Essex Newsletter 3-31-05 by linxiaoqin


									                         The Essex
    Essex Investment
     Company, LLC
                         1st Quarter 2005                                                        Volume II, Number 1

                         A Message From Our CEOs

                                  he start of a new year is often the time to take
                                  a fresh look at our portfolios and investment
A Message From       1            strategies and to provide our clients with an
Our CEOs                 update on the firm. Our Review and Outlook discusses
                         the events of the past quarter, our economic forecast,
Industry Spotlight 2     and our positioning among the major industry sectors.
Energy                   The dominant market theme in the first three months of
                         2005 was the sharp rise in both oil and energy share
                         prices. We delve further into our thoughts on the
Review &             3   energy sector in the Industry Spotlight.
1st Quarter 2005           Also in this edition of The Essex Exchange, we
                         highlight Nancy Prial in our Meet the Team segment.
Meet the Team        5
                         Last quarter, we announced the addition of Nancy and
Nancy Prial
                         her team of analysts from the Burridge Group in
                         Chicago. We are particularly excited about one of the
Around & About       6   strategies her team manages that is new to our firm: the               CHURCHILL & KLEHR PHOTOGRAPHY
Essex                    Essex Small/Micro Cap Growth Strategy.                             Growth Investing from
                                                                                          “Beantown” to “Chi-Town”
                           Over four years ago, Nancy applied her proven approach to growth investing to the micro cap
                         and small cap stock arena. In short, she uses a three-step process to identify companies at the
                         earliest stage of earnings growth acceleration – well before the company’s potential is fully
                         recognized by the market. The first step is the use of a quantitative screen to identify stocks
                         with market capitalizations between $50 million and $1.5 billion where earnings are growing at
                         a faster rate year-over-year. Second, the analyst team evaluates the sustainability of this
                         earnings acceleration and assesses the degree to which the future earnings potential is reflected
                         in the current stock price. For a variety of reasons, the small/micro cap market is much more
                         inefficient than other areas of the market. Lastly, Nancy picks the best candidates to assemble a
                         diversified portfolio and carefully monitors each stock to make sure a stock is replaced before
                         earnings decelerate.

                           With the addition of the Essex Small/Micro Cap strategy, our clients can now choose from a
                         full spectrum of investment strategies ranging from the smallest stocks to the largest stocks and
                         many combinations in between – while remaining true to our 28-year focus to growth stock

                           As always, if you have any questions or comments, please send us an email at
                                Page 2                                                                                                                                                                                                                                                         The Essex Exchange

Industry Spotlight Energy

         fter   significantly                                        valuations led to a twenty-year                                  lowest in three decades with                                                                                                                         production capacity and
         outperforming      the                                      bear market in energy stocks,                                    an estimated surplus of only                                                                                                                         growing demand will lead to
         broader indices in                                          resulting in the sector                                          1.5m barrels per day, mostly                                                                                                                         higher and more volatile
2004, the energy sector                                              contracting to an all-time low                                   in Saudi Arabia. Worldwide                                                                                                                           average prices over a longer
surged to new highs in the first                                     5% weighting in the S&P 500                                      supply      and    demand                                                                                                                            period of time.
quarter as investors revised                                         Index in February 1999. In                                       conditions have tightened to                                                                                                                           China is once again
upwards their expectations for                                       2000, with emerging signs of a                                   the point that any significant                                                                                                                       projected to comprise one
long-term commodity prices.                                          global recovery in demand,
Stock price gains were broad-                                        the sector came back into                                         Oil Industry Capacity
based, with exploration and                                          favor. We are now four years
production (E&P) companies,                                          into the cycle and the S&P                                                                          8                                                                                                                                                                                                                                          96

major energy producers, and                                          500 sector weight stands at                                                                         7                                                                                                                                                                                                                                          94

oil service firms participating                                      8.5%.     We believe energy                                                                         6                                                                                                                                                                                                                                          92

                                                                                                                                           Spare Capacity (MMBbls/d)
                                                                     outperformance will continue

