We analyzed the performance of stock recommendations made by stock research firms tracked by Investars, a New York based performance measurement specialist, for the 3-year period from January 1, 2010 through December 31, 2012. Investars provided performance history for 118 research firms, both investment bank-affiliated and independent, used in this analysis.
The table below presents the performance and risk of the buy recommendations for the top ten firms in the Investars universe with the highest return to their buy recommendatons over the past three years. Excluded from the analysis were research firms which made fewer than 250 buy recommendations during the period.
The performance measures the cumulative return that would be achieved over the last three years if the buy recommendations of the research provider had been followed during the period. We included the volatility, or standard deviation, of the buy recommendations, the average length that buy recommendations were in place measured in months, and the number of buys made during the period.
The 3-year track record of the buy recommendations made by the firms listed exceeded the return of the S&P 500 by at least 60% in the case of GMI Ratings and by 250% in the case of Alpha Street Research 2000.
However, performance alone is not the only metric of interest. It is also helpful to look at the volatility associated with the buy recommendations. Investors may not be able to follow the timing of a research firm’s recommendations precisely and therefore would be subject to the volatility associated with the recommendations.
Two of the firms had buy recommendations with volatility lower than the volatility of the S&P 500: GMI Ratings and Thomson Reuters/Verus Analytics. Another two firms (Global Select Research and Ford Equity Research) had buy recommendation volatility below the Investars universe average.
When we look at performance relative to risk, we generally expect to see lower performance as a result of lower risk. GMI Ratings and Thomson Reuters/Verus Analytics were exceptions to this rule, demonstrating lower risk than the S&P 500, while Global Select Research and Ford Research also had risk profiles below the Investars average.
In the chart above, we can see the risk/return profiles of the top performing providers over the 3-year period ending 12/31/2012 relative to the Investars’ universe. The average return and risk for the firms tracked by Investars are marked by the blue gridlines in the chart.
The average holding period of the buy recommendations is another important factor in evaluating research firms. Many investors are not active traders, and it is easier for these investors to replicate the performance of research firms with recommendations that have longer average holding periods. The longer the holding period, the more likely the firm’s performance will be captured by investors. Also, longer holding periods represent lower trading costs.
In the chart above we can see that most of the top performing firms have short holding periods for their buy recommendations. The exceptions are: KeyBanc Capital Markets, B. Riley & Co. and GMI Ratings. In the performance game, it is generally harder to generate excess returns with longer holding periods and these firms managed to do it.