New York – One of the more interesting performance statistics as they apply to research providers is the concept of batting averages. The performance data comes from Investars equity research performance database.Batting averages are hit rates for research recommendations. For example, if a research provider makes 3 sell recommendations over a specific time period, and two of those stocks fall in value, the firm’s sell batting average is 66.7%. For each stock that is recommended by a research provider the sell batting average and the buy batting average are averages of the individual batting stats.
From the Investars buy and sell batting averages, we construct the WABA, which is the weighted average batting average of both the buys and sells-weighted by the number of buys and the number of sells as percentages of the total number of recommendations over the period.
The table below lists the top 20 firms followed by the Investars system, excluding firms that have less than 10 recommendations over the 1-year period ended December 31, 2008. The table is sorted by the weighted average batting average, which includes both buy and sell accuracy.
|
Rank |
Research Provider | Batting Averages and No. of Recommendations | ||||
|
Batting Buy |
No Buys |
Batting Sell |
No Sells |
WABA |
||
|
1 |
Barclays Capital |
75.6% |
86 |
40.0% |
25 |
67.6% |
|
2 |
Pali Research |
85.7% |
7 |
40.0% |
5 |
66.7% |
|
3 |
Collins Stewart |
69.2% |
26 |
50.0% |
8 |
64.7% |
|
4 |
MKM Partners |
75.0% |
8 |
33.3% |
3 |
63.6% |
|
5 |
SMH Capital |
62.5% |
32 |
50.0% |
2 |
61.8% |
|
6 |
BMO Capital Markets |
11.8% |
51 |
75.8% |
161 |
60.4% |
|
7 |
Rochdale |
46.8% |
1864 |
73.4% |
1600 |
59.1% |
|
8 |
MarketGrader |
31.4% |
3381 |
72.0% |
5345 |
56.3% |
|
9 |
Channel Trend Inc. |
49.5% |
5624 |
68.7% |
2207 |
54.9% |
|
10 |
Ford Equity Research |
47.4% |
5687 |
64.1% |
3180 |
53.3% |
|
11 |
Trading Central |
36.8% |
204 |
70.5% |
190 |
53.0% |
|
12 |
Sandler O`Neill |
29.2% |
72 |
87.8% |
49 |
52.9% |
|
13 |
Audit Integrity, Inc |
41.7% |
1629 |
65.4% |
1416 |
52.7% |
|
14 |
Columbine Capital Services, Inc. |
43.4% |
8686 |
60.9% |
7857 |
51.7% |
|
15 |
Ativo Research |
36.0% |
1807 |
54.7% |
9252 |
51.6% |
|
16 |
Price Target Research |
41.9% |
6399 |
60.0% |
5536 |
50.3% |
|
17 |
Market Profile Theorems (MPT) |
36.6% |
13332 |
72.3% |
7808 |
49.7% |
|
18 |
Thomas White/Global Capital |
37.0% |
3245 |
57.4% |
3705 |
47.9% |
|
19 |
Haugen Custom Financial Systems, Inc |
38.9% |
669 |
58.2% |
536 |
47.5% |
|
20 |
Short Ideas |
46.9% |
32 |
46.9% |
||
- 1. Barclay’s Capital had the best batting average. However, this reflects the fact that they have only been tracked since the Lehman acquisition, when the Lehman team was absorbed into the Barclays Capital Research product. Therefore their data covers only Q4 2008. Still a 75.6% batting average in the fourth quarter is pretty good, considering the volatility in the markets.
- 2. In places 2 to 6 all firms are fundamental in approach. Pali Capital has is a fundamental small cap shop, which specializes in TMT (some Healthcare) and had an overall batting average of 66.7 (i.e. 2 of 3 call were correct in direction).
- 3. Collins Stewart is fundamental shop that had a batting average of just under 65%. In 2007, Collins Stewart purchased CE Unterberg Towbin Holdings.
- 4. MKM Partners is a fundamental shop for the purposes of measuring performance, but the firm also has a technical research product. MKM has just rolled out a new market research product which surveys of online panels, primarily in the retail space, but they have capability in other sectors as well.
- 5. SMH Capital (Sanders Morris Harris) had an overall batting average of 62% and is a Fundamental shop with a specialization in small cap stocks. In 2008, SMH acquired Miller Green Financial Group.
- 6. BMO Capital Markets is an investment bank underpinned by Canadian Chartered bank, Bank of Montreal. They feature fundamental research, have a strong presence in small cap research, and also feature quantitative models.
From 7th to 10th the quantitative firms prevailed, including Rochdale, MarketGrader, Channel Trend and Ford. In 11th place is a technical shop. Trading Central in a Paris-based technical analysis shop which covers about 3,500 stocks across North America, Europe and Asia.
Other notables include Audit Integrity–a forensic/earnings quality service and Short ideas–the name says it all.
While batting averages are instructive in demonstrating the accuracy of recommendations, they miss two important elements. First, they miss the home run hitters that tend to more than make up for their weaker batting averages with occasional very profitable recommendations. Second, batting averages ignore transactions costs that would change the economics of a number of marginally profitable recommendations that did not move far enough to compensate for the cost of trading.