                                                                                                                                                                                                                                                                                                                                                                                                                         Capacity Utilization (%)
in the rise. As a reflection of

more optimistic investor                                             as the industry has                                                                                 4
sentiment towards this group,                                        underinvested in additional                                                                         3

mutual fund flows into the                                           capacity for the past twenty                                                                        2

energy sector this year have                                         years. Although the stocks                                                                          1                                                                                                                                                                                                                                          80

reached a five-year high. In                                         have moved up rapidly in the                                                                        0                                                                                                                                                                                                                                          78

addition, as of year-end,                                            short-term, we continue to be                                                                     (1 )                                                                                                                                                                                                                                         76


















hedge funds held the largest                                         positive on the long term
long position in oil futures in                                      fundamentals of the energy                                                                                                       Sau d i A rab ia                                        O t h er O P E C 1 0                                          C ap acit y U t iliz at io n (R H S)

the history of this contract,                                        sector.                                                           Reference: International Energy Agency and Banc of America Securities

according         to     “The                                          Essex’s Chief Investment
Commitment of Traders                                                Officer, Joe McNay, believes                                     supply disruptions would                                                                                                                             third of this year’s global
Report”. Finally, during this                                        that while the energy market                                     cause oil prices to soar above                                                                                                                       demand growth, with
past quarter, Exxon Mobil                                            will be volatile, there will be a                                today’s price levels. OPEC is                                                                                                                        consumption expected to rise
surpassed General Electric’s                                         gradual, longer-term increase                                    intent on keeping oil above                                                                                                                          6% this year compared to a
market capitalization making it                                      in demand. He commented,                                         $40/barrel but is fearful that                                                                                                                       16% increase last year. The
the largest company in the                                           “Emerging markets are                                            too high of an oil price will                                                                                                                        Chinese government recently
S&P 500 Index.                                                       growing rapidly and helping to                                   choke off demand. So far,                                                                                                                            reported severe power
                                                                     drive the demand side of the                                     worldwide demand continues                                                                                                                           outages in 24 out of 31
  To put the recent rise in oil
                                                                     equation for the foreseeable                                     to look strong as the                                                                                                                                provinces prompting the
prices and energy stocks in
                                                                     future. The hesitancy of the                                     International Energy Agency                                                                                                                          government to ration electric
historical perspective, the
                                                                     major oil companies to sharply                                   has revised up its forecast                                                                                                                          supply for its industrial
energy sector entered a bull
                                                                     increase exploration has led to                                  again and is now expecting                                                                                                                           customers and forcing them to
phase in April 1972 which
                                                                     a set of conditions that will                                    consumption growth of 2.1%                                                                                                                           use their own electrical
lasted for eight years until
                                                                     enable supply/demand to be                                       for 2005. Last year demand                                                                                                                           generators which burn mostly
November 1980. The peak
                                                                     favorable longer-term.”                                          growth was 3.3% compared to                                                                                                                          diesel and fuel oil.       With
weighting in the S&P 500
                                                                                                                                      an initial estimate of 1.8%.                                                                                                                         continued        economic
reached 40%.           Excess                                          As indicated in the Oil                                        Therefore, we believe we are                                                                                                                         expansion, exploding
capacity,      significant                                           Industry Capacity chart,                                         in a new paradigm where                                                                                                                              automobile usage and the
overinvestment, and high                                             OPEC’s excess capacity is the                                    minimal excess OPEC                                                                                                                                  Olympics in Beijing in 2008,
Monthly Relative Price Chart of Energy Index to S&P 500                                                                                                                                                                                                                                    an imminent slowdown does
                                                                                                                                                                                                                                                                                           not seem to be in the offing.
     0 .2 1                                                                                                                                                                                                                                                                                  Higher commodity prices
     0 .1 9                                                                                                                                                                                                                                                                                translate to strong cash flow
     0 .1 7                                                                                                                                                                                                                                                                                for the majors, national oil
     0 .1 5                                                                                                                                                                                                                                                                                companies, and E&P firms.
     0 .1 3                                                                                                                                                                                                                                                                                These companies are
     0 .1 1                                                                                                                                                                                                                                                                                increasing their capital
     0 .0 9                                                                                                                                                                                                                                                                                spending, particularly on
     0 .0 7                                                                                                                                                                                                                                                                                drilling, as worldwide rig
     0 .0 5                                                                                                                                                                                                                                                                                utilization is over 95%. A


















