Finally a serious equity analyst internship program! 

We wanted to create the best equity research intern program in the world. We decided that it needed a little more structure and self direction plus some levels of achievement and an ultimate end-point that recognizes those who make it through.

So the R2 2012 Internship Program (Spring Edition) has some key features:

1. The program will run from January to May/June. Applications begin January 3rd and are received through January 16th. Selections are announced January 20th.
2. Interns will go through distinct phases with a combination of instruction, supporting information and related tasks. The rough schedule is:
   1. January – Candidate selection and on-boarding
   2. February – Basic information gathering using public sources, populating post, document and model templates
   3. March – Advanced information gathering and processing non-public sources of information and mining the network
   4. April – Analysis, valuation, drawing conclusions, packaging content for investor impact
   5. May/June – Finding, researching, presenting and publishing on a stock idea

We’ll provide some education and information at the start of each phase along with a list of tasks that need to be done. By doing these interns will build their skills and will be “leveled up” as they work through each phase so they can move on to the next level of education and practice.

R2 is a virtual organization so there is no physical location to report to. Interns will work from wherever they want. We plan to host an organizational meeting on January 23rd in NYC depending on what geographies our interns come from. We typically host two-day working sessions periodically in Boston and New York.

Before applying we suggest you go through the information below to learn more about us and the program. Then, if you think there’s a fit submit your application. Our review process begins January 3rd and the window for new applications closes on January 16th at 5pm EST.

FAQ

What types of people are we looking for?

We are trying to find and develop those few individuals who may go on to professional careers in equity analysis and find their great reward in doing the best work, being right, getting famous and/or making millions. Generally these types of people are smart, thoughtful, hardworking and resourceful. Having expertise in how an industry works or a background in math or science helps but it’s by no means a requirement. We do put a high emphasis on written, oral and visual communication skills. It’s hard for your insightful conclusions to change the world if nobody can understand them.

How much time and effort is required?

Of course it will vary based on what you want to put into it but considering our work tempo and the amount of material to cover it will require at least 5 hours per week. But for most people that probably won’t be enough time to reach the proficiency required to complete the final phase of the program. A level of 10-15 hours per week is probably a sweet spot for the program to work. If you are extremely serious about achieving results and finding a full-time job in equity research then 20 hours a week would be worth doing if we can successfully provide enough material for you to work on. We will put an estimated time on each of the tasks which you can use as a guideline. There is a huge difference from one person to the next – that takes one person 2 hours to complete might require 4 or 6 hours for another.

Do I have to be a technology geek for this?

You don’t have to but it will help. Not only do we focus on technology we use lots of it in conducting our business. In addition to typical programs like Microsoft Office we use a variety of online tools like Skype, Yammer, WordPress, Twitter, Smartsheet and social networks. A large component of the information gathering, packaging and distribution associated with research has moved online. If you are not a “digital native” many parts of this process will be harder. That being said the telephones, meetings, relationships, expertise and fieldwork can be extremely effective as well. If you are resourceful you will figure it out.

What if something comes up and I can’t continue?

It’s understandable. First of all our system will allow you to take more tasks on when you have time and not take them when you don’t. So if you can’t be sure to finish a task we ask that you not sign up for it. If you do then see it through. If your situation is permanent just let us know that you won’t be able to stay in the program and wrap up any remaining tasks you have to complete. Then we’ll off board you and wish you well!

How and where do I apply?

The process will be online and be open on January 3rd. Applications must be completed by January 16th. We may ask some applicants for additional information or to complete tasks beyond the basic application to help us get to know you. This will happen during the week of the 16th. There is a special application form to start the process and be added to the candidate email list for further instructions and updates. You can access the form by clicking on this link.

Is there an interview?

Part of the application process will include a video application. We also expect to do a live interview with many candidates by phone, video or in person the week of January 16th.

Can I be located anywhere?

Short answer: yes. However time zones still matter and we work mostly on EST. One partner lives in Paris so if we tend to shift toward the early side of the day and can certainly have interns in Europe. The further away you get from our time zones the more challenging it can be but it just requires a little extra determination and flexibility to be in sync with the whole team.

How many interns will be accepted into the program?

We are shooting for 2 to 3 in the graduating class. We may accept an additional 1 or 2 people in case not everyone makes it through. Since this is the first time we are running this more structured program we want to do everything we can to make it successful.

