Tools for the Equity Research Toolbox

by Robert Passarella | comments: 4

When I was a kid, I would always remember commercials for a school called Apex Tech. One of their taglines was "look over the professional tools you get to keep when you finish your training". It's a lot like that today. Google News, along with Yahoo! Pipes are two tools that analysts, traders, and salespeople are discovering and using.

Today the NYTimes pointed to the slow growth of ad revenue as a disappointment to Google on it's news site see - "At Google, Slow Growth in News Site"

In digging through the article I saw this quote that really outlines what Google News is about for people like me, those of us that live in the news.

Google executives defend the news site, saying traffic is not a paramount goal. Google News, they say, helps the company produce better search results and helps users find news sources that they might not know about otherwise.

“For us, news is about search and helping people find information,” said Marissa Mayer, Google’s vice president for search and user experience, who oversees Google News.

This idea of finding "other" news sources is the key.

One of the paramount abilities of a good analyst is to spot trends early and realize their potential impact on a company or industry. What analysts are usually searching for is any hint of weakness or strength in competitive advantage. Sometimes the smallest trends start in the local newspapers. Google News makes locating those topics and stories much easier.

If you pair Google News with the enhanced filtering ability of Yahoo! Pipes, and your favorite feed reader; you can create some worthwhile tools that help your trend seeking abilities.

I am a big fan of some of the ideas behind Microtrends by Mark Penn. Mark is known for spotting the 'soccer moms' impact on the 1996 Clinton campaign. Basically his idea centers around identifying trends that begin when 1% of a population begins to adopt. So if 1% of the US population (3 million people) starts saying something you need to pay attention. The trick as an analyst is to identify topics that may be on their way to that benchmark.

My current interest is in the debate on energy policy as it relates to Oil exploration. What I'm really concerned with is the indirect results and unintended consequences of a change in the current energy policy. Any change from today's policy will cause all companies to respond. This will allow me to set up a group of scenarios which I can watch and be prepared for as a trend develops. A cardinal rule in investment research is to make sure you have as much relevant data as possible. You never want to be blindsided. You can discount information at your own discretion -- but being ignorant is hazardous to your portfolio.

Here is an example I've been working on as part of a wider range of investment ideas on Oil.

My first approach was to set up a search in Google News that highlighted anytime OIL was in the title of a story. You can do that with the 'allintitle' operator and since I wanted US based sources I added the 'location' operator with USA as the source- it looks like this in the Google search window.
http://news.google.com/news?hl=en&ned=us&q=allintitle:oil+location:USA&ie=UTF-8&scoring=n

To see more useful operators check out the Google Cheat Sheet

There are choices on the page to make this search into an RSS feed. Clicking a link on the page will create a feed url in either RSS 2.0 or Atom. You can then take that feed and do further refining in Yahoo! Pipes. I like to create a broad search from Google News and then apply a layer of filters in Pipes for key terms that I think are important. Once I have configured Pipes to my liking it becomes a feed for my RSS reader. I also created a pipe that looks at the opinion and editorial feeds from certain newspapers. Those in the analyst community will recognize this technique as a kin to using Google alerts. Using RSS is the better mousetrap and it doesn't clog you mailbox.

So what did I find from my pipes that I think is interesting, below are some examples:

175 in House Sign Westmoreland Pledge to Vote to Increase Oil Production
Oil prices put Plastic industry under pressure
Point/Counterpoint: Oil drilling
Oil drilling question looms as election issue
Calls for crack down on oil speculation increase
McCain's policies will not help oil crisis, curb climate change

With two candidates on opposite sides of the issue. Stories and opinion pages are pointing to the key arguments that each side will make. Two of the resident themes are drill now, and oil speculation. Being apolitical here, if there is one thing you can count on -- somewhere along the line-- both of these candidates are going to introduce some type of energy legislation as part of their platforms. The sentiment in the stories, on either side, is just too high for either campaign to ignore as a differentiating issue. With further enhancement, I can track these issues on a regular basis without having to subscribe to every newspaper RSS feed. And as a side benefit to the newspapers involved, to get the full story, I need to go their site - display advertising anyone?

Data on the Web: VGChartz vs. NPD

by Robert Passarella | comments: 58

After writing my first post, Equity Research in the Age of Web 2.0, I received a lot of comments asking really good questions. Most of the questions from readers asked about real world examples. So here's a taste.

In the world of securities research, in general, we talk about consensus sources. These are sources that everyone looks to as an arbiter of what may be happening in a market or industry. In the macro economic world, figures released by the US government, (measures like labor statistics or GDP) are used by the market as a whole to judge where the economy may be headed and where it has been. In certain industries, independent benchmarks are used to define the prospects of an industry or the individual performance of the firms involved. A great example of this is the NPD Group.

The NPD Group, provides pay services that collect information from various retailers and then in turn creates a measure of sales for many product categories. Usually the reports are done on a monthly basis coming out about 2 weeks after the previous months close. I am pretty familiar with their reports and most equity analysts and the market use them as the benchmark. Usually an analyst will write a report in which they predict sales for a particular company in relation to the data provided by NPD. The differences in an equity analyst's view of NPD and his own projection usually leads to an upside or downside surprise in a equity's price, once the NPD reports are published and received by the market.

For the video game sector, NPD produces the benchmark measures for North American game and console sales. Analysts like Michael Pachter of Wedbush Morgan, and Colin Sebastian of Lazard, create, on a regular basis their monthly forecasts of where NPD will come in at. Over the last couple of years a new entrant has entered the picture with different aims from NPD; enter VGChartz. By all accounts this newcomer is causing a headache for NPD and their for pay service.

