Sell Side Analyst

Using public information for stock research

Kris Tuttle — Wed, 07 Apr 2010 07:07:52 +0000

Twenty years ago the first place to start research a stock was to get a copy of the S&P “tearsheet” and contact the company to get sent a pile of printed materials to go over.

These days everyone starts online because it’s fast and easy. However for public information to be enlightening one must make a bit more of an effort to gather from the most linked and trafficked sources of information.

While some focus too hard on cultivating non-public sources of information a skilled use of public information is critical for getting the basics done before making a greater investment in developing or purchasing proprietary information.

Learning these will make you more effective in generating the initial research story around a company and/or industry.

The Company Website: Of course this is where lots of people get many of the basics out of the way. This is a good place to review the company positioning statement (About) and then look through the management team, board of directors, products and also recent news releases.

The next level is to review past events if the company has them online. Prior presentations from investor conferences are one of the most valuable to look at but not every company includes them. It’s often worth looking at the last quarterly report and listening to that call to get a sense of how management talks about their business. The Q&A is often the most useful part.

Lastly before leaving the company website if there is a developer or partner program available and I plan to follow a company I join that. The more you can get into the community around the company the more public sources of information you will get.

Google: Googling the company name won’t get you much farther than the website but adding terms like “[product name] reviews” or “alternatives” or “problems” might turn up articles that are more obscure and full of information. Being creative with Google is a good way to unearth less commonly-known information about the company. The same searching technique can be used on sites like Twitter.

Twitter & StockTwits: Searching Twitter is a first step. Then it’s often useful to see who might have authority there and connect to them there. (If you are not familiar with Twitter you need to be.) Sometimes you can get a direct conversation going and find out more information that isn’t in the “public timeline.” StockTwits is a similar service for investors but is very trading oriented. Still worth a look.

Quora: Quora is a newer and slightly different online networking site that is focused on questions and topics rather than people. You can search for and follow topics and questions. Some of the information there is very good and unique. If you have time you can also ask questions and even appeal to people to answer them.

Google Finance: Along with Yahoo Finance and other sites this is the perfect place to get stock history, basic financial information, upcoming investor events, news releases and some sense of the comparable companies in the group. Although Google Finance is not great with links (for some reason) sometimes links to good articles are found here.

Market Organizations: Although many of these links can be found at Google Finance the SEC in the US provides online filings and more detailed information about shares traded, shares sold short and so on may be found here and on sites like the NASDAQ.

Seeking Alpha: Although this is a retail-oriented investor site there are sometimes useful posts here. In addition they also publish transcripts of prior company quarterly earnings calls that can be faster than listening to them. It’s best to read them in “single page view” and often I just use the “jump to the Q&A” feature to see what investors were focused on. It’s best to go to the site and enter in the ticker to search.

Local Newspapers: In many cases local newspapers (online or offline) spill much more ink on local companies. So look at where the company is based and search those news sites in particular to get more detailed stories. They often have more content on the management than national sources.

Industry Research: Most industry research (like from Gartner Group or Forrester) is not available to the public. However there is a useful and simple trick here. First go to those sites and search for the research. If there is a good research report go back and Google the title. Often one of the companies in the report will pay the research firm so that they can put it up on their website and make it available for free to people that register. For example a good report from Forrester covering online video platforms was useful for a recent report on Brightcove and available for free at one of the other online video platform sites.

Job Listings: Many analysts routinely use job listings for clues about what companies are working on. The same can be done using the Google patent filings search. Job listings help identify company hiring plans and by doing a search on the company products one can see if end-user companies are specifying these products in their own hiring plans. We have found SimplyHired to be one of the best and easiest to search.

Glassdoor: This is a service that starts to move into a more proprietary space but it is still a very open and public way to get some interesting information on a company. By signing up and contributing information to Glassdoor about companies you have worked for and/or interviewed with, you can then get information that others have shared. Level of content varies a great deal but there are sometimes some good nuggets in there.

Retail Brokers: If you have a brokerage account some of them furnish some decent Wall Street research at no charge. For example E*Trade provides Credit Suisse reports. Many others do something similar. It’s the fastest way to peel the onion of consensus estimates.