Is the program based on something?

SoundView Technology Group never had an analyst training program but they produced some great analysts and used research to dominate their niche over competition that included Goldman Sachs and Morgan Stanley. Kris Tuttle served as Director of Research before the company was acquired and managed to document and preserve a large body of material that was used in analyst training and development. This material was refined subsequently in developing some analyst training for Canaccord Genuity and supplemented with other analyst training materials that add more value. In addition there are a number of strong thinkers and books that we have incorporated into our approach that we will share with you as a reading list.

What if I don’t have a financial background or financial analysis skills?

Our research is ultimately for investors. So financial skills and analysis are key aspects of what we do. However they may not be the hardest and they can be learned. Complicated models and analysis can be powerful but often other foundations are used for the best research work and stock conclusions. If you lack financial skills you’ll need to take a crash course and learn the basics fast to keep up. It’s doable though if you are smart.

Will there be a Fall edition?

If the Spring edition goes well we will probably run the program again in 2012. Applications will be done in August for a September to December program.

Can I get fired from the program?

We don’t like to use the term “fired” but it’s possible that despite our best efforts the program may not be a fit for you. In the past it’s often been the case that people have a strong interest in equity research until they actually start doing it and see that it’s lots of hard work. It’s kind of like writing a book. Lots of people want to do it but the number who can pull it off is much smaller because of all the work that’s required. Generally we will notice that you are not keeping up and if necessary will suggest you stop and focus on other things.

Is there any compensation?

Nope. This is all about education and opportunity.

What do I get out of it?

Besides the education described above for those that complete the program they will have 1) a portfolio of published materials that they have worked on and can discuss with prospective employers, 2) a public testimonial and endorsement from us that you have completed the program and 3) if you are a student and your school provides credit for completing a program like this we will provide the necessary documentation.  If our graduating class is strong enough we may offer a paid summer internship opportunity that would provide full-time work with compensation. We will decide in May if we will be offering a paid summer internship.

What kind of recognition will I get?

Anything you contribute meaningfully to we will put your name on. Until you are doing work on your own at the end you will be listed in a supporting role. If you complete the program successfully we will list you as a primary resource on that work.

Some Background on Research 2.0 (R2)

R2 was started in April of 2005 as an independent research organization focused mainly on emerging technologies from an investor perspective. The firm is run by two senior partners, Kris Tuttle & Stephen Waite, who each have circa 30 years of experience in research, equity analysis, economics, investment strategy and portfolio management. R2 provide advisory services to emerging technology companies and publishes investment research on a broad array of institutional platforms. Our work is read by all the major institutional investment firms, hundreds of technology company managers and thousands of individuals and retail investors.

Our focus is on new technology, emerging investment themes, fundamental analysis, intrinsic valuation and long-term conclusions. Unlike broker/dealers and investment banks we can distribute our work freely and openly to reach a large audience and avoid all the counter-productive friction and forces that smother good research at these firms.

We also believe in a virtual or “mesh” business model where we leverage platforms and partnerships rather than build redundant and expensive infrastructure. For example we leverage partners like GigaOM to distribute some of our thematic research, SharesPost for research on private companies, and IPO Candy (which we own) for research around the IPO market and the companies there. In 2012 we will be using a platform called Covestor to launch a public investment fund driven by our research process.

It was odd to read the article by Andrew Ross Sorkin today in the WSJ. In it he talks about how all the major investment banks “missed the red flags” around Groupon as the company selected bankers for their planned IPO. He mentioned the balance sheet, the sales model and the fact that insiders already cashed out. Much of this was already discussed and written about when the filing came out and subsequent events made the story even more distressing.

Investment banking is purely about transactions

Mr. Sorkin is an experienced journalist and the WSJ certainly should know their way around Wall Street. What’s going on? Investment banks are hired to support a transaction. It’s true they sometimes call their services “advisory” when it comes to M&A but they only get paid when transactions happen and their fee is based on the size of the deal. It’s not hard to imagine what their motivations and priorities are. They get paid the same for good deals and bad deals.

Of course banks care about their brand and prestige. Goldman has standards. However those standards are driven by the market rather than from within. In other words if the market will accept it and thinks it’s good, Goldman is happy to get the print and take the fee.

