Market Profile Theorems Shows Top Buy Recommendation Performance For 3 Years Ending 9-30-18

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The top performing equity research buy recommendations for the three-year period ending September 30, 2018 came from quantitative boutique Market Profile Theorems, according to performance information collected by Investars, a research performance measurement and commission management systems provider.

Investars collected performance data on 142 research providers for the period from October 1, 2015 through September 30, 2018 on which we have based our analysis.  Investars calculates buy recommendation performance by tracking the buy recommendations as if an investor had invested equal amounts of cash into each stock in the research firm’s buy portfolio. A buy remains a buy until changed to a hold or a sell.

Top Performers

Market Profile Theorems, an independent research firm which relies on a multi-factor model focusing on corporate insider transactions as well as other inputs, had the best 3 year buy performance, marking the end of FIG Partners’ eight-quarter winning streak. Market Profile Theorems’ recommendations were accompanied high levels of risk, with a maximum drawdown of -16.4%, more than the -9.9% maximum drawdown for the S&P 500 and the average -10.7% drawdown for the Investars universe during the period.  The 22.2% standard deviation of Market Profile Theorems’ buy recommendations was significantly higher than the S&P’s docile volatility of 10.7% as well as the Investars average of 14.1%.  Like other quantitative research providers, the average duration of its recommendations was shorter than most fundamental research, averaging under two months.

Equity Research Firms with Top Performing Buy Recommendations for the 3 year period ending September 30 2018

Fundamental Research Corp., a British Columbia-based issuer-sponsored research provider, had the second best buy recommendation performance for the period, based on only three buy recommendations for the period.  The firm’s recommendations were accompanied by even higher levels of risk than with Market Profile Theorems.

First Analysis Securities, a Chicago-based boutique investment bank focused on technology and healthcare stocks, had the third-best track record for its buy recommendations.

The top twelve firms had better performance for their aggregate buy recommendations than the S&P’s 17.3% total return for the three years ending 9-30-18.  However, it is important to remember that the performance analysis does not include transaction costs.

Eight of the top twelve firms were investment banks while four were independent research firms (including institutional brokerage firm FBN Securities).

Market Performance

The S&P 500 index had another strong quarter, increasing 7.7% including dividends for the third quarter of 2018.  It was the best quarterly result since the 11.35% return of Q4 2013 and the best Q3 gain since the 10.72% posted in 2010.  The Q2 earnings season was another success helped by lower tax rates and higher sales, and trade war concerns abated.  Volatility declined, resulting in a quarter with no 1% moves in either direction.

Healthcare was the top performing sector during quarter, rising over 14%.  Industrials (+9.5%), Technology (+8.5%) and Consumer Discretionary (+7.8%) also outperformed.  The new ‘Communications Services’ sector — which replaces ‘Telecommunications’ by adding Alphabet, Facebook, Netflix, Walt Disney and Comcast among others – also performed well in the quarter, increasing 8.4%.  Real Estate (-.02%), Energy (-.1%) and Materials (-.15%) were the biggest laggards during the quarter.

Risk

Of the top twelve research providers during the period, KeyBanc Capital Markets had the lowest volatility for its buy recommendations (12.8%), followed by William Blair & Company (13.6%).  William Blair had the lowest maximum drawdown (-8.6%) followed by First Analysis Securities (-8.9%), both having lower drawdowns than the S&P 500’s -9.9%.

Duration of Buy Recommendations

William Blair and FBN Securities had the longest average durations for their buy recommendations, averaging nearly 11 months for each recommendation. Quant researcher Market Profile Theorems had the shortest average length for its buy recommendations, at 1.6 months.  The average for the Investars universe was over 9 months.

The longer the holding period, the more likely the firm’s performance can be captured by investors following its recommendations. Also, longer holding periods represent lower trading costs. On the other hand, model-driven recommendations are typically updated as soon as new information is available, making the recommendations as fresh as possible.

One Year Returns

The last three years have been a generally positive environment for stocks, and the last twelve months even more so. Therefore, it is revealing to examine the 1 year returns.  Fundamental Research Corporation, the issuer-paid firm had a 111% 1 year return on the three stocks it follows.  BWS Financial, an independent that limits its customer base to 40 investors, had the next best 1-year record of 43.8%.

Our Take

Small-cap was the flavor de jour for the latest period ending the third quarter 2018 as most of the top performers for the period focus on smaller capitalization stocks.  Financial sector specialists such as FIG Partners, Sandler O’Neill and Keefe Bruyette, which dominated the performance within Investars’ universe of providers have faded from the top ranks, as market performance has rotated to other sectors.  The top performing sector for the quarter was healthcare, which helped to boost Leerink Partners — which bills itself as ‘the healthcare investment bank’ — to the top ranks.

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About Author

Sandy Bragg is a principal at Integrity Research Associates. He has over thirty years experience as an investment research professional. Prior to joining Integrity in 2006, he was an Executive Managing Director at Standard & Poors, managing S&P’s equity research business and fund information properties. Sandy has an MBA from New York University and BA from Williams College. Email: Sanford.Bragg@integrity-research.com

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