This provides a reasonable starting point for any company analysis. A fairly decent picture can be put together based on these sources before sending one email or making one phone call. The next level is focused mostly on proprietary sources be they paid for (like Capital IQ, or The Information Pro) or developed by resourceful, applied effort.

If there are good public or semi-public sources we missed please leave us some feedback and we will make revisions to this from time to time.

Analyst Character and Mindset

Kris Tuttle — Thu, 28 Jan 2010 13:38:34 +0000

We saw a good post over at the research puzzle on “unbiased industriousness” and it illustrates some key facets of doing the job right as a research analyst, no matter where you work, or how you are paid. Although we have always used different words to describe it the character and mindset of the analyst is probably more important than anything else in determining success, especially over the long term. It’s worth talking about these core ideas in more detail. In addition to “industrious” we’d add intellectually curious, thoughtful, scientific and resourceful. The research job never stops and is pursued at all times at least in the mind if not with the telephone, the feet, the eye and ears, on the road in around your friends. It helps a great deal if you’re curious and also if you know the difference between “true” and “not necessarily true.” In an vastly expanding sea of information and data the ability to identify the pieces that are new and actually true is critical. Great analysts need to be industrious because the information that is valuable and makes a difference in terms of knowing about a business and a stock is not easy to find. It takes a combination of thinking, probing, compiling, searching, sorting, and analysis to take a key question and get at the answer which nobody else knows. And then it’s on to the next question, and the next one, and the next one… you get the idea. Eventually you are operating several moves ahead of everyone else in a particular area or company and in this way you make yourself indispensable, hard to replicate and hence valuable. Needless to say this is a very fun place to be. It’s riding the crest of a wave. It’s hard to be totally unbiased. In fact many arguments between good analysts and investors are over what aspects of a story are the ones that will really drive the stock. In some ways only the market can ultimately settle these arguments. Less esoteric is the question of how you make money and does that drive your research agenda. For any analyst the research agenda has to be the truth. Period. Companies can pay for research coverage via banking, analysts should be able to own the companies they follow as long as these things are transparent and made clear. This only works if the analyst is driven entirely by the desire to discover the truth and be right. In an unbiased and objective approach there has to be consistency between how the analyst is paid, what they own and what they say and do. It doesn’t mean that if they put out a favorable report on company that they have to own it but it means they can’t be short it. It doesn’t mean that they have to provide research coverage for a company they own but it does mean they shouldn’t put out research coverage on it because they own it. On the banking side an analyst needs to make sure that the companies that come to them via banking or research fees are given fair coverage and treatment and not just a glowing report the glosses over important threats that may face the company in question. In the end it comes to the point of never saying or writing something which you don’t believe is the best truth and being open to both sides of the argument. If there are companies and clients that don’t believe in pure objectivity and the truth and want a corrupted version of that for their own benefit, close your laptop and walk away!

