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Get Four
|  | JUNE 28, 2004
By Amey Stone Yes, Wall Street Research Is Better Despite the cost -- and the complaining -- stock analysis has clearly improved after the Spitzer settlement's forced changes Controversy over stock research still rages on Wall Street, more than two years after New York Attorney General Eliot Spitzer's investigation into conflicts of interest between analysts and investment bankers triggered dramatic reforms in the way research is conducted. A whole new set of rules now governs how analysts communicate both with the companies they follow and the investment bankers at their own firms. Two pages of disclosures are included at the back of every research report, showing how the stock has performed after an opinion changes and how ratings for investment-banking clients differ from other stocks covered by that firm. Analysts' pay is now tied more to performance and less to investment-banking deals, and it has declined significantly as a result. The reforms have been costly for firms, and behind closed doors they are roundly ridiculed. More changes are coming that will continue to shape this new era of Wall Street research. For example, firms this summer will have to start handing out reports from independent outfits along with their own in-house research -- a major provision of their $1.4 billion April, 2003, settlement with Spitzer and other securities regulators. "MORE ACTUAL ANALYSIS." Already, one thing that should silence some of that closed-door sniping is clear: Wall Street research is getting better. Over the past two years it has become more objective, more original, and more accurate. "There is less regurgitated-type scribe work," says Joe Cooper, a senior analyst at First Call, which monitors and distributes analysts' reports. "Firms are doing their own proprietary research. There is more actual analysis going on." Data from StarMine, an independent research firm that tracks analysts' stock-picking and earnings forecasting, make the case. Throughout the 1990s and until 2001, only 1% of stocks were rated sell. Now, 14% of stocks rated by the 10 biggest Wall Street firms -- the ones covered in the April, 2003, settlement -- carry the lowest rating, according to StarMine. Furthermore, StarMine calculates that in 2002, following analysts' advice would have had a slightly negative impact on portfolios on average. But in 2003, it would have added 2.2 percentage points to returns. Not bad. (To be fair, so far in 2004, StarMine finds that analysts' advice would have had no calculable impact on returns.) "RIGHT DIRECTION." The most important change for the better is in the quality of analysis. In the bad old days, research on the same company from different firms was often barely distinguishable. Now, written commentary in stock reports is more independent, more thought-provoking, and better represents the upside and downside potential for a stock than the bubble era's much-hyped reports. Analyst reports are also more diverse, reflecting more originality in analysis and research tools. In numerous interviews, portfolio managers, the main audience for Wall Street research, attest to the improvement. "It's definitely going in the right direction," says Steve Goddard, portfolio manager of the New Market Fund. He sees the biggest change in the way analysts value stocks. "They are coming up with more real-world valuations vs. the pie-in-the-sky-type work you saw that was very short-term-oriented," he says. "I see an improving trend," agrees Gary Lisenbee, president and portfolio manager at Metropolitan West Capital Management, which manages $2 billion in assets. "Clearly, there is better objectivity than there used to be."
BW MALL
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