Tulane Finance Professor Peter Ricchiuti talks with the Opportunist’s Managing Editor Leslie Stone about his student-run investment research program, why he prefers smaller, undervalued companies and why the current market is the most attractive for stocks since the mid-80s.
Peter Ricchiuti teaches courses on the financial markets at Tulane University’s Freeman School of Business and has twice been named the school’s top professor. He started his career with the investment firm of Kidder Peabody and later managed more than $3 billion as the assistant treasurer for the State of Louisiana. In 1993 he founded Tulane’s highly acclaimed BURKENROAD REPORTS stock research program. He has been featured on CNN and CNBC as well as in The New York Times and BARRON’S.
Opportunist: How did a Bostonian end up in the Bayou State?
Peter: I came down for my MBA in the early 1980s. From there, when Mary Landrieu became Louisiana State Treasurer (she is now the State’s U.S. Senator) she made me her chief investment officer. I was 31 years old, and we had a lot of young guns running an old establishment. That’s where I met my wife, who was an economist for the state. You don’t get that at every job. [Laughs]
Opportunist: What is BURKENROAD REPORTS and how did it come about?
Peter: I founded BURKENROAD REPORTS in 1993. It’s an innovative student-run investment research program in which undergraduates and graduate business students write financial reports to be used by the Hancock Horizon Burkenroad Small Cap Fund (Ticker Symbol: HYBUX). Students meet top management, take field trips to company sites, and publish investment research reports on 40 “stocks under rocks” in Louisiana, Texas, Mississippi, Alabama, Georgia, and Florida.
William Burkenroad was a graduate of the University and his family made an endowment to help us get started and keep the Burkenroad name alive, since he had no sons to carry on the family name.
Since its inception, about 600 of my students have moved on to positions in investment related fields.
Opportunist: Where did you get the idea to take students on field trips?
Peter: In 1981, when I was with Kidder Peabody in Boston, we went on a field trip to a company called Charles River Breeding in Cambridge. Our bosses believed the sales force could do a better job on IPOs if we got a feel for what our client companies did. So, our group of adult investment professionals rode a yellow school bus out to the laboratory where they bred hairless rats with no immune systems. [Laughs] It was like an episode of “Mister Rogers’ Neighborhood.”
Here at BURKENROAD REPORTS we do the same thing. Our student teams have visited everything from potato chip factories to offshore oilrigs. The people who run these companies have no hobbies. They wake up thinking how to get this stock price up. It’s an invaluable experience for students to meet with them and learn first-hand about their companies. About one-third of our companies are in the energy business, which makes for great field trips.
Opportunist: What are some of the most dynamic companies you’ve worked with?
Peter: We have followed Pool Corporation (Ticker: POOL) for 17 years. They are the biggest wholesaler of swimming pool equipment in the world. If you’re building a pool or you’re a pool cleaner, this is where you get what you need. The stock was pushed down because of the housing collapse, but it will come back. I like to say that the stock is “coward’s play” on the housing recovery. Of course, maintenance of existing pools is always in demand; otherwise, when a pool gets green it becomes a health hazard and looks like Monet’s Giverny.
Another company that’s a good play is TISI. They are a national company out of Texas that does repair and maintenance on chemical plants and refineries. The government keeps tightening up environmental regulations and these plants and refineries are getting older and older and need more repairs.
Peter: When I took 27 of my students to visit with Warren Buffett in Nebraska. It was right after Lehman Brothers had closed. He was 78 at the time, and the kindest, nicest person. He took us out to eat at his place and we all had to order Cherry Cokes. [Laughs] He stressed the importance of the old-fashioned Graham and Dodd school of security analysis and ignoring what’s currently racing across the TV screen. That’s what we teach in class, along with kicking the tires and meeting people and checking the balance sheets.
A couple of years ago [CNBC’s] Jim Cramer came and did his show from Tulane. My students pitched our stocks to him and my students and Cramer would get into friendly battles about why we think we’re right on some of these stocks.
Opportunist: Besides lecture and writing reports, what methods of teaching do you use?
Peter: The book we start off with is Peter Lynch’s One Up On Wall Street. There’s a chapter in which Lynch is asked to create a dream stock. His make believe company was called Bayou Cleansers. They were so deep in the swamp that analysts never visited them. He was always looking for companies that have fallen through the cracks and haven’t attracted any attention from Wall Street.
Opportunist: How do you prepare your students for a career in the financial industry?
Peter: It has turned into a valuable career springboard for my students. The main reason my students have done so well is they have these sophisticated reports they can send out with their resume. This includes spreadsheet calculations and assumptions and writing samples. They are tough projects. It costs about $750,000 a year to run Burkenroad, including salaries and flying these students around and it’s very expensive but it really pays off and their experience doesn’t look like those from programs at other universities.
What separates successful people from those who struggle is their ability to communicate. To bridge that gap, I created a Toastmasters club on campus for students. It’s voluntary, but I encourage my students to participate. Most people fear public speaking over dying; at a funeral more people would rather be in the casket than saying the eulogy. [Laughs] But it’s an important skill for my students to develop, to make them students become more comfortable in talking with management. It’s pretty intimidating to be with CEOs.
We have the lowest payroll on Wall Street [Laughs] and yet these students get to go out to the trenches and look at these companies, so it’s a lot of fun.
