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Wednesday, July 25, 2007
Thoughts on Batting Averages
New York – One
of the issues with analyzing performance of research recommendations is
the disparity between the realized synthetic return and the so-called
batting average of the recommendations. A batting average is the
percentage of the recommendations that the research provider made that
moved in the correct direction. As such, we include a table of the
batting averages of the research providers that are tracked by the
Investars database. The table below
details the sell batting averages (Sell BA), the buy batting averages
(Buy BA), the number of buy recommendations (No Buy), the number of
sell recommendations (No Sell) and the weighted average batting average
(WABA) for the top ten research providers as sorted by the WABA. Weighted Average Batting Averages
| Company | Sell BA
| No Sell
| Buy BA
| No Buy
| WABA
| 1
| Torc Research
| 0.0%
| 0
| 100.0%
| 2
| 100%
| 2
| The Zephrin Group
| 0.0
| 0
| 83.3
| 6
| 83.3
| 3
| Buckingham
| 33.3
| 9
| 86.2
| 116
| 82.4
| 4
| Kevin Dann
| 0.0
| 2
| 86.7
| 30
| 81.2
| 5
| Fidelity Model
| 14.3
| 7
| 81.6
| 440
| 80.5
| 6
| First Analysis
| 37.5
| 8
| 84.1
| 62
| 78.8
| 7
| CJS Securities
| 0.0
| 0
| 74.3
| 35
| 74.3
| 8
| When2Trade
| 60.0
| 39
| 76.2
| 265
| 74.0
| 9
| Barrington
| 50.0
| 8
| 76.1
| 88
| 73.9
| 10
| Merrill Lynch
| 48.3
| 118
| 76.5
| 642
| 72.1
|
As
always, when one tries to isolate a particular attribute of a
portfolio or a population, some perspective is gained from the analysis of summary
statistics and some granularity is lost. While it is insightful to examine
which research provider had the best batting average, it does not
provide any information on the magnitude of the returns acheived. Granted, one might suspect that
the firm with the best batting average might have the most future
potential to outperform the other providers, but there is a notional balance
between the batting average and the overall return - call this the sweet-spot of research performance.
To find those research providers that found the sweet-spot we multiplied
the batting average and the synthetic return together to identify firms that were
able to get the best returns and batting averages contemporaneously.
Since this number looks vaguely like a return or a batting average, but has
no direct analytical interpretation, we turn it into an index. The best
firm has an index of 100 and the worst, zero.
We use the
three year recommendation returns to provide a measure of return
consistency. It is helpful to realize that there are a smaller number
of firms that have been tracked for three years, than have been tracked
more recently. The table below details the top ten firms in the BA/Return Index.
Rank
| Company
| BA/Return Index
| 1
| Jefferies | 100 | | 2 | Raymond James
| 99.2 | | 3 | Zack Investment Research
| 98.5 | | 4 | Columbine Capital
| 97.7 | | 5 | Ford Equity Research
| 97.0 | | 6 | Price Target Research
| 96.2 | | 7 | KeyBanc Capital Markets
| 95.5 | | 8 | Merrill Lynch
| 94.7 | | 9 | TheStreet.com Ratings
| 94.0 | | 10 | Audit Integrity
| 92.4 |
Using
the batting average return index, Jefferies comes up first, followed by
Raymond James and Zacks Investment Research. In the top ten are 4
quantitative alternative firms, 4 investment banks, 1 fundamental
alternative research provider and a forensic accounting firm.
Note: The data used in this study was provided by Investars. The analysis, manipulation and interpretation of the data was done by Integrity Research Associates.
Posted at 11:02 am by Thomas Hutchinson
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