Goldman Sachs (Nostradamus) vs. Simple Quantitative Models (Common Sense)

by: Stephen Castellano

If Al Gore invented the Internet, and if an estimated 4,000,000+ very close and personal Facebook fans bought Citigroup (NYSE:C) at $0.97 and Bank of America (NYSE:BAC) at $3.12 last March, well -- we have some of our own pronouncements to make.

Specifically, Ascendere Associates LLC -- founded by a self-proclaimed internationally renowned genius -- has beaten Goldman Sachs, usurped UBS AG, outmanned Credit Suisse First Boston, outplayed Davenport & Co., presaged Fortune Magazine and Standard & Poors, and trounced a number of other major Wall Street edifices by auguring a significant number of market-moving Wall Street rating actions. It has also concurred with some notable Wall Street downgrades after the fact.

We are not writing this article to promote ourselves -- nor our model portfolios, weekly long/short focus list ideas, quantitative ranking systems or deeper fundamental research services-- nor are we implying that we have reverse-engineered the genetic algorithms of Nostradamus.

Instead, we wish to demonstrate (in the most academic and objective way possible) the power of deceptively simple quantitative models and some deeper level fundamental research when combined with the common sense of an experienced professional who holds a varied background in sell-side and buy-side equity research, as well as supply/demand consulting, and who is adroit at basic VBA programming and is expert in financial spreadsheet modeling. (It may come to a surprise to some as to what former liberal arts students from Oberlin College can do -- we are not referring to ourselves so much as we are to memorable characters like Dan Zane and John Gutfreund, among others).

Prescient or promotional? Please take a look at recent Wall Street actions with Domtar Corp. (UFS), Starbucks Corp. (NASDAQ:SBUX), Joy Global, Inc. (JOYG), Limited Brands (LTD), Fortune Brands (FO), McKesson Corp. (NYSE:MCK) and Netflix, Inc. (NASDAQ:NFLX). And decide for yourself:

Domtar Corp. (UFS)

Ascendere Associates LLC Pronounces Domtar Corp of "Particular Interest"

Of particular on the long side are LTD, THI, CMI, WCRX, SNDK and UFS.

--Ascendere Associates LLC, "Potential New Long and Short Ideas" --March 8, 2010

Eight days Later, Goldman Sachs upgrades Domtar Corporation and makes it a Conviction Buy

Goldman Sachs upgraded Domtar Corporation (NYSE:UFS) from Neutral to the Conviction Buy List and raised their price target from $63 to $82. The firm cited rising pulp prices, tightening uncoated freesheet markets, stronger EPS and free cash flow outlook, and an attractive 4.6X 2010 EBITDA multiple.

--, March 16, 2010

Starbucks Corp. (SBUX)

Ascendere Associates LLC Proclaims Starbucks Corp. "A Good Option for Growth Investors"

At the current level, SBUX is a good option for growth investors that expect significant upside to current consensus forecasts -- because we do think there is some chance of this occurring. SBUX is also currently a good stock ideas for high turnover portfolios driven by constantly updated relative value decisions, such as the Ascendere Long/Short Model Portfolio.

--Ascendere Associates LLC, "Starbucks Improving Across the Board: Is That Enough?" -- February 16, 2010

A month later, UBS AG Increases Starbucks' EPS Estimate and Price Target, and Raises to Buy

Palmer lifted his rating on shares of the Seattle-based company to "buy" from "neutral," and raised his price target to $29, from $27. According to the analyst, "We are upgrading Starbucks (SBUX) based upon our belief that sales and earnings momentum can drive ongoing, significant earnings revisions over the next two or more years.

--Forbes, March 16, 2010

Joy Global, Inc. (JOYG)

Ascendere Associates LLC Proclaims Joy Global, Inc. as the Best Midcap Industrial

JOYG has one of the strongest fundamental profiles of any stock in the Industrial Sector, and there is a reasonable possibility improving global economic drivers which could in turn drive analyst estimates higher for this company. As such, JOYG is probably one of the best mid cap stocks to own in the Industrial Sector.

--Ascendere Associates LLC, "Joy Global, Inc. Not a Bargain, but Still Probably the Best Midcap Industrial Stock to Own", December 29, 2010

Two Weeks Later, UBS AG Upgrades Joy Global, Inc.

