Research Affects Real Lives:
Interview with Dutton & Associates Senior Analyst Paul Resnik

Paul Resnik, CFA, a senior analyst with J.M. Dutton & Associates, has over 30 years of experience in the investment industry. He has held executive positions in portfolio and securities analysis and investment strategy at major investment firms including Merrill Lynch, Paine Webber, E.F. Hutton, Shearson Lehman Brothers and Smith Barney.

At E.F. Hutton, Mr. Resnik created the firm's Equity Research Marketing Department. In this position, he provided investment guidance to the firm's representatives and, at public seminars across the country, to individual investors. At Lehman Brothers, Mr. Resnik was a member of the highly rated Equity Research Department's Investment Policy Committee which, in addition to working with securities analysts in determining common stock investment ratings, selected the firm's well-known annual "Uncommon Values" list.

What experiences in your professional career have most influenced you as an analyst?

Certainly sitting on the Lehman Brothers Investment Policy Committee was one. It gave me the opportunity to learn from very intelligent people in terms of how they approach industries and companies and generate an opinion. Serving as Director of Equity Research Marketing at E.F. Hutton did a lot for me as well. In that position I was out in the field talking to brokers and their clients. It helped me understand that the equity research business is not an academic pursuit. There is real money made and lost that affects real lives, and you’ve got to take that into account. You’ve got to be sensitive to how your recommendations are affecting people.

Do analysts tend to forget that?

A lot of analysts who deal mostly with institutions and the like get a little removed from a lot of the people who are using their product. During the Internet boom, especially, people were actually fearless about making huge long-term projections and then creating valuations based on those projections. When you’re playing around with numbers, you need to realize those numbers are read by an investing public and depended upon. That’s why I am so upset with some of the things that have recently come out of Wall Street. There have always been conflicts of interest on Wall Street -- that’s not new. But there’s always been a willingness to balance those various interests, and not allow one end of it to dictate the end result of your product.

Are you speaking of investment banking?

Yes. The focus increasingly of the big brokerage firms in the past few years has been investment banking. If it’s not investment banking, then it’s institutional trading. The result has been certainly more than a little conflict of interest on the institutional banking side, and a tendency to ignore smaller companies. Because if you’re not going to give a big, big brokerage firm investment banking business, then there’s got to be a lot of volume in the stock to justify paying the analyst all this money to follow the stock. Just the fact that the stock might go up is insufficient to justify coverage.

Very interestingly, people always say we want to see more sell recommendations. Well, I knew in my days working at a major brokerage firm that the last thing anybody wants are sell recommendations, because that means that a stock you have viewed positively you now view negatively. The stock drops 10% and everybody gets upset. It’s not some sort of maniacal conflict of interest, it’s just that the analyst is trying to respond to what the market really wants. I saw a fair amount of that. I also saw analysts provide some benefit as far as marshaling data in an industry that may have been of value to some institutional investors who take that data and do their own work, but it was of very little use to the smaller investor who is really depending on the opinion of the analyst.

You’re now doing research for Dutton & Associates. Are there still pressures to give positive opinions?

Nobody writes a research report without a reason. There is some constituency that has provided money for this endeavor. The fact that at a place like Dutton that reality is addressed upfront, I think, is a welcome breath of fresh air. In addition, what I think Dutton has done that’s intriguing is get a lot of veterans to write these reports. And quite frankly after over 30 years in the business, I won’t do anything that would damage my credibility whether or not there is a financial benefit That’s a really important point: Recognizing that not every investment is going to work out, these are people whom Dutton selected because they are credible and will want to protect that credibility.

What areas do you like to focus on in your coverage?

There are a number of areas that look interesting. One is the emerging companies that have suffered because of the Internet collapse -- not because they were Internet companies per se, but because that investment area took a hit. During the boom people were willing to invest 100% on vision, with very little requirement for substance. To some extent we’ve gone too far the other way. The market seems to want instant verification and it’s unwilling to use even a little vision.

