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Analysts Go the Extra Mile in Their Research

When Capital Group equity analyst Lara Pellini set out to research the online food delivery industry, she wanted to learn all she could. She spent hours studying the companies that were catching on around the world. She pored over financial statements. And she ordered lots of delivery meals.

Then Pellini hopped on a bicycle.

Pellini wasn’t seeking exercise or a momentary diversion. Instead, she wanted to round out her analysis with firsthand experience. These businesses promised to pick up and quickly deliver meals that customers ordered from nearby restaurants via smartphones. How long, Pellini wanted to know, did deliveries actually take? What problems cropped up? Did delivery people enjoy their jobs, and were they likely to stick with them?

“This industry is very attractive because the potential is really huge,” Pellini says. “But these companies are fairly young, and it’s critical to understand the nuts and bolts of how they really work. You cannot get that by sitting at your desk.”

So with the permission of one service, Pellini signed up to make deliveries. Equipped with a company-issued bike and an insulated food pouch, she peddled around central London. She got an up-close look at the burgeoning demand for online food delivery services, especially among office workers ordering dinner at their desks.

“I had no idea so many people were eating in the office and ordering food like that,” she says. “This might one day replace workplace cafeterias and food services.”

Pellini also got a taste of the logistical challenges, such as restaurants not having food ready when she arrived to pick it up. Overall, she came away from the experience with a sharpened sense of the industry and its prospects — and her London outing was only the beginning. To gauge the differences among individual companies and the markets in which they operate, Pellini delivered food for a company in Glasgow. She plans similar trips to France and Spain, and is collaborating with colleagues who are doing the same in other parts of the world.

There’s no substitute for old-fashioned shoe leather.

Not every analyst dons a windbreaker and a bike helmet, but on-the-ground work is a central component of Capital Group research. Dissecting financial statements and regulatory filings is essential, but often just one step in assessing the merits of a company or industry. Analysts regularly meet with corporate management teams and others, including customers, suppliers, distributors, competitors and former executives. Though meetings often happen in one of the cities around the world in which analysts are based, Capital Group researchers and portfolio managers often travel elsewhere, such as to trade shows and industry conferences. They also regularly visit companies for one-on-one discussions with CEOs and other executives.

Capital Group commits substantial resources to global research. Last year, Capital Group’s 320 analysts and portfolio managers traveled to 42 countries, from Switzerland and South Korea to Slovenia and South Africa. In an information-soaked world awash in data, their goal is to unearth nuggets that can be gleaned only from touring factories, walking through research labs and peppering outsiders with questions.

“The depth of primary research is one of the key advantages that we have as investment analysts at Capital Group,” says Jason Karam, a New York-based analyst who tracks Latin American companies for Capital Group Private Client Services. “The goal is to build a mosaic, and developing a network with many sources of knowledge is invaluable. That can only be done by going to the source and traveling
to these markets.”

From left to right: Analyst Lara Pellini hands off food deliveries in Glasgow, Scotland. Analyst Jason Karam visits the floor of a Brazilian cookie manufacturer. Pellini biking meals to buyers in London. Analyst Archana Basi (right) and Portfolio Manager Cheryl Frank (center) visit a distillery. Karam grips the railing of a boat as it speeds through a Brazilian harbor.

Company visits provide important access to midlevel managers who don’t make the rounds at investment conferences but have keen insight into businesses and industries.

“Sometimes the most valuable meetings you have are with division heads or executives who are not in the public eye all the time,” says Greg Fuss, an equity portfolio manager at Capital Group Private Client Services. “You can really dig down into the weeds with people who are excited to be asked about what they do.”

One such discussion occurred at a retailer that sells food and other items. After meeting with the CEO, Fuss spoke to the head of the meat department, who offered a detailed explanation of the food-prep process.

“It was very impressive,” Fuss recalls. “A consumer might not necessarily notice all the effort that goes into trimming the fat or preparing the cut. But they’ll appreciate it when they go home and prepare a meal, and they’ll come back to that store.”

The commitment to research helps analysts build credibility with companies and develop rapport with executives. “It’s very helpful to have a decadelong relationship with the new CEO before he or she assumes the role,” Karam observes.

In the course of their travels, analysts visit a range of venues. Archana Basi, a London-based analyst who follows the spirits industry for Capital Group Private Client Services, has gone to distilleries in Kentucky and watched in fascination as iconic wooden whiskey barrels were assembled. She’s also broiled in sun-baked fields as agriculture workers surveyed crops in Mexico and navigated a jam-packed beer convention in San Diego.

“I talked to a whole bunch of distributors who are literally moving the product and dealing with the stores,” she says of the beer convention. “I just had casual conversations to get a sense from them as to which products are really working.”

Occasionally, a research trip goes in an unexpected direction. Karam thought he was in for a gentle cruise when a South American port operator offered a harbor tour. Instead, Karam, who was clad in a suit and dress shoes, clutched the railing with both hands as the boat sped through the water. “I literally almost went over the edge,” he recalls. Karam had a better experience at a commercial bakery in a remote city in Brazil, where he savored warm cookies rolling off a conveyor belt.

It’s important to understand the good and the bad.

While research trips often spotlight promising investments, they sometimes turn up red flags.

A few years ago, a European supermarket let Pellini stock shelves. The company had generated considerable buzz with a marketing campaign touting low prices. Pellini found the opposite when she walked the aisles of a competing chain on her lunch break and bumped into employees of the first store shopping at the second.

“They looked at me and said, ‘Please don’t tell our company you saw us here,’” she remembers. “I said, ‘Don’t worry, but please tell me why you’re here.’ It turns out they were getting every kind of employee discount and yet they shopped at the competitor because it was much cheaper.”

Not surprisingly, research tends to become a way of life for analysts, even in their spare time.

Basi reflexively checks out marketing displays and product placement in liquor stores. At restaurants, she peppers bartenders and even patrons with questions. “I’ll ask the bartender, ‘Hey, what’s really moving? What’s the product that people like to drink?’”

For Pellini, checking out delivery services became a family affair, with her 8-year-old son querying anyone who rang the doorbell.

“My son knows that every time we order food delivery I interview the driver,” Pellini says. “Now he asks people if they prefer working for one service or another. He says, ‘Do you mind if I ask how many drops you have done in the last hour?’”

The above article originally appeared in the Summer 2019 issue of Quarterly Insights magazine.