                                                                                                                                                                                                                                                                                                                                                        (Continued on page 5)
Source: Merrill Lynch Global Equity Trading Strategy, Rhodes Analytics, Federal Reserve Bloomberg
1st Quarter 2005                                                                                                         Page 3

Review & Outlook 1st Quarter 2005

         ollowing a strong        oil prices spilled over into      after their substantial
         finish to 2004, equity   other commodities, and raw        gains in the fourth        As January, so goes the year?
         prices see-sawed in      materials stocks were likewise    quarter. In addition,
the first quarter of this year    strong performers.       Other    fears over rising fuel
                                  winners included the stable-      costs put pressure on       Market historians, like baseball statisticians,
with the major indices
generating modestly negative      growth consumer staples           the     cruise    lines.    look for uncanny patterns and correlations as
returns. Rising bond yields       companies, as well as             However, we remain          a guide to future performance. A perennial
and surging oil prices proved     selected healthcare names.        confident      in    the
                                                                                                favorite is the “January Barometer” which
to be powerful offsets to         Conversely, financials,           outlook for these
generally constructive            transportation,           and     industries and have         states that the S&P 500 Index’s performance
earnings reports. It was a        technology were generally         retained positions with     in January predicts returns for the full year.
challenging quarter for growth    poor performers in the            companies that are          Since 1970, the January Barometer worked
stocks which underperformed       quarter. Following is a more      expected to provide
                                  detailed review of the major      the best long-term          86% of the time when January was up and
the broad market as investors
shifted to more defensive         sectors of emphasis as well as    returns such as Yahoo       46% of the time January was down. In 2005,
sectors and styles.      Small-   our outlook for the next six to   and Carnival Cruise.        the S&P 500 declined 2.5% in January, but as
sized stocks bared the brunt      twelve months.                      In our small and mid     the Red Sox proved by winning the World
of this change in sentiment,                                        cap portfolios, we
posting returns well behind                                                                    Series in 2004, history is not destiny.
                                                                    increased the weighting
their larger-sized peers in the   PORTFOLIO/SECTOR                  in several restaurant
quarter.                          COMMENTARY                        operators, such as Texas home-related turning in
  A more cautious stance by                                         Roadhouse and CKE, given disappointing results.              We
investors was reflected in the                                      continued strong sales results continue to favor companies
relative performance of                                             and the expectation of some that are focused on specific
industry sectors in the past
                                    Performance in the              relaxation of food costs. demographic niches such as
three months. Energy stocks
                                  consumer sector was mixed         Retail sales so far in 2005 Coldwater Creek and Joseph
of all sizes were the
                                  in the first quarter with         have been mixed, with Banks.
                                  several of the Internet           apparel retailers generally        The performance of media
standouts, rising sharply
                                  Services stocks pulling back      outpacing expectations and and advertising stocks varied
during the quarter. Escalating
                                                                                                        in the quarter, with large
                                                                                                        cap media outperforming
Index Returns January 1, 2005 - March 31, 2005                                                          its small cap counterparts.
                                                                                                        We retain investments in
                                                                                                        Walt Disney, punctuated
                                                                                                        by the recent management
        1.0%                                                                                            change, and are looking to
                                                                                                        News Corp. to broaden
                                                                                                        our exposure.
                                                                                     -1.6%              ENERGY
       -2.0%                                                                                            Energy stocks continued
       -3.0%                                                                                            their        impressive
                                                                                     -4.1%              performance of 2004 into
                                                                                     -4.3%              the      past      quarter
       -5.0%                                                                                            significantly besting the
                                                                                                        broad market. Our
                                                                                                        exposure to the energy
       -7.0%                                                                         -6.8%              sector overall is unchanged
                                                                                                        versus year-end 2004, with
                                                                                     -8.1%              a sizeable overweight
       -9.0%                                                                                            across most strategies. We
                                        January            February             March                   have, however, made a
                                                                                                        modest shift towards oil
                      Dow Jones Industrial Average       S&P 500                                        service stocks versus
                                                                                                        exploration and production
                      Russell 1000 Growth                Russell 3000 Growth
                      NASDAQ Composite                   Russell 2000 Growth                                      (Continued on page 4)
                  Page 4                                                                                  The Essex Exchange

