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Wednesday May 8, 12:08 am Eastern Time
Associated Press
Some Profit From Corporate Mistrust
Corporate Mistrust Proves to Be Profitable for Researcher With Data
WASHINGTON (AP) -- Americans' mistrust of corporate executives and Wall Street analysts has made Howard Schilit a very rich man.
If it weren't for accounting nightmares like Cendant Corp., Rite Aid Corp., and Waste Management Inc. (NYSE:WMI - news), Schilit wouldn't be able to charge upward of $30,000 a year to investors who want to avoid the next accounting disaster by subscribing to his research.
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In exchange for that hefty fee, clients gain access to his Center for Financial Research and Analysis reports flagging potential problem stocks, produced by a team of 12 analysts working in shorts and T-shirts in a shabby office outside of Washington, D.C.
"You'll probably never interview someone who has a more profitable business than me," Schilit recently told a reporter visiting his dimly lit office, littered with empty boxes and stacks of industry publications.
Once a tenured accounting professor at the American University, 50-year-old Schilit is one of the biggest success stories in the field of independent stock research.
Unlike major Wall Street investment banks, which make their analysts' reports publicly available, independent firms like Schilit's Center for Financial Research and Analysis allow only paying customers -- high-paying customers -- to view their research.
Since he began his business as a part-time effort from his home office in late 1993, Schilit has built CFRA into an Internet-based subscription service that claims 500 clients, with 90 new ones signed up in 2002 alone. He estimates his profit margin on the research is about 90 percent.
Schilit's success certainly isn't reflected in his appearance. He still looks like a rumpled professor, tieless and wearing worn boat shoes. CFRA's drab headquarters are in a nondescript office building near a sea of strip malls and discount furniture stores in Rockville, Md.
The ninth-floor office is always locked, but has no doorbell or intercom. The receptionist one afternoon was a teen-age friend of Schilit's son, who wore baggy shorts and a short-sleeved shirt and munched on takeout food. At other times, it may be Schilit's wife, Diane, who favors jeans and sneakers.
Few people see the inside of CFRA or care how well-appointed it is.
Professional investors and wealthy individuals are willing to pay tens of thousands of dollars for research from a firm that few average Americans have heard about because they know that Schilit's analysis isn't compromised by any other business relationships.
They also like the exclusivity that their knowledge gives them. Journalists aren't allowed to subscribe, and in his many public appearances, Schilit never discusses the individual stocks he is covering.
That's in direct contrast to Wall Street firms like Merrill Lynch & Co. Inc., which is being investigated by New York State Attorney General Eliot Spritzer for allegedly allowing its analysts' research to be tainted by investment banking ties.
Merrill's ratings changes are duly reported by several publications, and its analysts regularly appear on financial news programs.
"The fact that they are independent -- they don't run money, they don't get paid by issuers (with investment banking ties) -- means that they provide significantly more unbiased research than you'd find elsewhere," said John Bogle Jr., president of Bogle Investment Management, a subscriber to CFRA's research.
Much of Schilit's success is due to his research methods. CFRA has developed a screening system that runs through corporate earnings filings in search of operational deficiencies or aggressive accounting.
Then, its analysts flip through the filing manually to root out any false positives, and finally, interview the executives to make sure they aren't misreading the documents. Some common red flags: Changing the length of depreciation on assets, or too many related party transactions.
"What's different is we actually look for a problem. We start out with an analyst mindset -- we don't know if we love or hate a stock. It's a whole different mindset" than that of Wall Street analysts, said Schilit.
CFRA questioned the accounting tactics being used by Cendant Corp., Rite Aid, Sunbeam Corp. and Waste Management months before those stocks blew up. Schilit can't claim a similar timeliness on Enron Corp., the Houston oil-trading firm that collapsed last year.
In 1995, CFRA wrote a piece that examined the company's profits, warning that most of was coming from investment activity, not its operations. CFRA didn't revisit Enron again before the company imploded last fall, much to Schilit's chagrin.
"We can't take credit for saying we wrote a warning" on Enron recently, he said.
Although the product attracts raves from subscribers, it doesn't hurt that Schilit is a self-promotion machine.
He spends much of his time touring the United States, speaking before private gatherings of professional investors, such as hedge fund associations. His 1993 how-to analysis book, "Financial Shenanigans," was recently released in its second edition.
It's a major change from his life nine years ago, when Schilit began CFRA in his home office as a part-time project.
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