Investorside conference speech, Mar. 2004
by Mark Roberts
I was at Fidelity until early 1990, when I left to start my own business. I noticed the high growth of the hedge fund business, just beginning at the time. In those days the Feshbach brothers were starting to fly high. No-one was publishing research aimed at this new market. I also noted a dearth of sell recommendations on Wall Street, and thought that long only money managers would also pay for high quality well documented sell recommendations to protect their portfolios. On May 1, 2000 I published my first report, “TCBY is in Deep Yogurt”, The shares lost 2/3 of their value subsequently. I peddled the report for $5,000 per copy to money managers by phone from my apartment in Harvard Square. The second report was on Summit Technology, which later bankrupted. My business was started. I hired an assistant and rented a space in a third floor walk-up in Harvard Square a block from the Kennedy School. We are still there, but we are now eight analysts plus myself. We have no sales and marketing department and we have grown by word of mouth. Many of you have heard of us, but most of you have never seen me, since I rarely leave Cambridge. I hope someday to become the Howard Hughes of independent research, fabulously successful and eccentric.
Off Wall Street’s reputation is based on outstanding results, thoroughness, integrity and honesty. Since the early 1990s we have recommended sales of well over 200 stocks. The average stock recommended for sale has declined by about 30%. We have been right on our recommendations over 85% of the time. Investors who followed our advice to sell certain shares in 2000, 2001 and 2002 saved about 50% on our recommendations in each of those years. Investors who sold this portfolio short gained 50% in each of those years. This is a record unmatched on Wall Street and by traditional research sources. We publish our results in excruciating detail every quarter for our clients to see, whether good or bad.
Among our better known recommendations to sell: Priceline in its heyday, Elan, Pillowtex, Kodak, Hanover Compressor, Goodyear Tire, Imclone before Sam Waksal went to jail, and the now famous Enron sell report, published May 6, 2001, in which we detailed the problems at Enron for all to see. Many of you have heard about this report. It was the subject of a great deal of praise and wonder at the Senate Enron hearings. Both Senators Lieberman and Senator Boxer publicly praised our work on Enron and wondered aloud why no-one else had come up with a similarly detailed analysis of Enron’s woes well before the company’s collapse. This report is in the SEC library and has been purchased by many law firms involved in Enron litigation. It is discussed in the Senate Watchdog Report entitled: ” Financial Oversight of Enron: The SEC and Private Sector Watchdogs.” Report of the Staff to the Senate Committee on Governmental Affairs, October 8, 2002, and in particular Part 2, Enron and the Wall Street Analysts.
Many analysts ask how we have achieved such a good track record. The answer is that it is mainly through a combination of imagination, hard work and a rigorous research process. We have no secret formula to find good ideas. We use the same screens as everyone else. We do not go to many investor conferences, so we are less influenced by the sales pitches that management gives to investors. We study many stocks, and we try to be very selective. We have a lot of experience in thinking about what can go wrong with companies. This is our expertise. In addition, each analyst on the Off Wall Street staff is only expected to produce four or five reports per year, which means an analyst has plenty of time to try to get it right.
Investors tell us that they want us to find frauds. Fraud is hard to detect. Investors look for analysts with a “nose” for problems. We have identified many situations that did not smell right, but fraud was detected by us directly or by others only well after we initiated coverage of these companies, and never initiated coverage because we knew in advance that there was a fraud. We think that there will be fewer accounting frauds discovered in the future, unless some of the rules now in place are removed. However, even if there are fewer frauds, this should not affect our ability to find good candidates for sale.
Our research is never centered mainly on accounting issues, though we are excellent at accounting and we employ former accounting managers from national CPA firms. Accounting problems are a symptom, not a cause. Like medical symptoms, accounting issues can often be overcome, and do not necessarily signal that the company is seriously ill. Let’s say your left arm is numb. Is it the result of a pinched nerve, or does it signal a serious heart condition? It takes much more work to determine whether accounting issues are signaling that there is something very wrong with a company’s business model, and that the model, as investors imagine it, can not produce the hoped for results. This is where we spend our time and effort. Does the business model work the way people think, and the way management portrays it, and can it produce the results? What is the stock worth if it does not?