Friday, November 30, 2007

What Makes Research 'Valuable'?

One of the annoying buzz phrases that all independent investment research companies and analysts grapple with is:

What is our value proposition?

While the term itself is cliché and overused, the question is a pertinent one. The simple answer would be to say ‘it’s all relative.’ To some extent, that’s true. Instead of trying to define value, we’re going to outline the questions we (and our analysts) find ourselves grappling with as we develop research that reflects the needs of our clients.

First, does the investor need new, fresh investment ideas? Are they looking for new trends/sectors to look at that they have not paid attention to before?

Does the investor have ideas and just needs to see research that supports or clarifies the ideas? Or does he want research that says the opposite of what he’s thinking/seeing, so that he better understands the full picture?

Perhaps the investor is looking for new, smaller companies who are up and coming? Or insights that are contrarian?

How far ahead do they want to look? Are they long or short term, and are they trying to shift that strategy?

The truth is –it’s simply not a perfect science. Unfortunately, research needs don’t fit nicely into any single one of these boxes.

Perhaps the proper differentiator is much more simplified. What if the analysts are able to tell a story that no one else could possibly tell? For instance, an oil analyst who’s been an oil company CEO, and spent a lifetime in the energy sector; or technical analysts who use a proprietary analytical technique; or analysts who cover 6 times as many companies in a specific sector as most of their competitors?

What better way to ensure that your insights are valuable than to bring to the conversation something that no one else can?

The jury is still out as to whether we’ve re-discovered fire, but, feedback from the StreetBrains ‘Ask the Analysts: 2008 Outlook’ panel yesterday certainly suggests we’re doing something right. (click here for materials from the panel event.)

Tuesday, November 27, 2007

November 27th, 2007: Happy New Year!!

Remember when you were in college, and you would set your clock ahead by 45 minutes to ‘trick’ yourself into getting up in time for class?

Today, we’re encouraging all investors to ‘trick’ themselves - think like today is the start of 2008. Pop some corks, throw some confetti - and reevaluate the information you base you’re trading decisions on – get yourself back on track to succeed.

As we embark on this New Year, keep in mind that there’s one simple investing mantra that separates the savvy from the inept:

Buy on Call, Sell on News.

Many investors seem unable to avoid the plight of piling onto a sinking ship. Not to overuse our boating metaphors, but, once a ‘call’ is in the news – it’s safe to say that ship has sailed.

Particularly in a world where investing ideas are sanitized and Cramer-ized – trading decisions are often hinged more on what has happened than what will happen. While that strategy might sometimes work in a bull market, the bears will eat you alive.

Unfortunately, many investors don’t have the discipline to resist the allure of a company that’s being hyped in the news. Particularly in today’s world where access to company information is so abundant, many investors mistake awareness [of a company’s present] for insight [about a company’s future] and as a result of the poor investment decisions that ensue, they are left with miniscule returns – or worse – losses.

This week, StreetBrains is hosting an event to help reset the focus for investors. Our ‘Ask the Analysts: 2008 Outlook’ panel will address some of the big calls our analysts are making for 2008 to help investors get out in front of the ball. The analysts will discuss what they are forecasting for their coverage sectors; what will happen to the economy; what will be different by 2009. These are the issues that seed lucrative trading ideas – not today’s Wall Street Journal headlines.

Thinking out ahead of the news – not following the news – is a tough tactic to constantly deploy when most of us find it overwhelming just to keep up with and digest the information that is current. But, discipline and great investment insights will be key to navigating the turmoil that will take place in the markets in 2008.

Here's to '08!

Wednesday, November 21, 2007

In-House Research: Threat Level: Elevated

Tumultuous markets are leading to an increasingly treacherous landscape for in-house analysts at large and mid-sized firms alike. While the majority of the blame game is taking place in the credit arena, soon, it is likely to penetrate other areas as firms search for ways to regain some of their lost revenue. Before long, the in-house research desks will be asked to stand before the tribunal and prove their worth.

