Bank of Montreal’s $170 million tied to Raymond James 2015 picks drew high bid for top research

By Emma Trincal

New York, Dec. 17 – Bank of Montreal’s $170 million of 0% notes due Dec. 18, 2015 linked to Raymond James’ top equity picks was well-received just as it was a year ago, as investors are seeking for good stock-picks to generate alpha, sources said.

The notes offer a one-to-one exposure to an equally weighted basket of stocks and American Depositary Shares that make up the Raymond James Analysts’ Best Picks for 2015, according to a 424B2 filing with the Securities and Exchange Commission.

Another deal tied to the same basket should follow next month, as in previous years.

Each December, Raymond James Equity Research group comes up with its Best Picks for the next year.

The list identifies stocks that will be able to sustain operational growth and price appreciation over a 12-month period.

Top research

The notes were priced at $1,027.50 per $1,000 principal amount of the notes, according to the prospectus.

There is a redemption adjustment amount of $2.50 per note at maturity. With the premium and the fee, investors need to see the basket appreciate by 3% just to break even, according to the prospectus.

“Historically, Raymond James analysts have picked stocks that did pretty well,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

“It’s not cheap. But I would consider it because I’m biased. Year after year, Raymond James picks have outperformed the market.”

Raymond James ranks sixth in cumulative awards over the past ten years in the Wall Street Journal Best on the Street Survey, according to the brokerage firm’s website.

“The companies they select are not hitting the radar of other firms,” added Kunhardt.

“Raymond James generally doesn’t cover large-cap stocks. Others on the Street, Goldman Sachs, JP Morgan and Merrill Lynch have far more research on large companies than they do. With Raymond James covering a less crowded space – small caps and mid-caps – you have a better shot at finding the companies that perform better because nobody is paying attention to those stocks. If you can get early enough, valuations work to your benefit.

“Everybody is digging around to find gold. But you can find other precious stones with less competition.”

2015 Picks

The reference shares, or Best Picks for 2015, are Bloomin’ Brands, Inc. (BLMN); Cameron International Corp. (CAM); Cavium, Inc. (CAVM); Cinemark Holdings, Inc. (CNK); FLIR Systems, Inc. (FLIR); Harman International Industries, Inc. (HAR); Lincoln National Corp. (LNC); O’Reilly Automotive, Inc. (ORLY); Praxair, Inc. (PX); Priceline Group Inc. (PCLN); Quintiles Transnational Holdings Inc. (Q); Steris Corp. (STE); SVB Financial Group (SIVB); and Texas Capital Bancshares, Inc. (TCBI).

Last year

A year ago, Raymond James came up with its Best Picks for 2014. The 2014 Best Picks were used for the pricing last December of Bank of Montreal’s $185 million due Jan. 28, 2015, followed a month later by another $168.86 million offering, which is due on the same date.

The return of the Best Picks for 2014 was 2.97% as of Wednesday close.

Some stocks did extremely well, such as Advance Auto parts (+44.13%), Apple Inc. (+36.41%) and Quintiles Transnational (24.19%). The year is not over, but the 3% break-even level was the same.

Access

Michael Kalscheur, financial adviser at Castle Wealth Advisors, said the cost was not encouraging.

“It’s a big trade, but it’s really limited to Raymond James clients, so obviously, we can’t get into it. But we wouldn’t do it because it’s expensive. You’re paying $27.50 upfront in commissions. It’s kind of expensive for a one year,” he said.

“If I look at it as a structured note, I don’t see any benefit. There is no return enhancement, no downside protection. You’re not going to buy that for the structure or the payout.

“You’ve got to be a big, big fan of their stock-picking ability. The only way to access it is to have an account at Raymond James, and you have to be very committed to Raymond James as a firm.”

One advantage, however, was access, he said.

“You’d have to have a six-figure account in order to replicate the basket. If you have a small account, the note is a way to access the best of their research.

“It’s a nice, easy, one-stop shop. For small accounts, I can see it as a viable option.”

Do-it-yourself

Marc Gerstein, research consultant at Portfolio 123, disagreed.

“I don’t see anything here that justifies those fees. The names [of the stocks] are out there, in the prospectus. Even if you’re a small investor, let’s say you like the stocks, you can always go to Folio Investing.com and, for a flat fee of $250 a year, open an account and trade without paying a commission, even fractional shares and in any denomination you want.

“You just have to agree to execute the trade at a certain time in the day. But if the motivation is to give diversification to small investors, doing it via those notes is dated. We’re not in the 1970s anymore. There are ways out there that let small investors get diversified baskets, and they can choose what they want to buy and sell with a small dollar amount.”

Another negative aspect of the notes, he said, was the passivity of the underlying pool of stocks combined with the limited liquidity of the notes.

“A lot can happen in a year. Nobody talked about energy two weeks ago. Maybe someone owning their own basket would have bailed out of some stocks.”

The Energy Select Sector SPDR ETF dropped 13% since Nov. 21. The falling oil prices were followed by an equity sell-off with the S&P 500 index down 5% since Dec. 5 until Tuesday.

“If I have to pay that kind of fee, I’d rather go to a small-cap mutual fund,” he said.

BMO Capital Markets Corp. is the agent. Raymond James is the distributor.

The notes (Cusip: 06366RYE9) priced on Dec. 9.

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