Subscribe to Integrity ResearchWatch by Emailor  in an RSS/XML reader
For those of you who don't know about Integrity Research Associates, we publish syndicated research reports; provide an online database of reviews, analysis and ratings on research firms; and offer specialized consulting about the equity research industry for professionals at money management, hedge fund, and broker / dealer firms. You can learn more about our company and our products / services at www.integrity-research.com.
Please feel free to contact us about our company, our products, or our services using the contact information below.
Integrity Research Associates, LLC
1115 Broadway, 12th Floor
New York, NY 10010
Tel: 212-845-9088
Fax: 212-845-9091
E-Mail: info@integrity-research.com
URL: www.integrity-research.com
|
|
|
 |
|
Wednesday, January 23, 2008
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
One year ended December 31, 2007
| Company | Sell BA
| No Sell
| Buy BA
| No Buy
| WABA
| 1
| The Zephrin Group | 0.0%
| 0
| 100.0%
| 5
| 100%
| 2
| When2Trade
| 40.0
| 10
| 75.2
| 234
| 73.7
| 3
| Ladenberg Thalmann
| 0.0
| 0
| 71.4
| 21
| 71.4
| 4
| ICAP Equity Research
| 100.0
| 2
| 0.0
| 1
| 66.6
| 5
| Crown Global Capital
| 100.0
| 2
| 0.0
| 1
| 66.6
| 6
| Fortis Securities
| 50.0
| 2
| 64.4
| 45
| 63.8
| 7
| Channel Trend
| 63.0
| 2211
| 55.8
| 3267
| 60.4
| 8
| Merrill Lynch
| 67.0
| 106
| 55.8
| 3267
| 57.4
| 9
| MVest Management
| 77.7
| 27
| 31.8
| 22
| 57.1
| 10
| First Analysis
| 50.0
| 6
| 57.4
| 60
| 56.7
|
Source: Investars
As always, when one tries to isolate a particular attribute of a portfolio or a population, some perspective is gained by virtue of the summarization 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 achieved. 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
| B. Riley & Co
| 100 | | 2 | The Zephrin Group
| 61.7 | | 3 | Taglich Brothers
| 49.3 | | 4 | Longbow Research
| 45.1 | | 5 | FutureAlpha.com
| 44.6 | | 6 | MDB Capital
| 43.1 | | 7 | Zacks Investment Research
| 42.9 | | 8 | Susquehanna Financial
| 42.7 | | 9 | BWS Financial
| 41.9 | | 10 | Ladenburg Thalmann
| 41.1 |
Using the batting average return index, B. Riley demonstrates a commanding lead even on an index basis, followed by The Zephrin Group, Taglich Brothers and Longbow Research.
Even in adjusting the batting averages for returns, there are some measurement issues. Specifically, what is missed here is the luck factor. If a firm has one short and it falls deeply, it gets a great batting average (100%) and, potentially, a great return. As such, the thinness of the portfolio can indicate that the firm was lucky rather than skill. If the same return BA/return index was achieved with a greater number of recommendations, it indicates that the returns and batting average are less likely to be luck. We will take a closer look at this concern in our next blog on stock selection ability.
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 08:49 am by Thomas Hutchinson
Permalink
|
|
|