Information and Regulation FD

Kris Tuttle — Tue, 29 Dec 2009 17:14:41 +0000

This is the first of what will be many posts on basic information gathering. Gathering information is the foundation of everything that a good sell-side analyst does. We’ll cover lots of pieces but without continual, effective information gathering there is no “flow” which is an important part of being good on the sell-side. The Internet and social networks have added whole new elements to the information gathering landscape but we are going to start first with the most basic which is talking to managements. A bit of history is in order since the SEC passed a rule governing disclosure by public company management teams that has had a dramatic impact on the interaction between financial analysts and management teams. Before “Regulation Full Disclosure” or “Reg FD” or simply “FD” for short, analysts got information from senior managements that was material to the companies they were following but not available to the general public. This was certainly unfair and wrong. The spirit behind Regulation FD is to make sure that all material non-public information is made available to everyone at the same time. For many types of disclosures, like a change in forward guidance or a major manufacturing problem this makes perfect sense. However FD has not been so simple. Because it’s hard to define exactly what “material” means in an informational context most senior managers have taken the rule to mean something closer to “don’t divulge any information of any sort to financial analysts.” Some years ago interactions with senior managements of public companies became so inane and absurd that they ceased to be of any value whatsoever. The most important implication is that analysts must cultivate other sources of information for the companies they follow and rely much less on company management teams. We’ll go into many levels of description on these but before going there let’s stay on discussions with management teams. Although they have become mostly useless in gathering information about their own companies, senior managements, even of public companies, can be very helpful in gathering information on companies in adjacent markets. The first and most obvious thing many start with is asking about competition. Although heavily biased any specific information can be helpful and is often volunteered with alacrity. They key is getting specifics rather than “their product is not competitive.” Finding out about a design loss, senior management change, or product delays might be valuable if confirmed. More useful in our view are the insights offered in customers, suppliers and budgets. Most CEO’s have free exchanges of information with these companies and while they can be expected to protect confidential information, they end up with a great deal of non-public information which can certainly be useful and even potentially material to an analysis. The better information is likely to come after some warmup period of information gathering on top customers and suppliers. In that discussion it becomes easier to ask questions about that customer in terms of how their business is changing, the same is true in terms of suppliers by asking about changes in planned spending, changing lead times or other aspects of supplier performance. Although these pieces of information are likely to be anecdotal they can be quite potent in driving interest and areas for further research. It’s not uncommon to hear from a company that they are “not buying any more servers from IBM but rather shifting to HP due to a more integrated management approach” or “seeing a major customer who is a software OEM losing lots of market share to a low-end offering from Google.“ Here are the key points: 1. Senior management of public companies have a hard time sharing any information about their companies or business with financial analysts thanks in part to fear from Reg FD. 2. The only practical way to gather information on companies is from external sources or using unique paths (like customers) to get anything directly. 3. Conversations with managements can be very productive in terms of gathering information about the markets, competition, and adjacent companies that are customers or suppliers.

The Return of Research Driven Capital Markets?

Kris Tuttle — Wed, 02 Dec 2009 19:09:36 +0000

With the return of the IPO market the discussion of research and banking has started to come up again. For those who were not around for the last one there were a number of research-oriented investment banks like Hambrecht & Quist, Robertson Stephens, Alex Brown and SoundView Technology Group that led most of the emerging company IPO transactions. This was true in large part because the banks actually understood the companies and the markets they served in great depth and detail. So much so that institutional investors relied on their expertise to invest in companies. At SoundView the banking process was totally research driven. Not to take anything away from the outstanding investment banking team that made it happen but the research analyst had the primary responsibility to generate the research, call on companies and then represent the transaction to institutions through the sales force. If the company didn’t perform well, the analyst took an earnings hit and got a black eye. Of course all these companies are long-gone now. As the IPO market returns one wonders where the high quality research comes into play now. Of course banking organizations have hired their own analysts but they are limited in terms of what they can do with investors. Recently Sanford Bernstein announced that they were relaunching their capital markets business to leverage their still-world-class and much respected research capability. Sanford Bernstein isn’t exactly into emerging technology but their announcement is a harbinger of things to come. Research is essential to the investing process and needs to be harnessed for the IPO market to function best. Today there are some other potential structures to make this happen which we tested successfully in the last two years and the coming solid IPO market for technology companies is encouraging for research providers who have remained true to their craft. We will publish some of our research banking guidelines for those analysts who may find themselves back in the fray of covering newly-public companies.

Options

Kris Tuttle — Tue, 01 Dec 2009 15:56:25 +0000

Stock options are covered as part of the training and qualification process for equity analysts but most of the time they are ignored or unused which is a shame. Part of the reason is that many people just don’t feel comfortable with options even after they are explained clearly. We know really smart people who just don’t understand what it means to be “short a call option” on a stock. Option lovers eagerly dive into more esoteric vertical and horizontal spreads, straddles and so on which leaves the uninitiated even more in the dark. Options are your friends. A close colleague of mine used to refer to stocks simply as “options without an expiration date” which is true of most technology and growth names since they don’t pay dividends. It illustrates a way of thinking. The best book I know on the subject is called Options as a Strategic Investment by Larry McMillan. There are hundreds of books out there about options and some may be useful reading beyond this one but every serious analyst should start here. What is great about this book is that it builds up from the very foundation of options in a clear and unambiguous fashion without any extra fluff. It starts with the very simplest of options and expands into nearly everything that an equity analyst would need to know and then some. McMillan is also practical when it comes to treating options as a strategy and not just an instrument. For every construct he describes follow-up strategies that are needed when using options. There are several reasons to invest the time and effort in mastering this book but the ones that stick out for me are the fact that many of even the best institutional investors don’t really feel comfortable with options so you can sometimes add value. Secondly they are a very effective way to improve risk adjusted returns beyond simply buying straight equity. This is a 900-page beast of a book but for me it was a pleasure when I devoured it back in the late 1980’s. It has brought me many happy returns and you will never be lonely or bored if the options price page from the WSJ or IBD is around somewhere.

