Analyze This

Maybe you've seen Harry-a bulldog watching a securities analyst while he takes a shoe shine or sitting in a bubble bath while the analyst reads the financial pages and talks on a cell phone.Harry is the mascot depicted in New York City ads for Bulldog Research.com, a new Silicon Alley-based investment-tool site, launched in May, that awards Wall Street analysts by comparing their daily forecasts with actual stock and company performance.

"We analyze their stock and earnings estimates accuracy and compare their earnings forecasts to actual results," explains Brent Johnstone, co-president. At Bulldog's home page, users can search the awards database by analyst, research house, company stock or industry. The Watchdog is a daily update showing stocks with new award-winning analysts.

While other awards programs such as the Institutional Investor All Star Research Team, the Wall Street Journal, and TheStreet.com, are either qualitative or somewhat quantitative, "nobody does it on a stock by stock basis, updated daily," says Johnstone who co-founded the firm with co-president Mike Thompson who had 10-years in institutional sales and high-net-worth sales whom he met in the private client services group at Lehman Brothers. Johnstone-whose father, Bruce Johnstone, managed the Fidelity mutual funds for 34 years-started at Morgan Stanley in high-tech investment banking for two years, finished an MBA at Harvard Business School, before meeting Thompson at Lehman in the private-client services group.

The idea for Bulldogresearch.com came up because Johnstone was trying to figure out which research analyst at Lehman he should be promoting to his client base. "I wanted to be sure when I spoke to my client that I had some performance numbers to back me up," he says. He wanted to be able to say his analyst is the top performer for predicting earnings on the stock for the past eight quarters. Johnstone believed that it would benefit investors from the professional all the way down to the novice, but that was something no one had.

As a result, "We analyzed both analysts stock picking ability, to determine whether their stocks have been winners, and then earnings estimate accuracy." Those two calculations created the foundation for what Bulldogresearch.com does now.

Bulldog's database picks up the earnings data from I/B/E/S, the international leader in distributing analyst estimate data. The most difficult challenge was securing the buy-in from the Wall Street firms. Though I/B/E/S distributes, the data, the ultimate use of the data is up to the firms to determine. So Bulldog had to get the buy-in from every firm on Wall Street. So far, they've gotten 95% of the firms with 215 firms participating, including Goldman Sachs, DLJ, Bear Stearns, though some are holdouts, such as Morgan Stanley and Merrill Lynch. Currently, it tracks over 3,000 analysts at those firms.

It took 15 months to put together the database, algorithms and the calculations that go into creating the awards and making sure it's objective. Another key component was securing academics to make sure the algorithms were credible and reliable. Charles Lee from Cornell University and Larry Brown of Georgia State University, experts in earnings estimate accuracy, were recruited to help validate the calculations.

"We're giving exposure to a lot of analysts that wouldn't otherwise get a lot of credit," says Johnstone, noting that most professionals can only name a handful of analysts. A lot of the top analysts get overlooked," says Johnstone, who adds "we're giving them a pedestal."

The free site aspires to be an industry standard that investors of all levels can go to everyday. To make money, the site is advertising driven, it also sells research reports and it carries sponsorships on behalf of the firms that participate. For instance if an investor does a search on AOL and finds the top analyst is at DLJ, the sponsorship is a way for DLJ to provide a snapshot of what the analyst is saying now and to familiarize the investor with DLJ research.

On the business-to-business side, Bulldog is creating several higher-end financial tools for investment professionals, targeting money managers and mutual fund managers on the buy-side. On the sell side, it wants to create sales and marketing tools for use by a research director, the brokerage sales force, as well as the capital markets group.

"It's a very scalable model as far as going deeper into the top Wall Street research," says Johnstone, who says the firm can easily add more products on top of that. Currently, it's looking at a couple of trading models that rely on earnings estimates and accuracy scores to come up with predictors of what a stock is going to do in the future. Bulldog will make a portion of the product available for free, but then the full suite will be sold on either a subscription basis or sold directly to institutions. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio