Research Performance Awards – Q4 2006

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New York – Overall Synthetic Returns – Every quarter, the team at Integrity Research Associates tabulates data from Investars on the performance of a large universe of independent and investment bank research providers.  In total, Investars covers about 120 research companies. The data covers a full year of performance in the year ended December 31, 2006 (www.investars.com).

One approach to measuring research firm performance includes evaluating the return of a provider’s BUY Recommendations and the returns generated by their SELL recommendations. The addition of these two elements provides a measure of the research firms’ accuracy in stock picking.

Based on this metric we rank the independent research providers (IRPs) and the investment banks (IBs) in terms of their overall performance, and then try to evaluate why these results occurred.

Three features emerge from the performance data this quarter:

  1. Boutique Investment Banks did better that the IRPs.
  2. Research Firms with small coverage lists outperformed there larger brethren .
  3. Much of the strongest performances came from the short side of the portfolios.

On average, boutique investment banks performed much better than the IRPs in the year that ended December 31, 2006.  However, the outsized returns appear to have been centered in the short portfolios for all of the firms (IB and IRP) resulting in double digit growth on this side of the ledger. There were 15 companies that posted double digit daily basis point returns during the twelve months which ended December 31, 2006.

For example, Punk & Ziegel posted a 75.5 basis points per day (bpd) synthetic return over the period. Here, the short portfolio provided a 75.2 bpd return, while the long portfolio produced a 0.3 bpd gain. In general terms, Punk & Ziegel have recorded gains very similar to these over the previous two quarterly timeframes.

The top performing IRP was American Microcap Institute which posted an overall return of 30.3 bpd. American Microcap was also third among all research firms tracked by Investars, after Punk & Ziegel and Miller Johnson Stieched Kinnard. Even more impressive, is the fact that American Microcap had no holds or sells over the timeframe, so the 30.3 bpd return was generated exclusively by the buy portfolio.

Below we tabulate the results of our analysis:

Top Five IRPs and IBs for the year ended DEcmber 31, 2006

Return on Positive plus Negative Recommendations

(Basis Points per day)

Rank

IRP

Return

IB

Return

1

American Microcap

30.3

Punk Ziegel & Co

75.53

2

First Analysis

9.06

Miller Johnson Steichen Kinnard

39.78

3

Pacific Growth Equities

8.40

Taglich Brothers

28.12

4

AmTech Research

8.29

Henley & Co

27.87

5

When 2 Trade

6.66

Boenning & Scattergood

27.70

We have noted in past analysis that research providers with low coverage universes live in a bifurcated world, either dwelling at the top of the performance ladder or at the bottom.  As a result, Investars has separated its research performance information into three categories: those firms that have less than 100 stocks under coverage, those with coverage of 100 to 499, and those with coverage of over 500 stocks.

We tabulate below, a list of the top ten research companies which cover more than 500 stocks:

Top Ten IRPs and IBs Covering Over 500 Stocks

Year ended December 31, 2006

Return on Positive plus Negative Recommendations

(Basis Points per day)

Rank

IRP / IB

Return

Coverage

1

When 2 Trade -IRP

6.66

1440

2

Jefferies – IB

6.19

770

3

Columbine Capital Services – IRP

4.02

7000

4

Sabrient Systems – IRP

3.98

5600

5

Zacks Investment Research – IRP

3.61

1100

6

Merrill Lynch

3.56

2650

7

Ford Equity Research – IRP

3.15

5700

8

Rochdale – IRP

2.83

2570

9

Smith Barney – IB

2.58

2592

10

Price Target Research – IRP

2.35

3000

In the group of research firms with large coverage universes, independenet research providers fared considerably better. When2Trade took top honors in the year ended December 31, 2006, putting up a 6.66 bpd return on its recommendations.  In addition, the independents took seven (7) of the top ten (10) slots in this coverage category.

We also discovered that many of the players in this space are quite consistent in producing returns, with 9 of the 10 being repeat players in the over 500 club.

Measuring performance is fraught with issues in how to treat the recommendations of research providers with different strategies.  As in baseball, a home run hitter hit a lot more home runs, but also strikes out a lot more than a base hitter.  When the goals of different shops are different, the success they have in achieving those goals may or may not be adequately addressed by simple performance returns data.  At a minimum the volatility of the returns needs to considered, so that investors can make rational decisions about how much return can be achieved while remaining within their risk tolerance level.

Over the next several days, we will several performance criteria, thought to be valid in analyzing research recommendations. These will include, but may not be limited to: buys and sell stars, sector performance stars, batting average stars and stock sorting stars.

Note: The data used in the above article, comes from the Investars web site. The analysis and conclusions of this article are those on Integrity Research Associates.

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