What’s all this about “edge?”

Kris Tuttle — Thu, 29 Oct 2009 11:36:04 +0000

The demise of Galleon has stirred up press coverage and much discussion over what the hedge fund industry often calls “edge.“Â The basic idea is to find information that is not known by anyone else in the stock market.Â Then all one needs to do buy and sell the right stocks and make huge profits in a short period of time with low risk.Â The most difficult aspect of getting and using this approach is this little thing called the law governing the use of “inside information.“ Over the years the use of the term edge has been mixed up with research.Â In the old days, before regulation Fair Disclosure (FD), analysts and large institutional funds could get non-public information directly from company managements about their business.Â Since that time institutional investors and analysts have focused their efforts on finding alternative sources for the information they want.Â These efforts have tended to included the hiring of many industry consultants by investment shops and also the creation of many “expert network” services like Gerson Lehrman and myriad small research services that track everything from inventory levels to boats leaving harbors to slot machine use to cars in parking lots. Research can certainly provide dramatic investment results and so qualifies as “edge” as do things like investment process, risk management expertise, and so on.Â Said another way all these tools create superior investment performance.Â The problem with the hedge fund industry and firms like Galleon is simply greed. Galleon and firms like it want a copy of tomorrow’s newspaper headlines today.Â Let’s say we had a conversation with someone who actually knew that Apple was going to shift their chip supplier strategy and go with AMD over Intel.Â That would be big news.Â No doubt it would move both stocks dramatically in just one day.Â The problem with exploiting that information is that it’s illegal.Â The rules for determining insider information are fairly clear but there are gray areas. What if we were actively researching this area and during an interview with a professor of electrical engineering and noted expert in microprocessor architecture we discovered what appeared to be a compelling argument for Apple to change chip suppliers in the next two years?Â If that professor had no direct contact with Apple or the chip suppliers and was merely describing his informed opinion on what he future holds we could use that information.Â Now here is the tricky part.Â Let’s say that the idea sounds great and based on other factors like attractive valuation we took a position in the market based on this shift.Â So far, no problem.Â Now what if the day after we take the position Apple makes this announcement?Â Hmmmm.Â Now let’s say that in the course of doing research we also talked with some current and ex-Apple employees.Â Even if they told us absolutely nothing about any plans Apple had the circumstances seem pretty suspicious.Â Maybe we were just lucky, maybe we knew something.Â (As an aside security law works more like “guilty until proven innocent” so just because someone didn’t do anything wrong isn’t good enough to escape prosecution.) Coming back to the basics if one works very hard in developing edge than it’s probably going to be fine.Â Research provides “edge” because it translates into better forecasts on future product cycles, revenue growth and margins which tie directly into expectations and the current stock price.Â By having a defined process for this and practicing it consistently there is abundant edge available without ever having to push the envelope of legality in a search for quick and risk-free profits. As an aspiring analyst one of the most critical assets is your integrity and professional conduct. If you encounter institutions who approach the business looking for non-public information or lead every discussion with “tell me something I don’t know” they are not worth the investment of your own time and resources.Â Â High quality institutions do their own work and use research firms and analysts to help them get a superior understanding of industry dynamics, company fundamentals, investor expectations and valuation gaps that they can exploit.Â It’s good old-fashioned elbow grease applied with a honed expertise that takes years or even decades to develop.

It’s not the horse.

