Mike Churchill’s background:
The path to the development of the equity selection model
The Classical Insights model is the product of nearly two decades of working, thinking and tinkering. The process began in 1994 when I signed on as Latin America analyst for Polyconomics, a research firm in Morristown, NJ. There I was trained in the classical/supply-side/Austrian model by founder Jude Wanniski and then-chief economist David Gitlitz. Less than a month after I began, the Zedillo administration in Mexico devalued that country’s peso, triggering economic and intellectual chaos across all of Latin America. While the IMF, U.S. Treasury, World Bank, Banco de Mexico and Goldman Sachs all were lauding the devaluation as a great move, the classical framework allowed Polyconomics to predict the inflation, crime, economic depression and generalized misery that were to follow in Mexico. I spent the next two years tracking Mexican disasters day to day — my introduction to the superior accuracy of the classical model.
In 1997 I joined Bear Stearns in New York as an international economist for David Malpass, who remains perhaps the only serious supply-sider among Wall Street chief economists. Bear was an exciting place and a first-class firm, but my time there convinced me of the structural flaw in the Wall Street idea-generation process: The economists, equity analysts and strategists all exist pretty much in their own “hives” or “cells.” They do talk to each other, of course, (and talking to equity analysts was a big part of my job) but I’m not sure how much good really comes of it. The bottom-up people look at the world their way, and the top-down people look at the world their way. It’s left to the strategists to pull the two pieces together, but I’ve never really seen a Wall Street strategist who was all that useful — there are too many competing pressures on their time and intellectual freedom.
Thus, in mid-1998 I joined Buenos Aires Trust Co. as food, beverage, retail and agriculture analyst. It was in Argentina that I saw the real power of combining rigorous equity analysis and supply-side macroeconomic analysis. Early on, this led to tremendous opportunities with stocks like Banco Suquia and Banco Hipotecario. But the underside of emerging market investing also became clear: my stockbroker went off to his finca one day and shot himself in the head when his long-running fraud unraveled (an event that cost me a couple grand). As 1998 wore on, the supply-side analytical framework allowed me to see and to warn clients of Argentina’s looming economic implosion when it was still two to three years away. The peso was appreciating in real terms owing to its link to the dollar, and the resulting decline in peso-denominated commodity prices was undermining tax receipts and the economy in general. Making matters worse, the government responses to the growing crisis were totally wrong (tax hikes) and so in 1999 I saw that it was time to go.
From there I re-joined Polyconomics, first working from Milan, Italy, then moving back to New Jersey to become the firm’s director of global research and subsequently director of U.S. research as well. Soon I set about developing a new product that would combine top-down and bottom-up research, which we launched in May of 2001 under the name of “Supply-Side Portfolio.” I ran it for just over one year, during which time the hypothetical portfolio gained 15% — vs. a 16% loss for the S&P 500. In other words, the portfolio outperformed the S&P by 3100 bps in a tough market, showing that the concept clearly worked.
The Churchill Research portfolio
I founded Churchill Research, Inc. in 2002 in order to provide equity investment ideas for institutional money managers. One early decision I made was to let go of the sector themes I had been working on at Polyconomics and focus on what I believed would be the big stories of 2003: commodity stocks and emerging markets. It took a while for these calls to get going, but by the summer of 2003 they had begun to rise sharply. The success or failure of all the ideas I generate is tracked via the Churchill Research portfolio, which was launched on December 19, 2002. The portfolio is “real,” not hypothetical, and thus is subject to the usual performance detractors of commissions, slippage, and plain old bad decisions. A recap of every trade is published monthly, and clients are alerted to trades in new positions before they are put on. Roughly half the research is on U.S. companies, with the rest on global companies, many in emerging markets (though nearly all ADRs).
Beginning in 2011-12, I began developing an interest in Japan and have analyzed roughly 200 stocks there over the past two years. Japan now constitutes a large portion of the research efforts.
The research service
I interact with clients in several ways:
* “Morning Bullets,” published roughly three times per week, tackle three breaking events either on equities under coverage or macroeconomic news;
* The Monthly U.S. Portfolio & Themes piece displays the current make-up of the Churchill Research portfolio and updates big-picture themes;
* Voicemail back-up is available for institutional clients who want the 60-second schpiel upon publication of new reports;
* Periodically I publish powerpoint chart packages to update themes.
* I do conference calls 3-4 times per year.
The research process
I use a three-step process in analyzing equities. The first, and arguably most important, step is to get the country right. To do this I watch for changes in monetary and tax policies and keep close tabs on currency and commodity markets. I analyze changes through the lens of the classical economic model. After a decade looking at the world this way, I’m convinced it is just plain better than conventional modes of analysis.
The second step is to find those particular sectors poised to outperform. This is a fairly logical extension of the first step. To give a very basic example, the classical model argued against being in copper stocks in 2000-2001 due to a combination of low and declining gold prices (an inverse proxy for the dollar’s value) and the global economic weakness that was largely traceable to that same U.S. dollar deflation. Another example would be Russian telecoms in 2003: They became one of the most attractive investment vehicles in the world due to the Russia’s flat, 13% income tax rate, the dollar reflation (i.e. weakness) that made it easier for the Russian central bank to keep the ruble stable, booming global commodity markets and declining interest rates. I have developed a quantitative model that generates rankings for 107 U.S. equity sectors, and a separate model that generates rankings for 94 discrete country/sectors groups (i.e. Brazilian retail, Indonesian banks, Polish oil, etc …).
The third step in the equity selection process is bottom-up analysis of individual equities within targeted sectors. I maintain earnings and cash-flow models on 100-150 equities at any given time. When I analyze an individual sector, I’m looking for ways to “split” that sector into more-attractive and less-attractive stocks. A good example from back in 2003 was the fertilizers. Currency reflation had been positive for selling prices on nitrogen fertilizers, but this positive was more than offset by soaring natural gas prices (the key input in fertilizer). Hence, early in the year, I evaluated two fertilizer companies that were not reliant on continental U.S. sources for natural gas: Agrium (AGU) and Sociedad Quimica y Minera (SQM), the latter of which is based in Chile and doesn’t use natural gas at all. Both shares greatly outperformed their peers in the sector in 2003.
All Contents Copyright © 2022 by Churchill Research Inc.