Research performance – The Long and the Short of it

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New York – Every quarter Integrity Research Associates analyses the quarter-end data from Investars’ research performance measurement system and evaluates the top companies in the research space. Today we will review the recommendations provided by research providers in three basic categories: performance of a firm’s BUYS, performance of their SELLS and performance of their BUYS minus their SELLS. Through the next several days, we will also analyze researach firms’ batting averages, the performance of their recommendations in individual sectors, and their stock sorting abilities.


Performance of the Long Portfolio

The performance of a research firm’s BUYS is a telling statistic in years such as the one ended in March where there is little trend to capitalize on. The best performer in this category (see table below) was Longbow Research, which posted a 59 basis point per day return over the year. Longbow Research is an independent institutional equity research firm based in Cleveland, OH.┬áThe company provides fundamental research mainly of mid-cap NYSE-listed names, within the basic materials, industrial, consumer, technology, health care and consumer/business services sectors.

Henley and Co. came in second with a 30 basis points per day return, while American Microcap Institute racked up 27 bps/day to take third spot on the return table.

Performance of the BUY Recommendations

Returns in Basis Points per day

Longbow Research

58.57

Henley & Co

30.17

American Microcap Institute

27.31

Taglich Brothers

15.30

Copell Financial LLC

12.63

Emerging Growth Equities, Ltd.

9.56

MVest Management

8.28

Fundamental Research Corp

7.94

Maxim Group

7.27

Ladenburg Thalmann & Co. Inc.

6.93

Source: Investars database for a one-year period ended March 31, 2007


Performance of the Short Portfolio

Over the past twelve months, the performance of a research provider’s SELL recommendations appears to be dominated by a few really good short calls. BWS Financial came in first in the list, with a return of 62 bps/day. BWS Financial (Beating Wall Street) is a Los Angeles based independent stock research firm, which focuses primarily on undervalued companies with little or no street coverage, within the biotechnology, healthcare and technology industries. The company tends to cover the smaller cap stocks, but does not get paid by the companies that it does research on (i.e. does not have a paid for model).

Rounding out the top three are Ladenburg Thalmann & Co with a return of 56 bps per day and Punk Ziegel & Co with 55 bps/day.

Performance of the SELL Recommendations
BWS Financial

($61.61)

Ladenburg Thalmann & Co. Inc.

($55.90)

Punk Ziegel & Co

($55.27)

Boenning & Scattergood, Inc.

($38.89)

Miller Johnson Steichen Kinnard, Inc.

($34.16)

Fortis Securities

($23.70)

Morgan Joseph & Co. Inc.

($16.53)

Kintisheff Research

($11.34)

Cohen Bros

($10.93)

Merriman Curhan Ford & Co.

(10.74)

Source: Investars database for a one-year period ended March 31, 2007
Because most research firms tend to produce fewer SELLs than BUYS, the top of the leader board tends oscillate quite a bit from quarter to quarter. For example, BWS Financial and Ladenburg Thalmann & Co both had only one sell in their portfolio, while Punk Ziegel & Co had 4 SELLs. The BWS Financial SELL was held for 28 days, probably corresponding with the February Stock market declines.

It is clear that there is no perfect way to measure performance of research recommendations. However, one of the more consistent, transparent and well-reasoned approaches is to assess the return of a research provider’s BUY portfolio minus the return of their SELL portfolio. The below table displays the returns of the BUYS minus the SELLS.


Performance of the Long and Short Portfolios

Performance of the BUY minus the SELL Recommendations
Ladenburg Thalmann & Co. Inc.

$62.83

Longbow Research

$58.57

Punk Ziegel & Co

$51.32

Boenning & Scattergood, Inc.

$41.45

BWS Financial

$39.38

Miller Johnson Steichen Kinnard, Inc.

$33.12

Henley & Co

$30.17

American Microcap Institute

$27.31

Fortis Securities

$25.11

Taglich Brothers

$23.92

Source: Investars database for a one-year period ended March 31, 2007
Ladenburg Thalmann & Co took the top spot (63 bps/day), on the basis of its strong SELL performance, while Longbow (59 bps/day) took second spot with its 3 BUY recommendations. Punk Ziegel & Co (51 bps/day) was third in the list.

As is generally the case, the smaller coverage research firms and the boutique investment banks dominated the top of the leader board.

Note: The recommendation tracking and Equity Research Performance Measurement data comes from Investars. The analysis and interpretation of the data is that of Integrity Research Associates.

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