New York-Bear markets are a stressful time for most research providers as commissions decline and budgets are cut. However, there are a few types of research that thrive during market declines, particularly forensic accounting and short ideas providers. Used to generate sell recommendations, these providers thrive during market turmoil.
In this environment, when bearish analysts like Meredith Whitney of Oppenheimer and Richard Bove of Ladenburg become media stars, sell recommendations become more highly valued. The forensic research providers have seen this all before…
The forensic sector was a sleepy backwater prior to 2001. Then came Enron, WorldCom and the rash of other accounting scandals, and suddenly the forensic sector was hot. David Tice of Behind the Numbers was appearing on Louis Rukeyser, Mark Roberts of Off Wall Street was testifying at Congressional hearings, and Howard Schilit of the Center for Financial Research and Analytics (CFRA) was a fixture on CNBC. More importantly, nearly all their recommendations made money as the markets continued to tank through 2002. Times were suddenly very good for the original pioneers of the space.
Then two things happened. The markets started recovering in 2003 and a horde of new competitors entered the space. The number of research providers more than tripled, from 6 to 19. Suddenly, the market was not so congenial. In fact, business began to contract, as new clients who had rushed in at the tail end of the market decline suddenly lost their appetite for short ideas as the markets were rallying 20-30% per year. Investors began to get complacent, arguing that Sarbanes-Oxley would fix the problems that spawned Enron. Roberts hunkered down and launched a long oriented product in 2003. David Tice began turning more of his attention to money management and sold his research operation to employees in 2007. Howard Schilit, with impeccable timing, sold his business to a private equity firm in 2003, which in turn sold the business to Riskmetrics in 2007.
Now, business is booming again. Short ideas are in demand, and are providing good returns for investors. Forensic research providers, having survived previous boom/bust cycles, are less likely to be whipsawed this time around.