Ken Lewis lost his battle today to continue as both CEO and chairman of Bank of America. Shareholders voted to rest the chairmanship away from Lewis. Lewis has been under a cloud ever since the Bank of America acquisition of Merrill Lynch and in some people’s minds since the bank’s acquisition of Countrywide the mortgage company. The real question many people are asking is whether or not Lewis will continue as the bank’s CEO much longer. According to a story by Louise Story for The New York Times,

… the vote to separate the chairmanship from the company’s executive leadership raised questions about how much longer Mr. Lewis could steer the bank as shareholder anger mounts over his handling of the bank’s takeover of Merrill Lynch.

Mr. Lewis has worked at the bank and its predecessors for 40 years and run it as chief executive since 2001.

It is very unlikely this is the end of the story. The bank replaced Lewis as Chairman with Walter E. Massey, a longtime board member and former president of Morehouse College.

For more:

SEIU blog
Economic Times
Wall Street Journal
Huffington Post
Financial Times
Los Angeles Times

In his interview with TWST, portfolio manager Craig Stone recommends the energy resource company EQT Corporation (EQT). Here’s why:

Mr. Stone: EQT is a fully integrated energy company, focusing on the Appalachian natural gas region. We like EQT because this is Appalachian’s largest exploration and production company and they own about 3.4 million acres of low-risk resource plays in multiple zones. All the acreage is held by the company with no expiring leases. EQT has one of the lowest cost structures in the industry. The company’s three-year F&D costs (finding and development costs) are some of the lowest in the industry at below $1 per Mcfe (million cubic feet per equivalent) and the company is also a technological leader in air drilling, which over time has helped the company to further lower total operating expenses.

For the complete Investing Strategies report, including a full interview with Mr. Stone, his associate Jon Christensen and a series of full interviews with other portfolio managers, click here.

In our latest issue of TWST, we spoke with portfolio manager Adam Seitchik of Trillium Asset Management. Trillium is a company that practices socially responsible investing. While the idea of socially responsible investing sounds ideal, we felt it was important to talk to Mr. Seitchik about how exactly it works. It turns out that there are four central components to Trillium’s socially responsible investment strategy:

1. Screening- “We do both avoidance screening and also proactive screening to try to seek out companies that are managing well the environmental and social risks and opportunities that they face.”
2. Active Engagement with Companies- “This can involve filing shareholder resolutions and proxy voting, but that typically is something that we’re doing when discussions with companies have broken down. A lot of the positive evolution of companies’ social and environmental profile, we think, is really coming from the discussions that we’re having with companies, often in coalition with NGOs and other investors, concerning their social and environmental performance.”
3. Community Investing- “Community investments are almost unique to the United States. These are promissory notes or certificates of deposit with community development finance institutions that finance positive social and environmental projects. Unlike the bulk of our client assets, these are investments that are generally below market rate. They fall somewhere between philanthropy and market rate investing. Community investments often pay a return of 2% or 3% a year, and these days that’s a very good return relative to some of the risky investments out there.They support institutions focused both nationally and internationally on
   projects ranging from micro-credit to affordable housing.”
   
4. Public Policy Advocacy- “We have for many years been advocates for greater transparency in the financial markets. Our public policy initiatives are often focused on reducing risk, increasing transparency and better managing the social and environmental aspects of
   corporate behavior.”

For the complete Investing Strategies report, including the full interview with Mr. Seitchik, as well as portfolio managers from a variety of styles and philosophies, click here.

Collin Gerry of Raymond James in a recent interview as part of our Oilfield Services report gave us his views on deepwater;

Mr. Gerry: The only side of the energy complex that we are bullish on right now is deepwater. If you take a step back and you look at the global picture for oil supply, we’ve picked all the low hanging fruit. A lot of highly prolific areas of the world have seen peak production, areas that now include Russia and Mexico. The North Sea and the US have been in a state of decline for a while now. The next frontier is deep water. The reason I say that is because we’ve had some geological success there. Brazil has certainly made some pretty significant finds off their coast. The US Gulf of Mexico is a very prolific deepwater market, as is West Africa, and now you’re starting to see places like India and China bid for deepwater rigs and try to explore some of their opportunities. Thematically, I would say it’s deep water, because it’s an oilier play, and from an oil service perspective, it’s a less volatile play. Deepwater development can take five to 10 years, so you don’t care if front month oil goes from $60/bbl to $40/bbl. It’s a long-term investment perspective — you are looking at what oil will average over the next 10 years. It’s not as volatile as some of the shallower stuff or some of the land drilling in North America. The deep water is where we are positioning our recommendations.

Deepwater isn’t as volatile as land or shallow drilling. With a 5 to 10 year development process you are looking at a more longterm less erratic investment with deepwater companies.

As the government’s bank stress test results come closer to being released, rumors continue to fly that Citi’s CEO Vikram Pandit may be forced to become a sacrificial lamb.  While not over impressed with the results he has had over his short stint as CEO, Pandit was never dealt a good hand from the beginning of his tenure.   He has certainly made a serious effort to address the bank’s problems.  Mark DeCambre wrote a story that appeared in today’s New York Post entitled CEO STRESSED OUT, TREASURY’S TEST MAY FORCE OUSTER OF CITI’S PANDIT.  According to the story,

… sources tell The Post that regulators think they might have to make the bold move of removing Pandit to signal Washington is taking as hard a line with the banks as it did with General Motors when it effectively ousted GM CEO Rick Wagoner.

While DeCambre may be correct, I suspect Pandit will keep his position for awhile.  The risks of changing him right now while his tenure has been so short may actually make the situation worse.  Time will tell.  Stay tuned.