Shares of Joy Global (Nasdaq: JOYG) are trading higher this morning as an analyst at UBS raised his investment rating on the stock from Neutral to Buy. The firm also lifted its price target from $62 to $70. The stock last traded at $58.80, up 2.8% from yesterday's close. UBS' new price target represents potential upside of about 19% from where the stock is trading today., January 13, 2010

Limited Brands (LTD)

Ascendere Associates LLC Singles Out Limited Brands (LTD) As a Long Idea on March 8, 2010

Of particular interest on the long side are LTD, THI, CMI, WCRX, SNDK and UFS.

--Ascendere Associates LLC, "Potential New Long and Short Ideas", March 8, 2010

Credit Suisse First Boston Corp. raises LTD estimates a week later

LTD: Raising Estimates - LTD announced a special $1/share dividend and authorized a new $200MM share repurchase program. After the market close on March 15, LTD announced it will pay a special $1/share dividend on April 19, 2010 (to shareholders of record on April 5, 2010), and authorized a $200MM repurchase program. Increasing firm F10E from $1.63 to $1.64 to reflect expectation for $200MM in share repurchase in F10 (vs. $0 previously).

--BusinessWeek, March 16, 2010

Fortune Brands (FO)

Ascendere Associates LLC Names Fortune Brands as Particular Interest on the Short Side

Of reluctant particular interest on the short side are FO, LUX, UDR, DRE and SMS.

--Ascendere Associates LLC, "Potential New Long and Short Ideas", March 8, 2010

Davenport & Co. Downgrades Fortune Brands Less than a Week Later

A Davenport & Co. analyst stated: "We are lowering our rating to Neutral to reflect the recent strength and our belief that the stock currently reflects the potential for improving results in the Home and Security segment.", March 12, 2010

McKesson Corporation (MCK)

Ascendere Associates LLC Heralds McKesson Corp. as "One of the Best Healthcare Stocks to Own" on January 28, 2010

McKesson Corporation has a very strong fundamental profile, is securely situated in an industry that should show considerable long-term growth, and seems undervalued relative to its historical ROIC, growth prospects and other Healthcare stocks. As such, it is probably one of the best Healthcare stocks to own at the current moment.

--Ascendere Associates LLC, McKesson Corporation: One of the Best Healthcare Stocks to Own, January 28, 2010

More than a month later, Fortune Magazine rates McKesson the "World's Most Admired" Company on March 5, 2010, and S&P Raises Corporate Credit Rating to A- on March 12, 2010

Netflix, Inc. (NFLX)

Ascendere Associates LLC Quantitative Models Concur with Sell Side Downgrades of Netflix

We recall that a sell side few firms downgraded Netflix, Inc. (NFLX) this past week due to valuation. Interestingly, our models concurred with this move. . All that could mean is that NFLX is moving into growth territory, so the stock could move some more.

--Ascendere Associates LLC, Our Updated Focus List and Portfolio Leverage Strategies, March 15, 2010

A week prior, at least three sell side analysts downgraded the stock

Netflix (NFLX) shares are coming under pressure this morning from a trio of analyst downgrades. Bank of America/Merrill Lynch analyst Nat Schneider this morning downgrades the stock to Underperform from Buy, while keeping his price target at $70. He notes that the stock is up 26% year to date through yesterday's close, "pricing in a very optimistic scenario," with his discounted cash flow model requiring a near tripling of subscribers by 2015 to justify the current price. "....Kaufman Bros. analyst Aaron Kessler downgrades the stock to Hold from Buy...Susquehanna Financial analyst Marianne Wolk cut her rating on the stock to Neutral from Positive..."

--Barron's, March 3, 2010


If we had the time, we believe we could point to other "coincidences." But we think we have demonstrated the following, from a purely academic interest: 1) Anyone interested in obtaining cutting edge and value-added equity research idea generation as well as deeper fundamental analysis does not necessarily have to get it from the behemoths of Wall Street; and 2) Wall Street can take relatively simple steps to drastically improve the relevance of their existing fundamental research product.

For a pdf of this report, please see here.

Disclosure: No positions