How much is an Oppenheimer "buy" rating worth to investors?

In its regular Monthly Highlights, sell-side firm Oppenheimer reports on The Oppenheimer Twenty Focus List, described as its "Top Twenty Buy-rated stocks as selected by the Focus List Committee".  Here's the firm's report of its stock picking performance year-to-date:

Since inception (March 22, 2004), the Focus List has gained 3.51% versus 1.81% for the S&P 500.

A few points to note:

  • Holding the 500 stocks in the S&P index is less risky than holding just 20 stocks.  So on a risk-adjusted basis, these results are worse than they seem.  (It's also far easier to buy a single S&P 500 ETF or index mutual fund than to purchase 20 stocks.)
  • Turnover in the Oppenheimer Focus Twenty is far higher than in the S&P 500.  Three stocks were added and deleted in September alone.  Once you factor-in the short-term capital gains taxes, trading costs and spreads that result from the higher turnover, these results are again worse than they seem.
  • There are 31 people in Oppenheimer's Research Department, according to the November Investment Highlights.  Thirty-one people, for 180 basis points of higher-risk, pre-tax, pre-trading-costs outperformance.  Just think about that.

Doesn't this just illustrate the crisis in sell-side research?  Remember, this is a concentrated list of Oppenheimer's very best ideas from its entire research department. There are some bright and talented people there, but somehow the system just isn't working.

Most depressing is that Oppenheimer is primarily a retail
brokerage.  The majority of its retail clients probably don't have a
clue that its research adds so little value.

To make matters worse, Oppenheimer's 180 basis points of (pre-tax and pre-trading costs) outperformance likely beats many of the larger sell-side firms.  And they are paying a lot more than 31 salaries to fund their research departments.

So here's an idea for a new research performance metric for both the sell-side and the buy-side:

Research effectiveness = Basis points of after-tax, after-fees portfolio outperformance per dollar of total research salaries.


Links and article tools:

1. Other Seeking Alpha articles about sell-side research include:

Why fund managers should stop over-paying for sell-side research

The equity research debate

and Baaa baaa baaa! The sell-side analysts are coming!

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