PhillyDeals: Janney sees future profit in stock research

From its U.S. office at 17th and Market Streets, Aberdeen Asset Management Inc. invests $167 billion in clients' money. To help his team investigate and buy (or dump) stocks, senior investment manager Christopher Baggini hires research and trading services.

For some ideas lately, he hasn't had to go far. Stockbroker Janney Montgomery Scott L.L.C., at 18th and Market, has more than doubled the staff of analysts and traders in its research department since early last year.

"Janney is one of the better stories we have in investment management today," Baggini told me. "They've done a very good job expanding in a time when others are contracting."

He cited Janney analyst Brian McGill's "very valuable" call on gambling-equipment-maker WMS Industries Inc. earlier this year, which helped persuade Aberdeen to boost its longtime position; clients gained as the stock rose. Still more valuable, Baggini says: Janney helps clients meet key people working in the industries it covers.

It's not all about what to buy. Last week, Janney analyst Stephen Moss urged clients to sell Wilmington Trust Corp., citing management's reluctance to raise more capital to cover bad loans. Wilmington investor relations chief Ellen Roberts told me the bank wasn't going to raise cash it didn't need just to give brokers like Janney more shares to sell.

Best known as a retail broker, Janney is bulking up in capital markets and investment banking. By hiring stock researchers and traders, Janney has reversed the trend in a business traumatized by the collapse of Bear Stearns Cos. Inc., the failure of Lehman Bros. Holdings Inc., and layoffs.

Big institutional investors paid "maybe $10 billion" to brokerages and traders like Janney last year, says Tom Ferraro, managing director and head of equity capital markets since May 2008, when he was hired by Janney investment-banking boss Jordie Maine.

Industry leaders Goldman Sachs Group Inc. and JPMorgan Chase & Co. have maybe one-eighth of the market each, by Janney's count. "If we get 1 percent, $100 million a year, that's a great business for us," Ferraro told me.

Janney "is not going to cover the S&P 500." Instead, the firm specializes in financial, consumer, business-service, and industrial-infrastructure companies, large and small.

"After Lehman Bros. [failed], we could hire everyone we wanted," Ferraro said. For example: "We took Jonathan Feeney from Wachovia; he covers food, beverages, and tobacco stocks. Shawn Milne from Oppenheimer, he does e-commerce and video games. Mark Kalinowski, he trained at Citi, [and covers] restaurants. Tony Wible, also from Citi, entertainment and digital media. Dave Strasser, from Bank of America, he does big-box retail."

The extra help, Ferraro says, has also "rejuvenated" veteran Janney analysts such as Mitch Pinheiro, who "hit a huge home run" with Green Mountain Coffee Roasters Inc., "a company he's covered since it was very small" that's tripled in value since March.

Research at many brokerages flagged after the dot-com stock blowup of 2000. Stricter conflict-of-interest rules and enforcement drove up costs. When markets fell and investors lost interest, firms cut back.

But brokerages can still make a profit by selling research and trading: "You have to manage it so you're not paying people like [former Salomon Smith Barney Internet analyst] Jack Grubman $25 million a year," Ferraro says.

"You have to be very disciplined about hiring analysts who really add value," Ferraro continued. "As we gain mind-share with clients, we make money trading stocks for them."

Ferraro says he's built the staff: From 15 senior analysts to 23, with more hires on the way; from five salespeople to 17; from seven sales-desk traders to 14, spread among Philadelphia, Boston, New York, San Francisco and, as of this week, Chicago.

"We used to cover 100 companies. The goal is to be at 350 by the end of the year."

Ferraro says sales for his unit "are growing faster than our investment." He figures the research, trading, and sales group will make a small profit this year, and make "a larger contribution" to the bottom line at Janney owner Penn Mutual Life Insurance Co. in 2010.