VGchartz uses a similar methodology as NPD, in trending and forecasting game sales through representative samples.
Here is a excerpt from their About Us page.

"With a growing team of analysts, over ten years of experience and with over twenty years of historical data at our disposal, VG Chartz should be seen as a very powerful prediction tool for industry and casual user alike in looking ahead to the future market and making educated and informed predictions. Using our powerful and proprietary graphing and analysis tools, users can query the extensive sales database and compare the performance of hardware and software sales over time between different formats, genres, titles and manufacturers."

The main difference between NPD & VGChartz is that, VGChartz is a user-based community of video game enthusiasts/experts and NPD is a market research company. Their business models also differ, NPD is a for-pay service and VGChartz looks to be supported mostly by paid advertising. While VGChartz makes their North American data available on a weekly basis along with data from Japan and Europe. NPD is focused on North America, and their data is released monthly.

So if you're an investor interested in this sector or an analyst -- the first question you should ask yourself "is the data from VGChartz good?" My answer is, after looking at and using VGChartz data for the last two years, it's quality. But please in the Age of Web 2.0 form your own opinion.
Here are my reasons:

• The data is weekly as opposed to monthly -- time is a big advantage. (I saw Sony's changing future thanks to VGChartz much quicker than if I'd waited for monthly numbers)


• It is the only place to get as close as possible to worldwide figures on console & game sales.


• The best part of using or working with VGChartz data is that they give you their biases upfront along with a comparison of their numbers against NPD and key analysts like Michael Pachter.


• There is community that has arisen around the numbers; that is willing to have an open exchange about the short comings, and methodologies in VGChartz's multiple forums. You really don't get that with NPD.

It has to drive NPD nuts that a site like VGChartz can create a presence and provide high quality information with a completely different business model. I am sure in the NPD mindset, the thought of an outsider competing with them in this space was completely unanticipated. This was a theme that was echoed at our last Money:Tech. On one hand we had Reuters' Devin Wenig talking to Tim O'Reilly saying he didn't "... see direct competition from consumer media (including Google), arguing that professionals need richer, more curated information sources." And on the other hand, we had Sean Park of Six Paradigm talking about grabbing high quality useful data, as a buy sider, from consumer-oriented services like Yahoo! Finance and Google.

The one thing you can count on is this, smart professionals and investors will always look to high quality data sources that are leading indicators for consensus. If I can find a piece of data, or a source that is a good predictor for what a benchmark will do, I will use it no matter where it comes from. Time and proven results are the final judge. If it happens to be free, so much the better.

Equity Research in the Age of Web 2.0

by Robert Passarella | comments: 13

As a new blogger to Radar and the program co-chair for Money:Tech 2009, I thought I'd introduce myself along with a topic we plan to present at the conference.

After spending many years on Wall Street watching the buy side (investing institutions) and working with the sell side (investment banks); all I can say is that I am excited with what the future holds. The Internet is quickly becoming 'the' vast store house of data, research and commentary that I hoped it would. If you think the Internet is for message board jockeys, blogs for late nights in pajamas, and social media for dating; you are missing point. If you want to add to your company and industry analysis, as well as, your investment process, you need to be an interactive user of the Internet.

So why are we, "the professionals", turning to the Internet? Or more specifically; why are we turning to web sites, blogs and social media for investment research, data and commentary? Well I believe there are a few reasons.

Just about every public company has some type of presence on the Internet. In certain domains, enthusiasts and experts are better informed than most analysts on the actual products, goods or services a company may provide. And they are sharing this knowledge and information with each other in open forums. And if you decide to graduate from lurker to participant the gains are even greater. An informed investment professional, that knows his tickers and sectors, can quickly digest this information into his investment process, just like his phone calls with a Gerson Lehman or Coleman Research expert. This type of high quality information can be found if you know where and how to look.

The emergence of low cost publishing tools, cheap web hosting, and various ways to monetize knowledge is another trend that can put some people on the same level as a CNBC anchor and others on equal footing with a top ranked analyst. Just think of my well known blogger friends like Money:Tech Chair Paul Kedrosky, Barry Ritholtz, Nouriel Roubini, and Roger Ehrenberg. Their collective readership and influence is greater than most sell side analysts.

The economics and dwindling company coverage of most sell side research shops has forced the buy side to scale and employ a do-it-yourself ethic. Your typical buy side analyst needs a place to turn for leads and information, especially when switching sectors and industries. Those places are quickly becoming SeekingAlpha, Wikipedia, LinkedIn and Facebook.

And the biggest reason of all; the established sources of main stream financial news and data are ubiquitous. Everyone on the buy side and sell side has Bloomberg, Reuters, and Dow Jones. And if everyone knows everything at the same time what advantage is that?

So where are we headed?

We are headed to a place where the tools, practices and techniques are starting to emerge. It's a place where anyone with a need and drive can learn to scrape data, do their own automated channel checks, while benchmarking and creating reference data. Have an idea; model it yourself, grab the data from Amazon, benchmark it against Yahoo Finance, and set up your filters in Google Reader for stories or articles related to your themes.

The key is to meld the old with the new. Mixing your custom new found data with established sources from your vendors to provide leading edge mashups that help you complete or flesh out a company's position within the competing forces - think Michael Porter on steroids.

Researching during the age of Web 2.0 doesn't mean blindly following rumors on a web site -- that way leads to madness & ruin. You need to think more like Ben Graham in the early days of modern Wall Street when speculation was the name of the game. Graham was able to find high quality sources of information that others thought to be a waste of time, and he put them to good use.

The same can be said for the tools at your disposal in the Web 2.0 era. Put them to good use and you will be rewarded.