All this is especially true during the “bake-off” portion of the IPO process. At this stage a company like Groupon invites all the banks to come and do a dog and pony show with the senior management team to prove how valuable they would be as an underwriter. They are not in evaluation mode, they are in selling mode.

Much like a courtship the banks are invited by the company to “show how much they love them.” Only one suitor gets to be the lead bank (although in large deals there can be two or three) and the rest settle for placement that earns then a nice fee for which they will do zero work. And I can tell you it is zero. (The research analysts at those firms will eventually have to provide stock coverage (buy, hold or even sell which never happens) but the bankers and the distribution network does nothing if they are not the lead bank.)

A key part of the process is where each banks provides a “valuation estimate” for where the shares should be priced and expect to trade. This is the most absurd part of the process because the banks all try and find the highest number. They do need some justification which typically involves sending associates out looking for “companies that have something in common with this one and trade at or have traded at obscene valuations.” They put these in a sheet and find the metric that will create the highest valuation. Banks don’t spend anytime on how much *they* would pay to buy stock in the company. Thanks to the new regulations separating research from banking they can’t even involve the one person or people at their firm that would have worthwhile analysis.

It doesn’t have to be this way

In the “old day” some investment banks like Morgan Stanley tried to maintain high standards that they demanded companies meet before being willing to underwrite an IPO. As they watched other banks run away with deals in the mid-1990′s they changed their approach and created one of the best known “investment banking research analysts” in Mary Meeker.

Before regulations there were some small firms (like SoundView) that actually aligned the interests of the firm with investors in an IPO stock. For example before agreeing to be part of the deal the research analyst had to support a “strong buy” rating on the company with some caveats around pricing. More importantly the compensation of research analysts were tied to deals but subject to company execution. For example if a company came public and either missed published estimates or lowered guidance the analyst would not be paid on the deal. Pretty simple but it made analysts much more certain about their estimates which investors in the company would be relying upon.

The little research investors had back then was all stripped away with the new regulations put in place to “protect them” from the unscrupulous research analysts at other firms (guys like Henry Blodget and a few others at the “bulge brackets”.) It’s not unusual for regulators to get it wrong since they don’t have a deep understanding of the markets they are tasked to regulate. Today investors have to realize that “buyer beware” is just as valid in IPO stocks as it is in most other transactions. It’s unlikely that regulations or markets will get more investor friendly.

Conclusion

This situation is one of the reasons we cover newly-public and even some emerging private companies. There’s opportunity to help investors make decisions and in some cases to exploit solid investment opportunities in the absence of strong independent coverage. Much of our IPO-focused research comes out over at IPO Candy.

I hope the WSJ and Mr. Sorkin can start writing from their knowledge base which should be much deeper around investment banking and Wall Street than this article suggests.

We’ve just started a new blog/resource site over at www.sellsideanalyst.com which will contain a great deal of our analyst training materials, tools and commentary.

So most of our posts regarding the research process, the industry and “how to” will be going there going forward.

It’s been a project years in the making and an outlet for all the things we learned doing equity research at SoundView Technology Group (now gone) that can be passed on to the next generation of equity research analysts.

Sadly so much of what is going on now is no better than it was a decade ago.  Lots of “research” that is merely commentary.  Too much backward looking financial analysis.  A fixation on P/E and price targets, events and quarterly reports.

There are many ways to learn the basics of financial analysis and capital markets but few, if any, ways to figure out how to put them all together in a superior fashion. Getting an MBA helps, getting a CFA helps, getting a series 7, 86 & 87 from the NASD helps but none of them provides a complete picture.

So for our Research 2.0 readers who are interested in such topics we recommend you hop over there and sign up for RSS or email updates as desired.

For anyone who doesn’t know attenuation is about reducing the input values that are coming in.  What prompted this short post is a feed I stumbled on to and scanned across to see that there is giant business out there to generate "original" written content for something on the order of $1 an article.  Wow.  Every day dozens of sites are paying a few dollars to people to write whatever they can so that they will have some "original" content that the search engines will index and possibly drive some traffic their way. 

There seem to be an almost unlimited number of sites that are willing to do this in order to generate a few dollars a day in advertising revenue and possibly sell a site from time to time based on traffic.  The whole thing is insane.  We’re sad the newspapers are dying but at least they had editors. 