Review & Outlook 1st Quarter 2005 continued
(Continued from page 3)             boosted our exposure to the       finance and bank stocks           and/or a major downturn in
companies. This is based in         generics industry, reflecting     suffered the worst declines,      the value of the US dollar
part on improved relative           attractive relative valuations    while diversified financial       would cause a spike in
price attractiveness of the         for this group, a belief that     services and insurance faired     inflation fears, giving the Fed
services sector compared to         generics will take share from     better than financials on         enough ammunition to
the     producers        and        branded drugs as cost             average.    Brokerage stocks      abandon its policy of
importantly, on our                 containment efforts from          outperformed the sector,          measured rate increases. We
continued expectation for an        private insurers continue, and    driven partly by rising M&A       believe this is unlikely, as
acceleration in capital             the expected positive impact      activity.                         continued strong productivity
spending this year which            of the Medicare drug benefit         Our selective approach to      growth and tough global
would favor the service             in 2006. As a result of these     investing in this area, with a    competition in traded goods,
sector.     Please see the          trends, consolidation activity    focus on companies which          particularly from Asian
Industry Spotlight on page 2        is heating up in this area and    can deliver above-trend           regions, should keep inflation
for a more detailed discussion      we      expect       further      revenue growth such as            relatively subdued.
of our energy outlook.              combinations as the year          Investors Financial, Citigroup      For the majority of last year,
                                    progresses.       Lastly, we      and Goldman Sachs, and an         the equity market was
HEALTHCARE                          continue         to    prefer     avoidance of companies            insulated from the impact of
   The healthcare sector            biotechnology, as it              linked to the consumer credit     Fed tightening and rising oil
performed modestly better           represents the fastest, most      cycle, generated solid returns    prices by the drop in longer-
than the broad market across        dynamic growth in the             in this difficult environment.    term bond yields and better
all capitalizations this quarter,   healthcare sector.                We also continue to favor         than expected earnings. With
led by healthcare services and
                                    TECHNOLOGY                        insurance including AIG due       yields no longer falling and oil
                                                                      to robust underlying              prices marching higher, stocks
Biotechnology, and to a lesser        During the past quarter,
                                                                      fundamentals, despite recent      have become more sensitive
degree, medical technology          technology stocks were
                                                                      weakness related to the           to profit disappointments.
stocks performed worse than         among the market’s worst
                                                                      CEO’s departure and ongoing       Companies that have high
healthcare as a whole,              performers, giving back much
                                                                      regulatory investigations. In     visibility into their revenue
reversing some of the better        of their gains experienced in
                                                                      total, we made no significant     growth are likely to be
relative performance in 2004.       the final months of the past
                                                                      changes to our weightings or      rewarded with expanding
Biotechnology faced a               year. We retain our cautious
                                                                      positions in financial services   valuations. Our strategy is to
particularly volatile quarter       view of the sector as
                                                                      this quarter.                     continue to unearth
driven by unanticipated safety      evidenced          by    our
                                                                                                        companies across all market
and efficacy news on several        underweighted positions.          OUTLOOK                           capitalizations that can not
high-profile products.                Looking ahead, as a general        The US economy is              only exceed expectations this
Specifically, Genentech’s           theme, we are emphasizing         expected to deliver another       year, but also that will
positive findings regarding the     companies that are expected       year of solid growth              demonstrate strong growth
effectiveness of Avastin in         to benefit from continued         accompanied by moderate           relative to their industry peers
treating lung cancer, and           modest growth in IT business      inflation       in     2005.      and the market over the
Biogen Idec’s withdrawal of         spending particularly in the      Employment indicators have        longer-term.
its multiple sclerosis drug,        storage, outsourcing and          firmed, business confidence
Tysabri following newly-raised      communications equipment          has revived as evidenced by
safety concerns led to              areas.     We remain less         the surge in mergers and
significant market moves for        positive on the more              acquisitions, and housing
these stocks as well as the         consumer oriented hardware        activity continues to be
sector.                             areas of technology, such as      strong. The Federal Reserve
  We increased our exposure         PC’s, printers, and handheld      remains determined to shift to
to healthcare in most               devices.                          a more neutral policy,
strategies this quarter,                                              suggesting further increases in
reducing the degree of our          FINANCIAL SERVICES                short-term interest rates over
underweight position.         In      Our underweight position        the next several months.
particular, we added to             in financial services stocks      However, we believe the
companies that increase the         paid off this quarter as rising   pace of tightening will slow as
efficiency of the bio-medical       bond yields caused the sector     the federal funds rate reaches
laboratory such as Beckman          to significantly underperform     the 3% level. Where could
Coulter, Fisher Scientific, and     the broad market across all       we be wrong?            Further
Serologicals.       We also         capitalizations. In a reversal    escalation of energy prices
                                    of last quarter, consumer
1st Quarter 2005                                                                                                                    Page 5