So people have learned the wrong lesson from all of this. The lesson isn’t “never invest in an emerging company.” It’s make sure you understand how the company is going to succeed. You can make some guesses if you understand a company’s market. You can say that there’s a market big enough here that if this company achieves its business plan and goal, then investors will make a lot of money. That’s a reasonable thing to say. The problem with the Internet boom was that even if these companies achieved their goals, there wasn’t a clear path to making money.

Any examples of companies you cover?

I just did a report on Medix Resources (AMEX: MXR), and I think it fits perfectly into that category. Here’s a company where the stock price was much higher when their product really was the gleam in somebody’s eye. Now when they’re finally emerging with a product and with a very exciting one, the market has kind of forgotten about them. Hopefully we’re going to help get this company back on the radar screen.

Medix is a healthcare IT company with national contracts with WellPoint Pharmacy Management, Merck-Medco, and Express Scripts. Estimates are that of the 14% of GDP spent on healthcare, at least 20% go to backroom administration and another 10% go to resolve adverse health events caused by inaccurate or unavailable patient information. Medix's software products create a bridge for the healthcare industry's many disparate systems, reduce administrative costs, and reduce or even eliminate many types of errors that are currently wide-spread in the healthcare industry. Its first operation is in Georgia, and current plans are to roll out four more. Good execution of these rollouts could yield revenues of $1.6 million in 2002, rising to over $100 million in 2004. Our model projects EPS of ($0.08) in 2002, $0.06 in 2003, and $0.44 in 2004.

Do you cover mostly healthcare companies?

In the emerging growth area, yes. I understand healthcare. There are a lot of people out there who have a better understanding of the dynamics of electronic technology. I don’t feel I can really provide the edge that investors should get. In healthcare, on the other hand, I see the need, I see the potential, and it’s where I don’t feel there are a lot of analysts out there that have a better grasp of it. There have been some disappointments in the area, which will always happen, but the basic technology and concepts are still exciting. I think over the next five years you’re going to have very dramatic breakthroughs.

I also like to follow more mundane, value companies outside of the emerging growth area. These can be in any industry where there are good solid players that have a good niche.

What do you like about these value plays?

I think small-cap value is going to continue to be a very intriguing area for investment. There are a lot of companies that are decent businesses, maybe not in a dramatic new market, maybe not in a truly dynamic growth area, but companies in good solid areas that are knocking out some good numbers. A lot of coverage has disappeared on Wall Street, and decent real companies are not being followed, and if they are being followed they’re being inadequately followed.

What are some edges you look for in value companies?

I think we’ve got to find in this environment companies that provide a price competitive product. Pricing strength is rare in these days. You’ve got to be able to generate your product at an attractive price relative to the competition. A microcosm of that would be in retail where the old-line retailers, the department stores, are trying to find their way. The companies doing well are the really price/promotion kind of retailer, whether it may be in the drug store chains or in the warehouse stores, or in big discount stores. It is difficult to be a large operation without having a pricing edge. There’ll always be a demand for the very top of line Tiffany approach, but the more intermediate approach really is being taken over by the companies that can compete on a price basis.

Like the Wal-Marts of this world?

Like the Wal-Marts of the world. But, whatever your market is, it’s going to be important to be able to compete as an effectively managed cost competitive operation.

Any parting shots?

It’s a tough time in the markets right now, but people shouldn’t forget the maxim “buy low, sell high,” and that when the market is low, everybody’s selling, not buying, and when the market is high, everybody’s buying, not selling. So really if you’re a market timer, the only way to be successful is to be counterintuitive, and that’s extremely difficult. I think people have to understand that if you don’t feel good or comfortable it doesn’t necessarily mean it’s not a good time to buy. Right now we have a lot of issues confronting the marketplace and the world, but you cannot wait until you feel comfortable because by that time you’ll have given up far too much of upside potential. This is a very uncomfortable time for investing, but I want people to understand that there are a lot of things that look right in the investing environment now and there are a lot of good values.