ResearchWatch from Integrity Research Associates

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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