The downside is I have 100% turnover every year when the students leave. Nobody has that much of a problem. [Laughs]
Opportunist: Why did you choose teaching over Wall Street?
Peter: In teaching you obviously don’t make what you do in the investment business—in terms of dollars—but when you see students you had 10 or 15 years ago doing well it makes you feel great. I think of that as psychic income. The Business School is trying to raise money for a professorship in my name, and I am seeing blasts from the past writing in about me. It’s very satisfying.
Opportunist: Have you published any books?
Peter: I wrote my own textbook with a former student, but I don’t write for academic journals or do the kind of publishing that most academics do because I’m more of a practitioner. I have a blog on Forbes.com, Stocks Under Rocks, where I typically talk about a couple Burkenroad companies, and I will occasionally do something for NPR. It’s sort of hit-and-miss—if I have an idea or find something I believe the listeners or readers will find interesting.
Opportunist: Please tell us about your radio show.
Peter: Several months ago I started hosting a podcast radio show called “Out to Lunch.” It’s a half-hour program recorded over lunch at Commander’s Palace. Every week we bring in two young entrepreneurs and discuss their business goals. Next month we are going to move over to a local NPR affiliate. We are pretty excited about it.
Opportunist: Do you have any advice for those considering a career in the financial industry?
Peter: You need a passion for the markets. Even people who enter the industry for the big bucks have to think this is the greatest career in the world. I did my undergraduate work at Babson College. I was on the dean’s list, a pitcher on the baseball team and a dorm director, but I hadn’t taken a course that did anything that really interested me. Once Professor George Troughton introduced me to the market that was it. I took an investments class that combined finance, accounting, journalistic investigatory ideas and mathematics; it was almost a religious moment when the sky opened up. Until then I thought I’d have to tell my parents that after thousands of dollars spent on my formal education I’d have to become a fireman. [Laughs]
Opportunist: Tell us about your experiences on the public speaking circuit.
Peter: I’ve been speaking for 20 years and have addressed groups in 47 states and several foreign countries. I usually have 50 or 60 speaking engagements per year. I enjoy taking a dry subject that I’m very passionate about and making it interesting, so I have all kinds of fun little skits and gags and jokes that people don’t expect from an economist or finance professor.
I adapt my speeches to different audiences. It’s fun to meet people in all walks of life. I’ve spoken at workshops for the New Orleans Saints players, healthcare executives, financial planners—you name it. Once, I even spoke to 450 nuns in Albuquerque, who handled the finances for their respective churches.
I’m not selling anything, so people aren’t suspicious about whether I have an agenda. [Laughs]
Opportunist: New Orleans has a reputation of being a very fun place. How do your students deal with that?
Peter: I think it is the perfect place to attend college. It is a very tough curriculum and our students are very good at time management. Tulane is a very unique school in that 80% of our students come from more than 500 miles away. By nature, students tend to live in a five-block area. All of a sudden, when I’ve got them in a van or an airplane and we are headed out to meet with company CEOs, they think wait a minute, there are some really smart business people running some great companies. They go back to where they came from with a different spin on New Orleans. It’s no longer about parties and Mardi Gras.
New Orleans has become a very dynamic place. In fact, it was recently named the No. 1 city for young entrepreneurs. It’s a city that doesn’t look like any other place in the United States. It’s hip, and it’s inexpensive. After Hurricane Katrina a wonderful sense of community developed here. Everybody here in New Orleans is doing something extra now—from tutoring to helping to build houses. Three years after Katrina, Tulane averaged over 40,000 applicants for 1,600 freshman slots. That’s more than any other private college. We have mandatory community service. Students like it, and they are really involved in some great projects to improve the community.
Opportunist: What are your thoughts on the U.S. economy?
Peter: I believe people have been purposely talking down the economy for political purposes. Seventy-five percent of Americans believe we’re still in the recession and on the wrong track. In the early 1990s two-thirds of Americans thought we were on the wrong track, and yet that was a great decade to be an investor. In 2000 about 80 percent thought we were on the right track and we went into the lost decade. If the majority were right the majority would be rich, but they’re not. [Laughs] It’s a great counterintuitive index. The bottom line is companies are buying back their own stock left and right—$400 billion worth in 2011—and so are insiders. Those are great indicators because nobody knows their companies like they do. People get wealthy buying good companies at reasonable prices and sticking with them. This is the cheapest stock market since 1985. Between buybacks and M&A activity I think we could actually experience a shortage of stocks—a “Honey I Shrunk the Market” situation—as more money becomes available and there are fewer companies out there.
People need to step away from the day-to-day TV watching because it’s creating a generation of terrible investors. It’s better to try to get a longer-term perspective on the markets and not be driven down by the daily news. Investors need to focus on what counts. What moves markets in the long run are corporate earnings and balance sheets, which are better now than they’ve ever been in the history of the country. The bond market is where money is going but stocks are the opportunity. Companies are sitting with cash on the books and they are targets for LBOs [leveraged buyouts]. Companies are more liquid now and have more cash as a percentage of the balance sheet than they have since the 1950s.
Leslie Stone is an award-winning writer/editor with more than two decades of experience covering business, finance and lifestyle issues for newspapers, magazines and online publications. Originally from Virginia, she currently resides in the Orlando area.