Best Performers in a Down Market

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New York – Performance and the business cycle have always been negatively correlated for most research shops. Even though it has been an awful year for investors and borrowers, it presents an opportunity to assess the attributes of research firms that can perform best in down markets.

Researchers often tell their students to “stay close to the data”. This inevitably glides right over the students heads, while they presumably engage their intellects in further analysis of the cafeteria menu specials. After about 20 years, the student might say, “You know, old whooitz actually was right. Who would have thunk.”

The below table lists the top 10 performers in Investars universe by 12 month returns in the period ended September 10, 2008. For analysis, we have broken the returns into their buy and sell contributions and added some color by looking at the number of buy and sell recommendations each provider made.

One of the first questions we ask when a rookie slams in a home run in his first at bat is whether the performance is repeatable. We would rather have a player or and RP that has been solid in a number of at bats or games rather than one that has been excellent, yet has not proven consistency.  From the below data, we can begin to approach at least some elements of this concern.

Company Buy Ret # Buys Sell Ret # Sells Overall Ret
B Riley & Co

-0.65

128

-86.82

5

73.49

MDB Capital Group

-5.91

61

-81.59

17

61.4

Trading Central

0.84

216

-46.11

149

23.95

Haugen Custom Financial Systems, Inc

2.4

661

-29.73

642

20.03

Market Profile Theorems (MPT)

-5.94

8473

-30.01

7954

19.7

Hilliard Lyons

0.01

87

-34.16

15

19.54

Ladenburg Thalmann & Co, Inc.

18.7

661

-30.9

642

18.02

GARP Research & Securities Co.

0.72

81

-28.9

3

13.08

Sandler O`Neill

-0.92

77

-31.26

18

11.78

Avondale Partners

-1.38

145

-25.68

3

8.94

For example, B Riley demonstrated the best overall return at 73.5 basis points per day. We can see from the table that all of the positive return came from the sell recommendations on stocks that fell over the period.  For B Riley, the 86.8 bps return on its sells is equivalent to a 686.1% annualized return. This is already a little suspicious, so let’s look a little deeper. The sell return also came from only 5 recommendations. This is problematic statistically, because it raise the probability that these were lucky events. Yet it is also problematic from a common sense point of view. Why would a research provider have only 5 sell recommendation in the current market environment? According to our database B Riley has 80 stocks under coverage so this represents just over 6% of its total coverage. MBD Capital, GARP and Avondale also raise some concern, despite their overall performance placing them in the top 10.

Another area that could reflect strength was firms that were able to create positive returns on their buy recommendations. There were no firms that were able to do this.

Passing through the top ten with these factors in mind, we suggest that the best of the best for Q3 2008 bear market are Trading Central, Haugen Custom Financial Systems, market Profile Theorems and Ladenburg Thalmann.

Notes: The data for this report is from Investars. The analysis and conclusions are those of Integrity Research Associates.

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