Kris Tuttle — Mon, 05 Oct 2009 08:41:13 +0000

It’s still commonÂ to run into professionals who can’t quite see the value of research.Â My conviction on it is quite deep because it comes from applying it directly to stock market investments since the late 1980’s.Â Yet not a week goes by where we don’t fine very smart, investment savvy people who find it hard to grasp the value.Â Of course the real issue is that they haven’t tried real research.Â The bulk of what passes for “research” today is mostly commentary which belongs in a newspaper, not a pretend research report. Betting on horse racing gives us another analogy to try and convey the message.Â [For a full account of this and great reading see this speech by Steven Crist, publisher and columnist of The Daily Racing Form.]Â To the uninitiated the key to betting on a horse race is about picking the winner.Â That’s absolutely not the case.Â Making money at the race track is about making bets where there is a difference between the odds offered on a bet and the likely outcome.Â It may seem subtle but this realization is critical to understanding how to make money in the stock market using research. Like a bet at a horse race a holding in a stock (long or short) will have a strong return if and only if future events translate into results that are not already expected and fully priced into the shares.Â The research task is broken down into two parts, the first is to forecast a stream of future events based on a fair amount of industry knowledge and understanding current product cycles, market and competition.Â The second part is distilling this into what we call an intrinsic value (IV) that represents a point estimate for the future value of the company based on this scenario. Both steps can reveal meaningful opportunities to make money.Â In the first case we sometimes discover that the market holds an incorrect, uninformed or at least unlikely view of what the future holds.Â Most describe this simply as “knowing something other people don’t know” based on a new product, encroaching competition, key customer win (or loss) and so on.Â There is some active research published in this area but unfortunately it is often very short-term in nature thus much harder or impossible to exploit. The second opportunity comes from IV.Â Even if the first analysis of future events agrees with the consensus view, it’s possible that our analysis of how it will translate into company value may differ materially from the current stock price.Â For most this area is harder to grasp and get excited about than the first one because it’s more abstract.Â However it is just as effective and requires much less work.Â In some cases wide differences occur and with little or no industry expertise or analysis these differences can be exploited.Â A fairly broad and correct application of IV would be like “shooting fish in a barrel” in terms of buying undervalued stocks and selling overvalued ones. Of course the best of all situations is where the fundamental analysis leads to a different future scenario for a company and there is also a large material difference in IV and the current stock market value.Â As many investors would say this provides both a “story” and a potential “catalyst” for the gap between the two to be closed and allow the investment gain to be realized.Â In the absence of a clear catalyst the difference between the market value and the IV for a company can persist or even widen for quite some time. Going back to the horse race betting analogy the power of research is in projecting likely future outcomes with embedded expertise and then applying a valuation method that illuminates which bets are most and least attractive.Â The translation to portfolio construction is straightforward using a standard range of position sizes, both long and short.

What is a research report?

Kris Tuttle — Tue, 09 Jun 2009 14:41:39 +0000

We noticed a recent headline that NASDAQ OMX (NDAQ — $21) has selected Morning Star (MORN — $43) to provide “Equity Research Profile Reports” for all their listed stocks.Â Today there are more than 3,600 companies listed and a large number, let’s say 1,000 have no “research coverage” today. The “profile reports” are planned to be four to five pages long and include a description of the company, a data “tearsheet” and an analyst blurb on the industry that the company is in.Â There will be no forecasts or buy/sell/hold recomendations.Â So if we can paraphrase here the “report” consists of what you would get automatically generated from a service like CapitalIQ or Bloomberg with an industry blurb written by a research analyst without any industry experience and already “covering” 20 companies on average. Maybe it will add some value for the companies and/or investors but it’s hard to say.Â Even free sites like Google Finance and Yahoo Finance provide most of this information now for free.Â More focused sites like Seeking Alpha include more commentary and analysis along with useful company data like call transcripts. We probably don’t have to say it but it sounds like a pile of useless, mostly machine-generated information to further clog the information channels that lead to real investors. There’s already a ton of this kind of thing going around and these reports can be seen in just about every place already. But to be more constructive we should spend some time instead on what constitutes a research report. There are some major sub-themes here we will cover in future posts but we will go through the first which the most basic and also look at company coverage reports. [We’re dusting off some of our SoundView research training materials here!] First of all any published report targeted towards investors should have three things in it:

Information — This is the foundation of your value add.Â Information provides the evidence for important investment conclusions and without it, anything further is just opinion, not research.Â The more proprietary or unknown, the more valuable the information is to investors.Â Most people, even reports tend to know this.Â Practicing it is harder to do however.Â It takes work and time.Â There are few shortcuts to make.Â Deep industry experience and/or contacts certainly help.
Investment Relevance — Why should investors care?Â The world is full of information. There’s even lots that is proprietary or unknown. A research report highlights information that runs counter to consensus thinking and investor expectations and links it directly to a stock conclusion.Â Investors do not want to “figure it out” so your research report must contain clear links between information, investment relevance and stock conclusions.
Impact — A research report should be written to captivate and persuade the reader about the information, logic and conclusions that the report is asserting.Â A conclusion and a point of view is essential.Â If there is no clear conclusion that it makes more sense to go back to step one and gather more information than to publish the report.Â (Scenarios are useful however in cases were future developments are unknowable; especially if each one is followed through to a full stock conclusion.)Â For a report to have impact the lead story should be clear.Â If consensus on a company expects declining margins and your information suggests otherwise, package that clearly and unambiguously.Â Go further and raise your forecasts and earnings estimates for the company as well.Â Translate it all into a crisp, well-defined stock conclusion.

Because most automatically generated or “book report” type stock reports as we call them don’t actually have any new information in them, may or may not be investment relevant and certainly are not carefully packaged for impact, they most certainly do not fit our definition of what a research report should be.Â Do they fit yours? Before we leave this post we’ll suggest at least the short version of what investors expect in a company report. These are at least the major sections that need to be included:

The Market: How big is it?Â What key factors are driving (or will drive) demand? How fast is it growing?Â What’s the total addressable opportunity? What factors could cause market growth to speed up or slow down?
Competitive Dynamics:Â Who are the competitors and what are their products?Â What barriers to entry exist? Are there different technologies, approaches or solutions being offered by competition.Â What are the strengths, weaknesses, opportunities and threats (SWOT) for the subject company and the key competitors?
Company Business Strategy & Model:Â How is the company positioned?Â What is their go to market strategy?Â What is the sales and distribution model?Â How do these come together in a financial model for the company.Â Are there important balance sheet, cash flow or accounting issues?
Valuation: We use intrinsic valuation (see related post) but investors also like to see an array of multiples and comparisons to the most resonable other public “comps” in the space.Â This section makes an explicit rating needless since the difference between current prices and your intrinsic valuation figures are all an investor needs to know.

Research is always changing but the basic elements that anyone needs to make an investment decision stay pretty much the same.Â If one intends to publish material that can be considered research then it should meet some important criteria.Â Otherwise it’s something else.Â I’m not sure what, but not research.

What happened to research?

Kris Tuttle — Mon, 27 Apr 2009 17:38:26 +0000

It’s a long story. The truth is it started fading while it was still growing in importance.Â The first culprit was investment banking.Â Stock trading commissions were something like 5c per share while investment banking deals offered $1 or even more per share.Â No wonder people were distracted by the money.Â Successful sell-side analysts not only starting getting paid big money for deal-related research but some even started getting pre-IPO shares in companies they were helping to bring public on the basis of their “research” efforts. If the story ended there the research we knew and loved would have returned after the banking cycle and market excesses were over.Â Â However with the crash came a whole raft of new regulations and practices that made sure that good fundamental sell-side research would take a long time to reappear.

For what seemed like good reasons the regulators put a greater separation between banking and research activities. The more intelligent path would have been to further tie analyst compensation to the aftermarket performance of companies post an IPO to ensure that any analyst supporting a deal coming to market will lose compensation if the company fails to meet or exceed their estimates in the first year.Â But the SEC cobbled the “solution” under the advice of the criminal firms rather than asking any of the honest ones for guidance.
That might have been okay but it was surrounded with a bevy of rules and procedures tied to a wave of “compliance” investments that basically drowned any valuable research and content in pool of inane rules and procedures.Â It even dictated the bland, inconclusive and disclaimer-laden style that most any prospective reader would be repulsed by.Â Stock ratings, valuation and covering news took center stage despite the fact that institutional investors see them as useless.
Separated from banking most commission firms felt that research should start doing more to drive votes and business so analysts were given regular marketing duties ranging from daily phone calls to dedicated marketing trips to spend time with customers and get them to like/vote/pay for the research team.Â Â Not surprisingly the amount of energy available for research dropped off just when more was needed thanks in some small part to Regulation FD.
Regulation FD (Full Disclosure) removed one unfair advantage analysts had with public company managements but it came at the cost of getting little or no useful information from management teams.Â The dysfunctional aspect of this “rule” is that senior management says far more to a prospective customer than they do to a prospective investor.Â It’s a clear violation of Regulation FD but it goes on every day.Â It just means analysts need to work harder and get their information from better and more diverse sources.
Like other declining businesses the broker/dealer/banks cut their budgets, causing a decline in talent and quality which led to more lousy results and cuts.Â Before the big decline many of the best analysts went to the buy-side where the value of good research can be still monetized thanks to attractive asset management fees.Â (This may be less true today but up until two years ago the buy-side has been in a much better position to hire top quality research analysts.)