In-house research has been the red-headed stepchild within firms since the fallout in 2001. Seen as a cost center, the research desk has been tossed around from division to division within firms, with no one wanting to take on the ‘overhead’ of supporting them. In a tightened market, the ‘hot-potato’ toss will likely resume for who is responsible for the in-house trading desk.

Are the days of in-house research over? Will we see all research end up being outsourced, where firms can more easily scale their usage of research with the rise and fall of commissions and revenues? It would seem that the day is nearing where these questions are seriously asked.

In any case, it is likely that an increasing number of great in-house analysts will jump ship and move into the independent side of the business to places like StreetBrains.

Making the case for independence

While having a big firm's name to put on your business card used to grant instant credibility for analysts, now, many industry peers will instead make the assumption that your research is a) tainted or b) commoditized. You turn on CNBC, and more and more lesser known firms are popping up as credible, independent sources, whose insights are not commoditized. The playing field is leveling – and rightly so – where the success and credibility of an analyst is more a reflection of track record than affiliation.

Independent analysts are also helping their own cause by proving time and again that it’s not just the big boys who have the tools to get calls right. On the contrary, in a constricted market, it’s hard to ignore the possibility that leaks and cracks in those ‘Chinese walls’ between investment bankers and research desks may deteriorate quickly when a firm’s best interests are at stake. For many institutional investors, it’s just not worth the risk to rely on this type of questionable intel when placing big trades.

So, while highly scrutinized (sometimes unfairly) large investment firms walk the tightrope of finger-pointing and protectionism – the path is being cleared for independent analysts to step up to the plate and establish their value.

While the internal battles ensue at the big Wall Street firms, those analysts who have found the right formula and business model are in a position to capitalize.

Tuesday, November 20, 2007

We Called It

Moderator’s Note: Every week or two, we’ll be putting together a brief update section, such as the below to give our readers an update on how our analysts are doing and where their insights are being published. Check back for more calls-come-true!

As mentioned in the previous post, Photizo Group – part of StreetBrains independent research consortium – was the sole analyst group (1 out of 14) on the Street to have a BUY rating on LXK (Lexmark International). After having this fact highlighted in an article in Sunday’s Barron’s, the stock jolted up 2.08% on Monday - a day when the DJIA was down 1.66%!

Also over the weekend, DebtVisions was cited in the FT, after calling that the Alltel deal would have trouble getting done.

Two other StreetBrains analysts kicked off the holiday week with timely calls:
  • MediValu was one of very few analysts to have a BUY rating on Pharmion (PHRM), with a $55 price target. Pharmion was acquired by Celgene (CELG) for $72 a share.
  • The Bank Notes put a BUY rating on Franklin Bank Corp (FBTX), calling the15.28% drop off in the stock price on 11/19 “unfounded.” The analyst covering FBTX for Keefe, Bruyette & Wood seemed to have the same sentiments – he issued the same call this morning. Together, they seem to be the only two analysts ready to stick their toe back into the water of this stock.

Last but not least, have we mentioned that StreetBrains’ oil analyst, Sterling Account, is up over 43% on its calls for the year? (As per Sterling Account, please click here for full details of their calls.)

More to come....

Sunday, November 18, 2007

He Who Stands Alone....

Henrik Ibsen once said, “The Strongest Man in the World is He Who Stands Most Alone.”

The same can be said for investment research – the strongest research is that which sets itself apart entirely from its peers.

In a story in this week’s Barron’s, one of the Street’s brightest, most well respected investment columnists, Michael Santoli, pointed to insights from StreetBrains’ analysts, Photizo Group, to support the idea that LXK (Lexmark International) is a BUY - despite the fact that 13 of 14 analysts on the Street have a SELL or HOLD rating on the company.

Photizo Group – the leaders in imaging industry research – are the sole analysts rating LXK as a BUY.

