The top performing equity recommendations for the three year period ending March 31, 2015 came from healthcare-oriented investment bank Leerink Partners, according to performance information collected by Investars, a research evaluation and commission management provider.
Investars collected performance data on 140 research providers for the period from April 1, 2012 through March 31, 2015 on which we have based our analysis.
Leerink Partners, a healthcare-oriented investment bank, had the best 3 year buy performance, partly reflecting strength in the life sciences sector. Although it made only two sell recommendations over the last year, its sell performance was sufficiently weak to drop its buy/sell performance by an order of magnitude.
Haugen Custom Financial Systems, a quantitative research firm which covers 7,000 U.S. and international stocks, had remarkably balanced performance over its buys and sells, even as the number of its sell recommendations nearly equaled the number of buys.
Firms with Top Performing Buy Recommendations for the 3 year period ending 3-31-15
Northcoast Research, a Cleveland-based independent research firm, had more buys than sells, but showed strong performance across both. Thomson Reuters/Verus, a collaboration which integrates quantitative analysis from Arizona-based Verus Analytics into Thomson Reuters stock reports, had by far the highest number of buy and sell recommendations, while maintaining a very strong track record for its buy recommendations. Not an easy feat.
GARP Research & Securities Co., a Maryland-based independent whose analysts cover around 65 stocks, had strong performance over the period for its buy recommendations with no sell recommendations.
Of the top five performers, Northcoast Research and Thomson Reuters/Verus had the best risk/reward profiles. The maximum drawdowns, a measure of the largest percentage loss the recommended stocks would have experienced during the 3 year time horizon, were between -9% and -10%, nearly half the drawdown associated with Leerink Partners recommendations for the period.
The standard deviation of returns associated with the recommendations, a measure of their variability, were lower for Thomson Reuters/Verus and GARP Research.
Duration of Recommendations
The three firms which rely primarily on analyst recommendations – Leerink, Northcoast and GARP – had the longest average durations for their buy recommendations, ranging between nine and eleven months. In contrast, the buy recommendation duration for the quantitatively oriented research firms – Haugen and TR/Verus – averaged around one month.
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.
It is rare for an investment bank to be a top performer for its stock recommendations, so kudos to Leerink Partners for its outstanding performance during the period. It is also refreshing to see a mix of analyst-driven firms with the quants. In an era where an increasing amount of trading is computerized, it is heartening to see that mere mortals can hold their own.