The end result is a big reduction in high-value activities like developing sources, gathering information, thinking, doing analysis and packaging content for impact in favor of low-value ones like updating models, calling and traveling to support marketing activities, dealing with production systems, compliance, administration and ratings committees comprised of individuals lacking research, investment and even industry experience. Research is being reborn.Â It is taking different forms because of the changes that the industry has been through but signs say it may be for the better.Â First of all there are thousands of new sources being developed online and offline that analysts can tap into without having to invest huge sums of time or money to develop.Â Second the ability to produce and distribute the final product (as long as one stays outside of making stock recommendations or being a broker/dealer) has become nearly as easy as clicking a button. The hard part is that analysts today have to be prepared to do the entire job from the ground up. Stock opinions are rampant.Â So the ones that matter need to be backed up with proprietary industry forecasts, survey data, segment revenue and margin forecasts, links to related company and industry dynamics, financial analysis, valuation work along with stock supply and demand features. Getting it right today requires a combination of the same foundation elements for sell-side analyst success with some fresh approaches and techniques to leverage new technologies and networks for discovery, development and distribution.

They don’t teach it in school.

Kris Tuttle — Fri, 09 Jan 2009 21:02:49 +0000

In 1995 my dream came true.Â After a career at IBM, and MBA in finance and a stint as a VP of institutional sales at a major Wall Street firm I was handed the keys to the kingdom — to be an equity analyst on the sell side. Strangely enough the sector I was hired to cover wasn’t available since another analyst had decided to “sit on it” because it looked too promising.Â Fortunately the firm I joined (SoundView) was small at the time and the rest of software, my specialty, was uncovered. My first day was inauspicious.Â The only senior analyst who I knew (and helped me get hired) came into my office after the morning call and said “So how does it feel now that you just made the biggest mistake of your life?!“Â Then he laughed hard, turned on his heel and left.Â (We’ll write more about our interactions with this fellow later.) Â My boss was the head of research and was great at it.Â But he wasn’t much of a talker and when he did the last thing he wanted to talk about is how you might do your job.Â Â The training program consisted of “you should cover some stocks.“ Our firm had special access to Gartner Group which was a wealth of information to draw on.Â After a few months I was ready to launch my first coverage (a company called InterSolv, symbol ISLI.) It started out well and blew up spectacularly in my face a few months later (while I was in a rental car with a salesman on the way to a client golf outing in Florida no less.)Â So began my “education” into a world in which our small analyst team would ultimately dominate a very competitive space, being #1 often versus firms like Goldman Sachs in trading and also being a co-manager on over 30 deals personally and having the largest market share in underwriting in software.Â Â Â This was a major success thanks to many factors, as much institutional sales, trading and banking as research.Â Therefore learning what these other groups do and how to work with them is a critical aspect for success. The surprising thing is that there is little, if any, formal instruction on how become a successful sell-side analyst in any business school curriculum I have seen.Â There aren’t any good books on it either.Â Parts of the job are well documented of course.Â You can buy 100 books on financial analysis and equity investing but they are only a portion of the skill set that’s needed. The great sell-side equity analyst is a combination of qualities that will be described here in great detail.Â Our goal is to explain every aspect, answer every question and provide the basis for an individual to take some industry expertise, stock savvy, communication skills, resourcefulness and a work ethic and forge it into being one of the best sell-side equity analysts out there. Harvard doesn’t teach it, neither does MIT/Sloan, NYU or INSEAD.Â There are many helpful books that will cover major aspects of the diverse skill set we will talk about here and we will use every one of them. We have seen more helpful courses and licensing standards in the form of the CFA and also the Series 86/87 exams.Â Again these provide the rules and tools but not the winning techniques. At the same time the sell side has changed greatly over the last 10 years.Â Research has changed and will change even more with it.Â The skills will be the same but the context and the tools have changed.Â We will be covering that too.