The mighty Taglich & JM Dutton get WSJ treatment, lol:
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ANALYZING THE ANALYSTS
See complete coverage of the heightened scrutiny of stock analysts at wsj.com/analysts
Amid Shrinking Research Pool,
Companies Buy Their Coverage
Faced With the Prospect of Being Ignored,
Public Firms Pay Fees for Analyst Reports
By SUSANNE CRAIG
Staff Reporter of THE WALL STREET JOURNAL
Friedman's Inc. became a Wall Street orphan last year when ABN Amro Bank NV, the only major financial firm to publish research on the jeweler's stock, closed its U.S. stock-analysis operations.
But Friedman's didn't go begging for other research coverage -- it went out and bought some.
The small Savannah, Ga., firm turned to J.M. Dutton & Associates, which for a flat annual fee of $25,000 will publish research on almost any publicly traded company. Founder John Dutton says he doesn't guarantee positive ratings, though 86% of his firm's clients that are rated receive either "buy" or "strong buy" ratings or some similar variation. And clients like Friedman's say they don't mind that it looks like they are paying for bullish coverage. Says Friedman's Chief Executive Officer Bradley Stinn: "We just want people talking about us."
Critics say investors should take such "bought" coverage with a grain of salt. "It's a lot like using an online dating service -- you wonder what is wrong with them," says Henry Hu, a corporate and securities law professor at the University of Texas. "You don't see Cameron Diaz putting herself online to find a date."
It's a fact of life on Wall Street. With 6,384 publicly traded companies on the Nasdaq and New York Stock Exchange alone, you need research analysts to cut through the clutter and get the word out to investors. But more companies are being shut out. Wall Street research departments are being pared as firms struggle amid falling revenue and regulatory overhaul that no longer will allow them to pay for research with investment-banking revenue. During the past two years, research coverage for U.S. companies dropped about 20%, to 4,189 firms, according to Multex Data, a research firm.
Figures tracked by the Nasdaq Stock Market, where many small stocks trade (as well as some of the largest ones), show that 44% of its 3,611 companies have no analyst coverage at all, and an additional 14% are covered by just one analyst. For instance, Goldman Sachs Group Inc. covers 1,848 companies, down 17.7% from September 2001. And Deutsche Bank AG recently discontinued research coverage of Charles Schwab Corp. because an analyst left.
Firms that get paid to publish reports have been around for years. And most independent research firms generate cash by selling their stock analysis to big institutional clients. But more companies seem to be willing to pay for research today as Wall Street's coverage universe shrinks.
Taglich Brothers Inc., which has an investment-banking arm as well as individual and institutional clients, began offering companies research for a fee in 1999. All clients pay a $1,750 monthly fee, plus a $5,000 retainer. Its client base has grown from just 15 clients in 1999 to 50 today.
Other firms are just starting out. New York-based Chatsworth Spelman Associates Ltd. was founded three months ago and charges companies $15,500 annually for coverage. President Guy Cohen says the company's analysts work on retainer and like other firms of its ilk, it says it doesn't guarantee a rating. He says he hopes to benefit from the regulatory settlement that will force Wall Street firms to distribute independent research.
The trend is part of the broader fallout from new regulatory scrutiny on Wall Street research. Regulators have alleged that securities firms issued overly rosy research reports simply to land more-lucrative investment-banking business. Under a regulatory settlement announced in December, most of the nation's largest securities firms will be required to pay a total of $450 million over five years to buy stock reports from independent-research firms that don't do investment-banking business.
Securities regulators will designate as many as 10 independent research firms that will provide stock reports to brokerage firms, which will be required to provide independent research to investors alongside their research.
J.M. Dutton, based in El Dorado Hills, Calif., was founded two years ago and so far nearly 50 companies have paid more than $25,000 each for one year of research coverage, primarily small-capitalization firms such as Leather Factory Inc. and Rawlings Sporting Goods Co. J.M. Dutton currently has no "sell" ratings, just four "neutral" ratings and a handful of companies where a research rating is pending. The rest rate "strong buy," "speculative buy" or some variation. Mr. Dutton says he is unlikely to pick up coverage on companies the firm doesn't like, which is why it doesn't have any sell ratings.
In addition to research, J.M. Dutton organizes investor roadshows for companies. Mr. Dutton concedes that his firm has benefited from the bear market and stricter regulatory environment. "I couldn't have asked for a more favorable event," he says. "All these services are paid for one way or another, and thanks to the regulatory environment it is all out in the open."
More than what the analysts write about them, clients like Friedman's Mr. Stinn say they are hoping J.M. Dutton's research will increase their profile, and trading, among institutional investors. It seems to have worked: In the month after J.M. Dutton launched coverage in November 2002, the firm says Friedman's average daily trading volume jumped 11.6% to 78,000 shares a day. Its stock price increased almost 12% to $8.89 in the first month of coverage. In 4 p.m. Nasdaq Stock Market trading Tuesday it was at $9.95, up 29 cents.
Scott Johnston, chairman and chief investment officer of Sterling Johnston Capital Management, which has $600 million under management, says he keeps 10 to 12 independent-research firms, including J.M. Dutton, on retainer, paying anywhere between $15,000 and $50,000 each for their research.
"We go to five or six different sources for information," says Mr. Johnston. "We don't mind if the issuers are paying. You just need to be aware of the fact a company is paying for the research, just as you need to know if an analyst's firm has an investment-banking tie."
Write to Susanne Craig at susanne.craig@wsj.com
Updated March 26, 2003 |
