst, who is focused mainly on the [profit-and-loss statement] and where the next 30, 40, 50 basis points of margin is going to come from.
When I see a piece of news that interests me, I want to do more work: Who owns the stock? What does the board look like? Are there people on the board who have transactional experience? Have they made big moves in the past? What are the board connections? Is this a company that has disappointed investors? Have they missed earnings two out of three times, four out of six times, six out of eight times? Has the management-compensation program been slammed by investors? So, there are various things we look at that are divorced from how much debt a company has, or what the earnings are going to be next year. We’re coming in the back door to look at these situations and assess vulnerability, and whether it is time for a change.
Which situations are ripe for change now, making for good investment ideas?
M&A in the [Texas] Permian Basin. Finally, after so much talk about M&A last March or April, Concho Resources [CXO] bought somebody. Energen was then sold to Diamondback Energy [FANG], and now you’ve got QEP Resources [QEP] up for sale. Probably, some other businesses in that region will go, as well.
Does one industry deal beget another?
Absolutely. These things tend to go in waves. And as consolidation rolls through an industry, if you see one domino fall, very often you’re going to see two and three fall. In the wake of Chevron [CVX]/Anadarko Petroleum [APX], more deals will happen.
Any companies in particular?
Pioneer Natural Resources [PXD] is interesting. They’ve just had a big management shake-up. The CEO’s out. Ex-CEO comes in to run the company. He’s past 65 already. This is clearly an emergency process. He had to be brought back. Those are very dangerous situations. That’s one of the all-time great signals—a CEO gets bounced; the guy who used to run the company comes back. What’s he going to do? The succession plan got blown up. A sale becomes the most likely or easiest option to solve the issue. In Pioneer’s case, there’s a lot of M&A activity in the region. and now you’ve got this issue of what to do at the top of the company. That could be answered with a sale.
What other sectors are seeing that M&A cascade?
Software. There have been a lot of deals in software for as long as I’ve been doing this, but this year we’ve seen Ultimate Software Group sold for a big multiple of more than nine times sales. A [software] company called Ellie May was just sold. Private equity has raised $10, $12, $15 billion to attack this particular space. There will be more deals.
Which companies will be part of those deals?
A couple of possibilities:Symantec [SYMC] is one. [Activist fund] Starboard is there already. The stock has bounced a little bit, so it’s not quite as opportunistic as it was, but they have had some problems. There was an accounting issue. It’s a turnaround story at this point.
Another name we think is interesting is LogMeIn [LOGM]. LogMeIn was involved in a transaction with Citrix Systems[CTRX] a couple of years ago, and received a bit of business. LogMeIn really blindsided investors on its latest earnings call: They announced a restructuring program that will require a lot of investment in the business. That’s going to kill profit margins for the next couple of years. [Activist fund] Elliott [Management] had been in the stock; it is probably out at this point. They know the stock well. The executive chairman has sold a company before. You might get private-equity buyers moving in there to take it out on its lows. Two big private-equity firms, KKR[KKR] and Thoma Bravo, already have positions.
You’ve written a lot about health care. Centene [CNC] is buyingWellCare Health Plans [WCG]. Anything else to do in that space?
You still have Molina Healthcare[MOH]. You probably have everybody. Cigna [CI] made its big bet, put its balance sheet on the line [when it bought Express Scripts]. CVS Health [CVS] is integrating Aetna. UnitedHealth Group [UNH] is so big at this point, it really can’t buy anything.Anthem [ANTM] is building its own pharmacy-benefits manager. They had sworn off M&A—the old Anthem, which was WellPoint, got in a lot of trouble with M&A. The new Anthem CEO has taken a more cautious approach. I wouldn’t expect them to make a big deal.
So what’s left?
The big step left is, do you get somebody from outside the industry buying into it? That would be your Amazon.com [AMZN] orWalmart [WMT] looking to make a deal for a Molina or something like that.
That’s an out-of-the-box idea.
Well, there was a story last spring that Walmart was talking toHumana [HUM]. The jet-sightings service that we use [told us] that the Walmart jet was in Louisville [Ky.] all the time last spring, [but that] died down. But Walmart may have an interest.
There are services that will tell you where corporate jets are?
There are. And we track it a little bit; we occasionally see some interesting activity.
You are covering so much, how do you make time?
I try to have six things for clients each morning. I start my process at about 4 o’clock in the morning.
That’s early.
The dog gets its 20 minutes; then from 4 a.m. to 9 a.m. is my time to focus.
Thanks, Don.