GAYLE ESSARY CONTINUES TO DUPE PUBLIC. INVESTREND PAID TO RESEARCH ANALYSTS TRACK RECORD SHOW THEM TO BE WORST STOCK PICKERS ON EARTH:
Issuer-Paid RESEARCH
Investrend: High Standard of Value
A pioneer in the paid-for research space
remains in the vanguard of both standards and independence.
BY ROBERT SCOTT MARTIN
When Gayle Essary of Investrend hit upon a way to build up the credibility of issuer-paid equity research nearly a decade ago, the idea failed to attract much interest from key industry players.
"When I started Investrend, we were producing forms for small- and mid-cap companies as our business model, and there just was not sufficient recurring revenue for doing that," he explains. "I started asking around at the New York Society of Securities Analysts (NYSSA) and our friends at Thomson, but they said there was no way these research orphans could be covered. There was no one to pay for it."
At the time, Essary was doing consulting work for Thomson that would eventually evolve into the "Chinese wall" that separates analysts from the stocks they cover, even though the issuers are paying the bills. Thomson passed on adopting the model because institutional clients wouldn't be interested, so there wouldn't be any real money in charging investors to subscribe to the research.
"We came up with the idea of having the company or someone close to the company pay for a commissioned report," Essary says, and that's when Investrend got into the business of publishing issuer-paid (or as the firm calls it, "fee-based") research. Today, he's got 70 analysts watching 115 companies, each of which pays anywhere from $5,000 to $40,000 a year to give investors and potential shareholders an independent perspective on each issuer and what it's worth.
As with other top-tier issuer-paid research firms, Investrend has developed a strict set of protocols to keep that perspective as independent as possible -- in fact, Essary's version of the Chinese wall is stricter than many other pay-for-play firms. "We originated the model by which the end reader of the research can feel confident that there's been a lessening of the potential for conflict, or the elimination of it altogether," he says.
The first step was to find a way to make sure analysts could feel comfortable reporting their true feelings about a company without feeling that a failure to soft-pedal the risks would translate into a lost client and smaller paycheck. Investrend analysts are all independent contractors who receive compensation when they start following a company; after that, they're free to shoot from the hip. As a result, downgrades and outright sell signals are more frequent than they might otherwise be.
"Investrend enrolls the company in its program and then we find and pay the analyst so the analyst receives no money direct from the company," Essary explains. "We then publish what they produce, so the analysts remain fairly independent when the reports are issued. If anyone comes up with a better model, let us know."
As a publisher, the firm guards its reputation jealously, working with client companies on a cash-only basis to prevent even the impression of bias that accepting stock as compensation could create. "We're in a business," Essary says. "We're not interested in promotions and stock ownership and other aspects that would lessen our credibility and our ability to grow in this business model." That extends to Investrend analysts, who are forbidden to even trade in the stocks they cover.
CREDIBILITY AND RESULTS
To maintain the credibility of its analysts, Investrend is also strict about finding only qualified people -- CFA designates or the equivalent -- to write the reports. However, until recently, it was difficult to benchmark the firm's performance against other research desks or the market.
"I know one of the things Buyside has championed in the past has been performance-based research," Essary says. "Unfortunately, we do not predict stock prices. We did finally agree to performance metrics through MarketPerform.com, but we're doing it for public information only, not because we're trying to achieve a performance rating."
Instead of forecasting where stock prices will go, affiliated analysts work to determine what Investrend calls a "target valuation" on each issuer. "They divide the fair value of a company by the shares they anticipate will be outstanding down the road," Essary explains. "That per share price is the target valuation. If the stock of the company trades to that price, it validates what the analyst is saying. It's just the facts."
While Investrend analysts do set the usual "strong buy" to "sell" ratings, they're not so much trading recommendations as they represent the gap between the targets and reality. A stock trading under its target is undervalued according to the analyst's model, and so would logically represent undiscovered upside, whereas a stock trading over fair value would have more limited room left to rally.
MOST UNDERVALUED
While Investrend isn't in the business of promoting
stocks, the firm has compiled the companies in its
universe that have the biggest upside potential
relative to its analysts' target valuations:
I-Sector (AMEX: ISR): An information technology
provider focused on Internet Protocol (IP)
communications solutions; the stock is trading 60
percent under Investrend's target (rated Strong Buy).
Semotus Solutions (AMEX: DLK): Provides mobility
software to Fortune 1000 enterprises and other clients
that need to keep roaming employees connected to
headquarters. The stock is 45 percent under its target
valuation (rated Speculative).
Stockgroup Information Systems (OTCBB: SWEB):
A financial media company that distributes private-
label news and data to media outlets and corporate
customers. Shares are trading 40 percent under
target (rated Buy).
International Monetary Systems (OTCBB: INLM):
a leader in the growing barter networking space.
Shares are 38 percent under target (rated Buy).
Verification comes when a company gets taken out, Essary says. "There've been several mergers and acquisitions and so forth, and I actually don't recall a purchase price far off from what our analysts came up with. Only once was there a merger that the company actually agreed to sell for less than the target valuation. Our analyst weighed in fairly heavily and the merger was scuttled."
LOOKING OUT FOR INVESTORS
In the merger in question, it turned out that the CEO was getting a better deal than the other shareholders, which demonstrates another of Investrend's objectives: helping clients empower their shareholders.
"The shareholders should get the benefit, not the companies," Essary says. "The analyst is a proxy, really, for the shareholders, who need to understand a company and have it explained to them by a professional third party."
Investrend is aligned with like-minded fee-based research organizations in the FIRST Research Consortium, while firms that don't follow similar standards earn Essary's scorn. "A lot of so-called research providers are allowed to muddle the industry by sending out profiles and so forth called research," he says. "These reports have target prices, ratings and so forth without revealing the credentials of the so-called analysts."
However, he welcomes the proliferation of new players in the space that Investrend entered back in 1996, not only because it validates the company's model but also because it provides wider coverage to the market's neglected companies. "Now, really for the first time, companies of any size that are research orphans can feel comfortable," he says. "For many years, there was the idea that research from a fee-based organization was tainted somehow. We've been telling companies all along that when they graduate to institutional banking coverage, they were still paying for it, and in every case the fees were stratospheric."
In the future, the concept of research orphans may be obsolete, Essary says. "It's a shame that all companies do not have coverage." In a perfect world, he'd like to see coverage institutionalized as it now is in Malaysia and elsewhere, where the trading exchanges use part of their listing fee income to fund research for companies that would otherwise go overlooked by analysts. "As long as they have audited financials, they need to be covered," he says. |
