Continued from home page
Credible research on good companies that is widely distributed.
That's a validated and necessary step for well-positioned companies who are currently ignored by the markets or without quality research that attracts sophisticated investors, like institutions. This research has to be coupled with continued operational improvements to achieve the beginning of price movement and increases in trading volume.
Research coverage is in transition for small cap companies. As our Bob Davis pointed out on January 3 in his Second Study of Research Coverage, two thirds of the reported dropped coverage was of companies below $100 million market cap. Fewer small cap companies covered and fewer analysts per the remaining covered companies. This trend continues.
A few firms including ours, formed and run by experienced research directors and AIMR members, are stemming this decline and working to increase the coverage of small caps. At our firm, many years of research management experience and the continual improvement in our analyst staff and research product all together create a brand -- JM Dutton & Associates. This is the same formula that is necessary whether a brokerage or independent firm. This creates a credible research product.
At Dutton & Associates, our experienced analysts under our research director generate highly credible research with wide distribution. We look to cover good companies trading at a significant discount to their present intrinsic value. In these circumstances, research coverage can be highly effective in increasing shareholder value, and trading volume.
Take a look at Warrantech (WTEC), for example, with revenues of $49 million and 7 consecutive quarters of growing profitability. Its financial problems of several years ago, although effectively addressed, relegated it to Wall Street obscurity. In October, with its turnaround story not in Wall Street's radar, the stock was trading at 33 cents. Since our coverage initiation, the stock has risen to above 75 cents per share, representing a 130% return over 90 days.
Over the past 12 months, our analysts working for me have initiated coverage on 6 buy recommendations, as opposed to 4 with a lower speculative buy rating. The buy recommendations averaged +43% after 90 days, while the 4 lower speculative recommendations averaged a lower 90 day return of +32%. Our 5 most recent recommendations, 1 in each of October and December, and 3 in January, have averaged +25%.
That's the goal of Dutton & Associates: to bring widely distributed, quality investment research back to companies that are part of the small-cap markets.
When a company is covered by Dutton & Associates, it gets all the benefits of a research department of a major regional investment banking firm. Our analysts are experts in their field, most are CFAs. Our research is accepted by and included in all of the major databases of securities firms' estimates and recommendations, including First Call, Zacks, and Multex. In addition to our site, our research is available from all of the major financial portals, including the highly popular Bloomberg, smallcapcenter, and Yahoo Finance.
The only difference is we do not have any brokerage or investment banking operations. Instead, our firm's revenue model is similar to the S&P Credit Rating Model. We are prepaid $22,000 for a year's research coverage of a company. The year's coverage consists of an initial report and 3 quarterly updates. Research notes are issued by the covering analyst in between reports to provide coverage of events, and receive the same wide distribution as the full reports.
A benefit of this model for the investing public is they not only receive more coverage out of the small-cap sector (which typically doesn't yield enough in terms of commissions or financing fees to interest investment banks to cover them), but they also receive reports on companies strong enough to support paying hard cash for quality research. This is a natural self selection process for our coverage--only good companies who have the willingness to undergo our analyst's due diligence process and have the resources. These are the companies that investors find most advantageous to consider, and why a portfolio of these companies consistently produces high average returns.
We do not accept shares and our analysts and management are prohibited from trading in companies we cover. We benefit by being right -- by writing good research on good companies that give investors reasons to use our reports in their investment process.