Meet The Team Nancy Prial, Senior Principal and Portfolio Manager

N       ancy graduated from Bucknell University in 1980 with a Bachelor of Science degree in electrical engineering and a Bachelor of Arts degree
        in mathematics. In addition, she earned an M.B.A. from the Harvard Business School in 1984.
when Burridge Growth Partners became a part of Essex.
                                                                                                         Nancy joined Essex in December 2004

Tell us about your                   overall lack of liquidity in         my team of analysts to think
investment experience.               small and micro cap stocks           of themselves as analysts and
I have a strong background in        leads to limited Wall Street         also portfolio managers.
the management of small to           coverage and often times,            Essex’s structure allows its
mid cap stocks. Before joining       reduced ownership. As a              investment professionals to
Burridge in 1998, I spent four       result, small cap stocks tend        flourish in their research
years with the Twentieth             to be less well understood by        efforts. Additionally, I found
Century division of American         investors. Secondly, many            the historic stature of Essex
Century Investors, a large           companies fall into the small        within the growth style to be
mutual fund firm best known          capitalization range from a          quite appealing and am
for the management of small          larger market cap after a price      pleased to join such a well-           Nancy Prial
and mid cap growth stocks.           decline. These previously mid        estee med o rganization.
Prior to that, I spent ten years     to large cap stocks are often        Finally, this was a great way        an edge by thinking outside
with Frontier Capital                discarded as bad investments         for me to return to my               of the box. While I would
Management in Boston as a            and subsequently ignored by          Bostonian roots, without             never suggest that one should
fundamental analyst and              former investors who lost            physically moving back to the        always be contrarian, as often
portfolio manager. I began           money. Such lingering biases         area.                                the consensus turns out to be
my career as a technology            create a host of opportunities,                                           correct, there is an
analyst, eventually adding           as we believe that investors         What lessons have you                opportunity in having a few
other industries and                 do not quickly pick up on            learned?                             different ideas. If one has an
ultimately becoming the              positive inflection points in        One important lesson my              insight in contrast to the
investment manager for the           smaller-sized companies. We          experience has taught me is          majority of the market and
firm’s mid cap portfolios. I         seek to uncover those                that it is often best to follow      can back it up with
think this experience is             opportunities by looking for         your initial instincts. Back in      conviction, that idea can lead
particularly relevant to             companies with earnings              school, I quickly learned to go      to powerful investment
managing small cap                   acceleration.                        with my first answer on an           results.
portfolios, especially since                                              exam question. I never had
what was considered mid cap          What are your thoughts on            much luck with changing my           What do you do for fun?
during the early part of my          being a part of Essex?               answers on exams! I think this       If you asked my husband that
career is now considered             I have known Essex for many          is relevant to investing as well,    question, he’d say that I have
small cap.                           years, having worked at              as my experience has been            the most fun picking stocks!
                                     Frontier Capital Management          that, on average, my initial         Besides stock-picking, I enjoy
What do you find special             in Boston, which is also an          buy or sell opinion is correct.      spending time with my
about small and micro cap            AMG affiliate.         I am          If I have to search for reasons      husband and my two
investing?                           particularly excited to be a         to change my initial                 children. In particular, we
The small cap universe is an         part of an organization with a       perception of an investment, I       enjoy sailing, skiing, camping,
inefficient segment of the           research-driven focus. I             am probably trying too hard          and travel. We are lucky to
market, and the micro cap            consider myself a portfolio          to make it work. Another             live near Lake Michigan and
area is even more so for two         manager first, but also an           important lesson that I have         spend a great deal of our free
main reasons. First, the             analyst. In addition, I want         learned is that one can gain         time on the water.

