Research Strategies for Troubled Times

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NEW YORK — Earlier this year, before the ongoing credit crisis had begun to roil equity markets, Integrity Research published a ResearchFocus report on Earnings Quality and Forensic Research. At the time, we noted:

“The popularity of forensic research has gone through peaks and valleys. Investor interest in the sector became white hot after the markets collapsed in 2000. During the market declines in 2001 and 2002, forensic research and short recommendations became both highly visible and highly profitable. As the markets rebounded in 2003 and 2004, investor interest cooled. Now, with markets less buoyant and accounting scandals once again hitting the headlines, the sector is enjoying a renaissance of investor appeal. The forensic research providers are once again demonstrating their prowess in making early calls on accounting issues such as options backdating and subprime lenders.”


Since the publication of that report, equity markets worldwide have been exceptionally volatile, and earnings quality and restatement issues have been a central part of the troubles plaguing financial companies, homebuilders, and others caught up with the current turmoil. A significant part of the market’s turmoil has been due to the fact that earnings forecasts and balance sheet entries have included shaky future valuations often based on models, rather than reality.

Integrity has reviewed twenty research providers who specialize in earnings quality and forensic analysis. Their research ranges in style from purely quantitative earnings models to deep-dive fundamental analysis in assessing a company’s business. These research providers have generated some very insightful calls ahead of the market, and we have no reason to believe that the need for such research is waning – in a recent survey, Integrity found that over half of non hedge funds surveyed, and over one-third of hedge fund managers expressed interest in forensic analysis and earnings quality research.

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