In our interview with Jason Helfstein of Oppenheimer as part of our Internet Services Report he mentioned Move Inc. and why they stand out from the rest;

Mr. Helfstein: Move owns Realtor.com. They’re the leading real estate Website by a significant factor. They’ve made a number of changes over the last two years to position the company much more aggressively from a content Website standpoint and they have an exclusive relationship with the National Association of Realtors (NAR), which basically gets them the best data. So really if you’re a consumer and you’re looking to buy a house, that’s the place you go. They’ve got very strong relationships with agents and brokers around the country, and while all the listings are free, they then try to convince those agents and brokers to kind of upsell. They also have the leading CRM or client relationship management software for real estate brokers and agents, and I think there is an opportunity for them to tie that into the Website. So just like Google, you only pay, as in advertising, if somebody clicks, you can track the effectiveness, and I really believe there is an opportunity for that to happen over the longer term in the real estate sector with Move’s Website. In the short term, are they feeling pain because of the real estate cycle? Of course, but in the most recent quarter, the core part of their business was down just a few percent, and that’s pretty impressive, given what’s going on.

Internet is cyclical but the good news is that, in some cases,it is less cyclical than other areas of advertising. Search advertising and e-commerce are both taking market share so they aren’t seeing the negative trends that exist in the more traditional advertising market.

Scheherazade Daneshkhu wrote a piece for the Financial Times entitled, CEO attrition gives directors chance to step up.  According to the story,

Plucking a CEO from among a company’s existing directors is becoming a trend, says Marc Sanglé-Ferrière, head of the Paris office of Russell Reynolds, the US executive search company, who says traditional succession planning does not work in a time of crisis.

“The new CEOs have tended to come from outside or to have been a recently-recruited board member. We are seeing that, as part of succession planning, companies are increasingly looking to put on the board one or two non-executive directors who could have the potential to become the CEO,” he said.

While the focus of the story was on European companies, Liberum has seen some of the same circumstance crop up in the United States.  It is not a large trend but there have been a number of cases.

We recently spoke with Nathan Judge of Atlantic Equities LLP about the Gas Transmission space as part of our Oilfield Services/Pipelines & Distributors Report. With the new administration in place one thing is for sure some changes are coming;

Mr. Judge:  Generally, the Administration has emphasized the need for energy independence, and energy independence is a pretty broad statement. The Administration has also been looking at things like reducing carbon or actually regulating carbon emissions, perhaps putting some type of penalty on emitting carbon. Those have very different effects on the gas transmission, gas pipeline business, but generally there is an underlying supportive environment from the Administration to promote additional gas transmission infrastructure in the country. Policies to limit carbon could also provide an additional boost to natural gas demand. That said, there have also been some changes implemented by the Administration that would reduce the amount of tax breaks that E&P producers get. That potentially could lower the amount of gas being provided from some unconventional basins. So we have a mixed bag as far as that is concerned. There is also this big question mark around changes in personnel at the FERC, the Federal Energy Regulatory Commission. The previous Chairman has recently resigned and there is an interim Chairman who could potentially be the permanent Chairman. That’s important because we have historically seen some fairly robust returns over the life of these projects, and if there is a change of returns allowed by the FERC on these pipelines, it potentially could be lower than it has historically, which would be a very big negative for the group.

This still seems like a developing story so gather as much information as possible and pay attention.

As part of our special focus on Water Utilities, we spoke with analyst Timothy Winter of Jesup & Lamont Securities Corporation. He gaves 2 picks that he feels are worth investors attention in the Water Utilities space:

• American Water Works (AWK)- “It trades at 12.5 times 2010 numbers and 118% of book value versus the group, which is at 17 times forward numbers and 175% of book, so on a valuation perspective, it’s very, very attractive. The fundamentals of AWK are just as strong, and one could argue stronger, than some of the others in the group, given that they are in the process of filing rate increases for the neglected systems from the RWE ownership days. So there is going to be some accelerated earnings growth over the next couple of years.”
• Aqua America (WTR)- “The CEO is absolutely fantastic. The company’s track record is second to none. And they’ve grown bigger, they’ve expanded from the Upper Midwest and the Northeast into the Carolinas and Florida and Texas as of recently — when I say recently, I mean the last few years — to continue their long-term strategy, which is to be the best consolidator and the best operator. And I think we have earnings growth returning to their historical 10% per year growth rate that investors enjoyed from about 1992 through 2006 before they had to take some time to digest the strategic acquisitions in the Carolinas, Florida and Texas.”

For the complete Water Utilities report, including a full interview with Mr. Winter, as well as interviews with other analysts in this space, click here.

Earth Day Special- In a recent interview with Terence Gallagher of Kaufman Bros., LP he introduced us to Carbon Trading.

Mr. Gallagher: Carbon trading had its origins in the United States through SO2 and NO2 trading. SOX and NOX, as they are called, was started to reduce these pollutants and cut down on acid rain. Kyoto decided to adopt this model and apply it toward CO2.

Currently, according to New Carbon Finance, the worldwide market is $118 billion, with the majority of that market being Kyoto-based. Kyoto was established to encourage the developed countries of the world to invest in cleaner power in the developing countries. This provides a method for the developing countries to gain assistance and use cleaner, more expensive power as their needs increase. As a reward, the developed countries receive credits that they can apply to their CO2 caps.

One of the big issues that this market has to work out if it is going to grow further is that the carbon credits are not fungible. There are too many ways to define a ton of carbon that is taken out of the atmosphere. Currently, there are existing and potential markets all over the world, and there is limited overlap among the applicable products.