The top performing equity research buy recommendations for the three-year period ending June 30, 2019 came from issuer-paid research provider Fundamental Research Corporation, according to performance information collected by Investars, a research performance measurement and commission management systems provider.
Investars collected performance data on 134 research providers for the period from July 1, 2016 through June 30, 2019, 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.
Fundamental Research Corp., a Vancouver-based research provider which charges undercovered small- and mid-cap companies for research coverage, had the best 3 year buy performance, based on only two buy recommendations. Fundamental’s recommendations were accompanied by extremely high levels of risk, with a 41.5% standard deviation which was over twice the Investars’ average and 3x the volatility of the S&P 500. Fundamental’s maximum drawdown of -26.9% was more than the -20.3% maximum drawdown for the S&P 500 and the -25.7% drawdown for the Investars universe during the period.
Equity Research Firms with Top Performing Buy Recommendations for the 3 year period ending June 30 2019
FBN Securities, a NYC-based institutional broker mainly covering the technology and media sectors, had the second best buy recommendation performance for the period. Needham & Company, a NYC-based investment bank focused on growth 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 6-30-19. However, it is important to remember that the performance analysis does not include transaction costs.
Ten of the top twelve firms were investment banks while two were independent research firms (counting issuer-paid FBC as an independent along with institutional brokerage firm FBN Securities).
Q2 2019 was a great quarter for chiropractors, as market whiplash caused severe neck injuries. After the S&P 500 was up 3.9% in April, closing at a new high (2,946), and down 6.6% in May, two-thirds of the way to a correction, it ended June up 6.9% also setting a new closing high at 2,954. The S&P 500’s net result for Q2 2019 was a volatile 3.8% gain, after a celebrated 13% Q1 2019 (after a not-so-celebrated 13.9% Q4 2018 decline), all of which resulted in the first half of 2019 being up 17.3% (18.5% with dividends), the best start since 1997’s 19.5%.
For the first half of 2019, all sectors of the S&P 500 gained. The best performing sector was Information Technology, up 26%, followed by Consumer Discretionary (21%) and Industrials (20%). The worst performing sector was Healthcare, up 7%, as policy proposals for Medicare-for-All and drug price restrictions were in the news. Energy stocks (up 11%) and Utilities (up 13%) were also laggards.
Of the top twelve research providers during the period, Compass Point Research & Trading had the lowest volatility for its buy recommendations (13.6%), lower than that of the S&P 500. Compass Point also had the lowest maximum drawdown, -21.8%.
Duration of Buy Recommendations
Fundamental Research Corp. had the longest average duration for its buy recommendations, averaging 13 months for its recommendations. FBN Securities had the second longest, at nearly 12 months. Drexel Hamilton had the shortest average length for its buy recommendations, at 5.6 months. With the exception of Drexel Hamilton, the buy recommendations of all the top twelve providers had average durations longer than the Investars average of 8 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.
One Year Returns
The last three years have been a generally positive environment for stocks, including the last twelve months. Therefore, it is revealing to examine the 1-year returns. Fundamental Research Corporation, the issuer-paid firm had a 77% 1-year return on the two stocks it follows. Drexel Hamilton had the next best 1-year record of 19.9%.
It is perhaps fitting that an issuer-sponsored firm was top ranked, since Nordic banks including DNB, SEB and Nordea have embraced issuer-paid research as an alternate business model for funding research coverage in the wake of MiFID II. However, Fundamental Research Corp’s performance is tempered by the fact that it covers a very limited number of stocks.