The Equity Research Shortfall

BusinessWeek: Aaron Pressman, 1.8.2009

Wall Street has slashed its ranks of analysts, but there's solid information out there if you know where to look.

In 2009 many investors will find themselves looking for new sources of equity research. Wall Street firms, crushed by subprime losses, have laid off scores of equity analysts. Goldman Sachs (GS) let go of a dozen analysts covering industries from newspapers to industrial materials in November, and Citigroup (C) said it was dropping coverage of 7% of stocks its analysts once followed. (A Goldman spokesman says the firm has increased the total number of stocks its analysts follow worldwide over the past year.)

And that's after competitors acquired Lehman Brothers (LEH), Merrill Lynch (MER), and Bear Stearns (BCS) and slashed the ranks of their analysts. The total number of senior analysts shrank 40% to 50% over the past year, says Sandford Bragg, CEO of Integrity Research Associates, which tracks analysts from over 1,000 firms for institutional clients. "We've been forecasting consolidation for some time, but we didn't think it would happen so quickly," says Bragg. Even analysts holding top rankings from Institutional Investor magazine and The Wall Street Journal will find themselves looking for work, he adds.

Meanwhile, academic studies haven't shown much value added by analysts' stock picks. The more useful function for investors is being alerted to new developments, whether from tidbits buried in corporate filings or data gathered from multiple companies to discern trends. "Many analysts did know a lot about their industries," says Len Rosenthal, a finance professor at Bentley University in Waltham, Mass., who predicts considerable additional analyst layoffs in 2009. So where to look for new sources of premium investment guidance?

Former Wall Street analysts typically go to work for hedge funds or open boutique research firms, which makes it all but impossible for individual investors to continue reading their reports. At Bear Stearns, Edward Wolfe led the transportation analyst team, top-ranked by Institutional Investor, for almost a decade before opening his own shop last year. Like many of his peers who have gone independent, Wolfe isn't looking for individual investors as clients. Neither is former Credit Suisse Group (CS) housing sector analyst Ivy Zelman, who launched her own company about a year ago. In 2006, in her Wall Street days, Zelman challenged CEO Robert Toll of Toll Brothers (TOL), whom she thought was being overly optimistic, by asking him "which Kool-Aid" he was drinking.

So far there's just one boutique with former top analysts creating a product for individual investors, says Integrity Research's Bragg. Research Edge, in New Haven, employs a half-dozen former top-ranked analysts. The firm was founded in April 2008 by former Carlyle Group hedge fund manager Keith McCullough and started with the same big-client orientation as its competitors. But McCullough decided there might be sufficient interest from high-net-worth investors. Starting in the next few weeks, Research Edge will offer online access to its buy and sell recommendations on stocks and exchange-traded funds at a starting fee of $2,700 a year. Subscribers will also get in-depth reports periodically. "We're trying to offer research without all the compromises and constraints of the old brokerage model," McCullough says. The firm bolstered its reputation with some on-target advice last fall, including a warning for investors to move out of stocks and into cash in September and a recommendation to buy Brazilian stocks in November. (The iShares MSCI Brazil Index Fund (EWZ) gained 25% in the past month.)

Some long-running free financial blogs are also starting to offer premium services. Michelle Leder, a former reporter, started in 2003 to dig into revelations buried in companies' securities filings. This year, Leder added FootnotedPro, a premium service charging $100 a month or $1,000 a year. The Pro service provides rapid updates about disclosures likely to influence stock prices, as well as more in-depth studies based on data from many filings on hot topics. A recent piece searched for hints of impending merger activity hidden in the revised executive compensation agreements of 30 companies.


Paul Hickey and Justin Walters left Birinyi Associates, the money management and analysis outfit of former Salomon Brothers stock trader Laszlo Birinyi, to found Web-based research firm Bespoke Investment Group in May 2007. Along with a free blog, Hickey and Walters offer a $365 annual premium research service that includes daily reports on key market indicators as well as stock and sector picks and pans.

For example, after a huge runup in the prices of coal industry stocks in the spring of 2008, Bespoke issued a June 19 warning that the sector was poised to fall based on excessively high price-earnings ratios. "It's hard not to shake your head at these charts and realize that someone is going to get burned," the pair wrote. Since then the sector has plunged, with the Van Eck Market Vectors Coal exchange-traded fund off 75% in the past six months, vs. a 30% drop in the Standard & Poor's 500-stock index. Most recently, Bespoke moved its model portfolio to 95% equities from 70% cash on Nov. 20. The S&P 500 is up 21% since.

The granddaddy of premium Web sites remains Morningstar (Morn). The Chicago firm started out providing reports on mutual funds, but since 2005 it has been steadily adding product categories. Currently, for an annual fee of $159, subscribers can read regularly updated reports from 200 analysts on 2,000 stocks and get access to fairly involved screening tools for finding stock or fund bargains. Morningstar bought Web site 10-K Wizard on Dec. 4, adding one of the top automated services for screening securities filings to its investing arsenal.

Once investors find potential stock buys, they may want to bounce ideas off other investors. Sites that charge a fee screen out most of the invective common on free sites., which charges $250 a year, does that in part by asking members to rate each other's posts. Many members post only about industries where they used to work. Instead of relying on Wall Street, they seek to profit from the knowledge of peers.

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