Independent Equity Research Process

A number of factors have impelled investors to seek new sources of information and new ways to conduct research on public companies. These factors include:

• Regulation Fair Disclosure (FD), an SEC ruling that forbids selective disclosure of material events by public company officers.
• the realization that research conclusions of securities analysts employed by investment banks may be influenced by the bank’s corporate clients;
• The imprecision of US accounting rules, which leave public companies with tremendous discretion in how to present their financial results.

Our research process blends the best of securities and market analysis, in an effort to evaluate and predict the performance of stocks in our coverage.

Sector-Specific Approach

We begin with a sector-specific approach, in order to identify the common elements of companies who compete with one another in the same industry. Our view is that this will maximize our chances of gleaning insights into individual stocks within a group, and minimize the probability of missing a trend or industry development that might impact all stocks in the same group.

We develop financial models that include a forecast of 18-24 months, as well as historical balance sheet data that enable us to develop financial ratios that we can compare across a range of companies that compete within a particular sector.

In addition, we develop and track proprietary metrics that we believe will influence the performance of a stock over time. In the case of software companies, for example, financial metrics such as accounts receivable and deferred revenue may provide insight into a company’s health well in advance of other warning signs. We also examine a range of financial filings which shed light on events unfolding at a particular company.

We also track metrics relating to market share in a company’s addressable market. These include data from private as well as public-company sources, as well as divisions of various companies, public and private. The data gathered helps us to make informed judgments about a company’s relative strength within its sector.

With regard to management meetings, we believe they can often shed light on a company’s market position and prospects, but we also believe these meetings have their limitations. This is partly due to the impact of Reg FD, but, more importantly, experience dictates that we can be lulled into complacency by relying too heavily on insights gleaned from company management.

Ongoing regulatory changes to the investment landscape promise to bring new challenges to the investment research community. We expect, as a result, to modify our process over time.