How Jack Sullivan Chooses stocks
"When Jack Sullivan calls," observes Peter Lynch, portfolio manager for Fidelity Investments's top-performing Magellan Fund, "something is going on."
"What I need are ideas," adds Tom Cashman, vice-president of investments and portfolio manager at Massachusetts Financial Services Cos.' $170-million Emerging Growth Fund. "And Jack Sullivan has given me three good ones. I've made a profit in all three -- and that's in a down market."
Sullivan, a 38-year-old principal with the San Francisco investment banking firm of Van Kasper & Co., is not your typial stockbroker. "What most money managers need, Wall Street can't provide," he says, pointing out that anywhere from 15 to 25 analysts follow most of the better-known stocks. Managers who buy into the latest hot tip from the Street are thus buying into companies being peddled by brokers all over the country.
Sullivan, by contrast, is one of a new breed of touts who specialize in stocks that Wall Street is ignoring. And although he offers his ideas exclusively to professional investment managers, his approach to stock-picking makes as much sense for small investors as for big ones. The ideas most of us get from our brokers, after all, are being sold to us only after the Big Boys have had their shot at them.
When he was 30 -- an age when most brokers are busy building client lists -- Sullivan took a five-year sabbatical from the investment business. For two years during that time he served as president of the legendary ice-cream parlor, Bud's Ice Cream of San Francisco. His attitude toward stocks is as iconoclastic as his career path. Most of his ideas, he claims, would never withstand the scrutiny of a Wall Street investment committee. "If they want to look at balance sheets, numbers, and ratios, fine," he says, doing his best to sound artless, "but I don't know what all that has to do with whether a stock will go up or down."
Artless or not, Sullivan has compiled a pretty good record of honing in on what others have missed, as testimony from Peter Lynh and other highly regarded fund managers implies. During the initial public offering craze in 1983, for example -- a time when Wall Street was wild for high-technology issues -- Sullivan looked in precisely the opposite direction. That angle of vision turned up a newly listed OTC stock, Agency Rent-A-Car Inc. A $50-million company at the time, with 6 million shares outstanding, Agency was the largest insurance replacement car rental company in the country.
"Agency not only dominated the industry, it invented it," Sullivan explains. The company was undergoing extraordinary growth, but, because of the high-tech hysteria, it had largely escaped the attention of institutional investors. Also, Sullivan knew, chief executive officer Sam Frankino owned a large majority of the stock. That recommended it: "If the person making the decisions is working for himself, he's working for you. There's nothing like significant ownership to focus the attention of a CEO."
Once Sullivan had made his buy recommendation, he stayed in touch with the company, another often-ignored tactic that can pay off handsomely. When Agency suffered a walkout by top-level management in early 1984, the stock's price plummeted from 21 to 15. Instead of the usual broker's reaction -- tell your clients to unload the stock, and do it quikly before you look like a fool -- Sullivan advised them to hold on to it, largely because of his confidence in Frankino and executive vice-president Vince Garrenton. The market apparently agreed with Sullivan's conclusions; recently Agency Rent-A-Car was back up in the 25 range.
A similarly personal approach uncovered another winner, albeit of the hurry-up-and-wait variety. Several years ago, when Sullivan was working at the investment firm of Morgan, Olmstead, Kennedy & Gardner Inc., in Los Angeles, a man named Sidney A. Stewart Jr. walked into Sullivan's partner's office. Sullivan introduced himself and explained that his partner was in London visiting clients. As the two started talking, Sullivan learned that Stewart was chairman of E.H. Crump Co., the ninth-largest independent insurance broker in the country.
Crump, Stewart explained, is a second-tier insurance broker that makes the majority of its money on commissions; the industry's larger firms, by contrast, make most of theirs on the basis of multiyear, prenegotiated fees. Once the then-prevalent rate wars in the insurance industry eased up, said Stewart, premiums were likely to rise, and commissions with them. But the larger brokers' locked-in fees would lag behind.
The company, Sullivan noticed, had fewer than 4 million shares outstanding and was therefore too small to garner attention from institutional investors. So he started calling Stewart every couple of months, waiting for a glimmer of light.
The light began to shine in June 1983, when Stewart indicated that rates were beginning to stabilize. Sullivan started feeding the idea to his clients, and last year began a full-fledged campaign for the stock. As INC. went to press, Crump was reporting earnings for the third quarter of 1984 up 61%, and its stock had risen from 11 3/4 in June 1983 to about 16 3/4.
Big companies that the Street finds uninteresting are as appealing to Sullivan as the small companies it hasn't yet discovered. Back in July 1983, for instance, he noticed that most analysts saw Zenith Radio Corp. as "that big color television company that for years has been losing money to the Japanese." His own view of the company focused on its little-recognized high-tech sector, which was finding its own market niches, growing by more than 50%, and essentially creating a new business environment. He wrote up his opinion in a one-page report and sent it to his clients. Soon the stock flew from 28 7/8 to a high of 36.
Similarly, he got interested in Carnation when "other analysts were looking for more magnetic companies," according to Moe Cevallos, managing partner with the New York City office of Loomis Sayles & Co. What provoked his interest was a report from Value Line Investment Survey, the widely distributed investment bulletin.
"If I had read only the Wall Street reports," says Sullivan, "I would have been presented with a boring company. The Value Line author, however, represented a company that was undergoing important changes." Ben Niedermeyer, vice-president of the $325-million Janus Fund Inc., says that Carnation is Sullivan's best call to date, noting that it hit paydirt when the Swiss company Nestle S.A. bought out Carnation. "Sullivan liked Carnation's sustained earnings and thought the stock was reasonably priced. Apparently Nestle thought so too."
Loyalty to a company doesn't get in the way of recommending a sale, especially when Sullivan understands why the company might be headed for a fall. That is another trait that seems to endear him to clients: "It is important," says Peter Lynch, "to know why a company is not doing well to keep from losing money."
Pandick Inc., a financial printer, was once a Sullivan favorite. During the strong bull market of late 1982, while others were looking at brokerage stocks, Sullivan looked for less obvious winners. Pandick, which was printing prospectuses as fast as companies were going public, fit the bill. The company boasted state-of-the-art computerized publishing facilities, and had surpassed its two competitors in market share and revenues.
But when the new-issues market began to sour, Sullivan realized that Pandick's earnings estimates didn't take the slow-down into account. He called the money managers he knew who owned the stock and gave them the warning. Andrew Cox, vice-president of Founders Corp. and manager of two of the company's funds, had first heard about Pandick from Sullivan, and shared Sullivan's enthusiasm for it. But thanks to Sullivan's counsel, Cox was able to get his funds out with a profit.
Get in, get out, make a little money on offbeat ideas: An investor, like a money manager, could do worse than listen to Wall Street -- then, like Jack Sullivan, look the other way.