StreetBrains clients who read Photizo Group research have been privy to these insights about LXK for months. This Barron’s story underscores the value of StreetBrains research: Our analysts are experts on niche industries, companies and sectors, and we provide insights that our clients aren’t hearing anywhere else.

In addition to the Barron's placement, DebtVisions - also part of StreetBrains research consortium - was featured in the Financial Times this weekend, discussing the unlikelihood of the Alltel deal getting done. (click here to read the full story.)

Thursday, November 15, 2007

Indie vs. In-House Research: What’s the Difference?

A brilliant economist once said in a conversation with the media:

“[Brokerage] firms providing only their own research to clients (and no independent research) is like Gideon shoving Bibles in motel room drawers.”

The case for independent research has certainly been made – particularly after the global research settlement, but what still seems to be unclear is: what’s the difference?

From where we sit, it seems to play out like this:

Big brokerage houses have a research desk that covers, by and large, only the companies and sectors that it is expected to. That is not meant to be a criticism. Let’s put it this way:

If you’re an investor trading GE, and your brokerage house doesn’t have an analyst in house who covers GE, aren’t you going to be a little skeptical? Meanwhile, firms have had to cut back on a lot of research, so as not to cover companies or sectors that no one cares about.

As a result, it’s no real wonder why most firms have in-house research desks that seem to be in place more as a ‘CYA’ for the firm, rather than as the center for intel that they should be.

This is also no fault of the in-house analysts. Many of these guys would love the opportunity to make more ‘edgy’ calls. But for many, it could be an uncomfortable position inside the firm to be labeled as the ‘boat-rocker.’

Some might argue that it is the trader who has devalued the in-house research desk – because most traders have ideas and insights of their own, and really only rely on in-house research to support the ideas they already have – not to help generate new ones.

The in-house research model has become inherently flawed, but there’s no clear direction to point the finger at who’s to blame.

Independent research, almost more as the result of a forfeit, rather than a showdown, has become a champion in the research equation. Particularly truly independents – those who have no broker/dealer component - where analysts have become the ‘trusted advisors’ traders – entrusted to generate fresh ideas and offer new insights.

There could be room for everyone in this sandbox. Independent researchers to generate fresh, new ideas and insights. Traders to add onto those insights with some of their own, or to choose which insights to follow through on. And in-house research to support the traders’ decisions, and help protect the integrity of traders’ investment decisions.

But the hard truth is: Egos will always get in the way. Everyone wants to have the good idea. So all parties will want to prove that they are the source of the best investment ideas. That’s what we’ve set out to do with our analyst roster here at Streetbrains.

The good news for all independent researchers is that, for now, the regulatory environment; in-house turmoil and reporting changes; the volatility of the market – and of course, Gideon and his Bible-shoving - all underscore the need out there for our product.

Wednesday, November 14, 2007

Dispelling Common Myths About Independent Research

We spend a lot of time talking to our clients and to potential customers, and most days, the issues they discuss with us are the same. So today's blog will address the 7 most common misconceptions we hear - and offer our responses to the issues.


MYTH #1: “All investment research is the same.”

FACT: StreetBrains takes research a step further than what currently lands in your inbox – our research focuses on specialized sectors, niche trends, and unique companies that will help you to garner unmatched returns.

MYTH #2: “There’s no such thing as truly independent investment research.”

FACT: StreetBrains has no investment banking arm or broker-dealer, so our analysts are able to offer opinions free of any conflicts of interest. Period.

MYTH #3: “My firm doesn’t pay for independent research – We get it for free.”

FACT: If your firm pays for execution and is provided with research as an ‘add-on’ or ‘bundled’ service – your firm is paying for that research. “Bundling” of research and execution makes for opaque record keeping, and will soon become extinct.

MYTH #4: “Unbundling research from execution services probably wouldn’t save my firm any money.”