Industry Spotlight continued
(Continued from page 2)              appreciation. Steve Cutler,          there is more to go as Wall          slowdown leading to reduced
prolonged drilling cycle will        President of Essex, makes the        Street is underestimating the        demand, our outlook for
benefit the earnings of many         observation that “while the oil      earnings potential for this          energy remains favorable
oil services and equipment           services and equipment               cycle."                              supported by strong
companies and result in              stocks appear overbought in           In summary, barring a               fundamentals and still
continued solid share price          the short-term, we believe           worldwide   economic                 reasonable stock valuations.
                                        Volume II, Number 1                                                                         Page 6

 ESSEX INVESTMENT                       Around & About Essex
     COMPANY, LLC                       Our New and Improved Web-site
                125 High Street              If you’ve perused our web-site recently, you may have noticed the
                     29th Floor
        Boston, MA 02110-2702           redesign of the site. The improvements we have made are more than superficial, though, as we
                  617-342-3200          have also enhanced and broadened the content. The expanded Products section now displays
           quarterly data and characteristics on all of our strategies, including top holdings, sector weights,
                                        and our current market outlook. To find out more about our people, please check out the newly
                                        updated profiles of our investment and research professionals. We hope this site will serve as an
                                        informative resource for Essex’s clients and prospects. Please stay tuned for additional offerings
    The Essex Exchange                  and we encourage you to check back often.
                        Laura Allen
                                        Joe McNay Addresses The BSAS
                 Graphic Design
                   April Whitman              On March 3rd, Joseph C. McNay, Essex’s Chairman and Chief Investment Officer, addressed
                   Contributors         the Boston Security Analysts Society at
                    Trey Bowers         their 19th Annual Market Outlook
                Stephanie Crumb
                  Laurel Gormley        Dinner.       Joe gave the standing room
                      David Goss        only audience an overview of the
               Michael Grossman
                    Deirdre Julian      financial markets in the past year as well
                      Karen Korn        as his prognostications for the coming
          Christopher McConnell
            Stephen Scinicariello       year. According to Joe: “Despite the sell-
                   Valerie Sullivan     off in the first quarter, I see a number of
                                        positive influences for the equity market.
         The opinions and analyses
 expressed in this newsletter are       Interest rates and inflation, while rising
        based on Essex Investment       cyclically, should remain at low levels.
    Management Company, LLC’s           More importantly, short interest ratios
          research and professional
experience, and are expressed as        have once again hit record highs
 of the date of our mailing of this     suggesting to me that investors are quite
 newsletter. Certain information                                                         Joe McNay at the 19th Annual Market Outlook Dinner
                                        skeptical of the market and for growth                             on March 3, 2005
           expressed represents an
  assessment at a specific point in     stocks in particular.”        For a video
 time and is not intended to be a       presentation of Joe’s speech and a printable file of the charts used in the presentation, please visit
   forecast or guarantee of future      the News/Market Commentary section of
       results, nor is it intended to
       speak to any future periods.
      Essex makes no warranty or
        representation, express or
   implied, nor does Essex accept
                                        The Eagle has Landed: New Statements, New Reporting
  any liability, with respect to the         Those of you with a discerning eye for detail may have noticed a change in your most recent
    information and data set forth
      herein, and Essex specifically    Essex statement. It is the result of our conversion to a new, state-of-the-art data management and
 disclaims any duty to update any       performance/accounting system. For more than a year, we have been diligently working on the
        of the information and data     integration of the new system from Eagle Investment Systems Corporation to streamline back-
      contained in this newsletter.
 The information and data in this       office operations. This system, launched earlier this year, is designed as a central data hub for the
   newsletter does not constitute       entire organization in order to best serve the needs of our clients.
legal, tax, accounting, investment
      or other professional advice.          This is an exciting time for us as the new system has many added features that will allow us to
                                        enhance our internal controls, improve client reporting, and provide portfolio managers with new
                                        investment tools. As we move ahead with this integration, we expect to offer additional report
                                        customization for our clients.

                                            While our team has been vigilant about maintaining account accuracy as we transition to this
                                        new system, we need to know of any portfolio discrepancies. We welcome your questions, and
                                        encourage you to e-mail us at

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