4/19/2007

New York, NY – Stock Sorting Ability - Each quarter, the team at Integrity Research Associates tabulates data on performance for the companies in the Investars equity research performance evaluation database (www.investars.com). The data is as of the end of March 31, 2007 and covers a full year of performance.

One of the more compelling metrics that has been looked at is the ability of a research firm to allocate stocks into the correct categories – BUY, SELL or HOLD.
The rationale for this metric is that if a research company is worth its salt its BUY recommendations should consistently outperform its HOLD recommendations, its HOLD recommendations should outperform its SELL recommendations and its BUY recommendations had better outperform its SELL recommendations.

Having said that, there are a few ways in which one could go about measuring this. At Integrity Research we take both a simplistic approach and a more complex approach. The simple approach is as follows:

BUYS > SELLS = 50 points
BUYS > HOLDS = 25
HOLDS > SELLS = 25
ELSE = 0

The index value is the sum of the individual index values.

While this metric is appealing in its simplicity when examining the attributes of a particular research company, it is not very interesting when comparing a number research companies against each other. The points system is valid but, like the batting average, has no way of accounting for the magnitude of the differences between the various portfolios.

For example, there were 30 companies that had perfect 100 scores. He Sort sorting ability of the group as a whole improved from the fourth quarter of 2006 to the first quarter of 2007. Those RPs that received a score of 100 increased from 30 to 38 over the quarter and the number of firms with a score of 75 improved from 37 to 43.

See below table:

It is apparent that the results of the stock sorting index are not very granular in their ability In the interests of ranking companies in a more granular manner we have added a wrinkle to the sorting ability metric. Rather than a simple points system, we have created a weighted average sorting ability metric.

The weights to the metric are the actual differences between, for example, the BUYS and the HOLDS of a particular research companies returns. Just to be clear this metric has nothing to do with return, it is simply a raw score. The higher the score the better the job the research company did in sorting stocks into the appropriate buckets.

Below we tabulate the results of our analysis:

There is a solid mix of research category and coverage mix in the top 10 stock sorters list. There were three quantitative shops in the top ten and 7 Fundamental research shops. With in the more consistent firms, three have a smaller coverage list (less than 500) while the other 7 cover a greater number of stocks. The diversity of winners in the this table suggest that this metric may be a starting point to comparing research firm that analyze stocks very differently and have different levels of specialization.

Note: The data used in the above article, comes from the Investars web site. The Analysis and conclusion of this article are those of Integrity Research Associates. Investars has re-engineered its product offering, which now includes a full suite of services to the buy- and sell-side to track research performance, manage research and to integrate this into the broker vote system.