FACT: By unbundling research from execution, you can secure best execution pricing. Then, you are able to take your research dollars and pay separately - and more transparently - for high quality research that delivers actionable information and profitable returns. Unbundling is gaining steam as the preferred approach to obtaining quality research.

MYTH #5: "When the global research settlement terms end in 2008, firms will do away with independent research."

FACT: Although the ten firms involved in the global settlement will not be required to distribute independent research, these firms, as well as most other large firms, have publicly noted their intentions to continue offering third-party research. Because the global settlement required firms to handle their in-house research differently, independent research continues to be a valuable asset to the firms.

MYTH #6: "Soft dollar payments for research will soon be eliminated."

FACT: Although the issue of soft dollar payments looks likely to move to the SEC's front burner before the end of 2007, it is unlikely that soft dollars will be eliminated. It is unlikely that more disclosure and regulation will be required under current soft dollar arrangements, however, the SEC will be looking for ways to show mutual fund boards how they can easily distinguish proper soft dollar arrangements from bad. License-fee payment models - such as StreetBrains' - help deliver transparency of pricing in soft dollars arrangements.

MYTH #7: "Fundamental research is still the most widely used and desired investment analysis."

FACT: According to a recent study by Integrity Research Associates, specialized research has outgrown fundamental research as the leading category of analysis for independent research providers in the UK. As fundamental research becomes increasingly more commoditized, institutional investors continue to search for analysis that gives them an edge on their competitors.

Tuesday, November 13, 2007

The Investor’s Dilemma: Drowning out the Research Noise

Calling all institutional investors - raise your hand if you agree with this statement:

“The volume of research I receive is impossible to review, and all it does is clutter my inbox.”

Yet another prospective client made this very statement today. It feels good to know we’re the solution, not the problem.

The tides have turned for investment research, and independent research providers, by and large, have not been quick to adapt to the new needs of their clients. Clayton Christensen (author of "The Innovator’s Dilemma"), who brought us the notion of ‘
disruptive technology’ – would say that the investment research industry is missing a tremendous opportunity.

Consider this:

Not long ago, research reports used to stack up on our desks, and we’d have to sort through them page by page. Now, the new dilemma in research is that instead of research overrunning our desk space, it’s cluttering our inboxes.

Where does it end?

Some companies, such as think they’ve done clients a grand favor – they aggregate all of the research the client has purchased, and they allow them to filter it and make it searchable, so the volume of research is more manageable.

Perhaps I’m missing something, but wouldn’t it make more sense to just pay for the research you want – as opposed to paying for research you may or may not want and contracting another party to filter what you’ve paid for?

And then, taking it one step further, simply make that research available in one place, rather than having 75 emails in your inbox every morning that you’ll never be able to sort through?

Not to preach, but we think StreetBrains’ research solution would make Mr. Christensen proud.

Today’s Lesson: Unclutter clients’ inboxes. Provide to them what they pay for, in a format they prefer.

[Off soapbox.]

Monday, November 12, 2007

Welcome to The Brainstorm!

I’m Larry Margolis, moderator of The Brainstorm, and co-founder and Managing Director of StreetBrains. The Brainstorm is still in its infancy, so we thought we’d tell you a little bit about what you’ll be able to find here as the blog expands.

As you may know,
StreetBrains is an independent investment research consortium that provides limited distribution research to qualified institutional investors. The Brainstorm is where our analysts come to blog about the topics they are most interested in, or the issues and trends that are on their minds in between research reports.

Additionally, The Brainstorm is where we talk about trends in the research industry – what types of research institutional investors are looking for in the current market; new regulations and what they mean for payment arrangements (CCAs, etc); new trends in how independent research is being used and who’s using it; and the myths about independent investment research that we encounter as we navigate the business.

We welcome the opportunity to hear your thoughts and suggestions. To ask a question, offer feedback or make suggestions, please contact

Please check back regularly to see what we’re Brainstorming about.

- LM