We have wondered why the expertise of an organization like the NYT or WSJ, even USA Today, might not help cull the wheat from the chaff.  So far it doesn’t seem to be happening.

Of course the new way seems to be link journalism which is based on link sharing and recognizing original and good content.  We’re not an expert in the publishing space and defer to others like Scott Karp and O’Reilly.

But somehow this has to end. This comes after large firms like Reuters got rid of most talented writers to use much cheaper authors of earnings fodder and news updates to feed their user base.

Many seem very motivated to flood the Internet with so much that we actively worry that we can choke on our own volume of an infinite number of monkeys typing away all for $1 a page.  At some point the effort/value equation will drive people away from discovery on the net.

Social networks seem to hold a potential answer. Humans will filter out the good stuff and mark/star/tweet it or whatever.  We will start to ignore everything else.

This reminds us of when the early libraries had no catalog or even a useful labeling system.  Early days indeed.

Ciena held their analyst meeting in NYC today.  Although we were around town we still attended remotely which is more useful than being there, but that’s another RealVR story.

Although the company has well-known customer concentration issues and overpaid for WorldWidePackets management articulated some very intriguing developments in the metro space that we think position the company well for some of the adoption trends we see coming.   This is a very interesting, long-term and pervasive area for development for metropolitan areas and the technology convergence that will go on there.  Ciena sees it and is getting positioned there while it sees it’s stock crater to the single digits.

Management wasted a trip in coming to talk to typical securities analysts who focused on useless near-term questions like: "Are you going to do a stock buyback?", "Can you give us full year future guidance?", "Are you going to take the company private?"  All we can say is:  Analyst, please!

Obviously the company doesn’t know or can’t say. How about engaging on the material they came to present and so some of your own work on the name.  Companies should just do these analyst meetings online.

At the same time we hope the company has a good 1-on-1 schedule where they might even have a discussion about what’s really going on in the business and how it can play out over the next 12-18 months.

If not they should do these from HQ using video and collaboration which will be more efficient and drive the kind of bandwidth they are positioned to supply.

Tags: CIEN, Meetings, RealVR

Credit Suisse (CS) stock equity analysts will be using Gerson Lehman (GL) consultants to help them actually do a little primary research. At the same time Gerson clients who want to speak to an industry expert equity analyst but not wanting investment advice will be able to consult with Credit Suisse stock analysts. (Article Link.)

Many of our institutional clients have said the future would be that they "pay by the analyst" and not "the shop."  This is clearly a step in that direction.  Large brokers like CS often insist on hefty minimum commission levels for their clients to get full access to the CS research product, analysts and events.  But most of those clients also have relationships with GL where they do their own research and can pay by the hour.  Now they can talk to the same CS analyst by appointment and pay a fee.  CS may say that their analysts will not talk stocks with GL clients but most investors want to talk about industry dynamics and fundamentals anyway so this may not work so well.

Of course CS analysts may benefit from having a ready network of company and industry contacts to speak to.  The bad news is that companies have clamped down fairly heavily on information sharing for a fee to anyone outside.  This is making it harder to mine the network for great information.  However it will be a vast improvement over the resources that CS analysts have today.   What they may or may not enjoy is the "hourly consulting" business that they may be getting themselves into for GL clients.  We expect it will be governed but it’s not much of a boost to your independent research agenda.

For GL buy-side clients it raises some questions about how "special" the information they get from GL will be if brokers like CS are getting it too. 

The overriding question for us remains "Is this going to create better, more valuable research and expand the industry?"  In this case there are two pieces to consider.  Will having access to CS analysts boost demand for GL?  Will CS analysts routinely provide better research and become a source of money making ideas and insights that clients will actually pay *more* for in two years? 

At this point it doesn’t feel that way.  It seems more like CS wants to limit their investment in research, resell GL to their clients and put more of their analysts on a meter which is at least measurable.  Firms like CS are spending $1B+ on their research efforts and still having a hard time figuring out where the value is.  The basic reason is that the regulatory and compliance burden, combined with the restructuring of the brokerage, money management and investment banking use of research has created an environment that is basically anathema to doing great top-down/bottom-up thoughtful research work.

Gerson Lehman has certainly come up with a good model that is based on on-demand primary research conversations across a network that is paid on a variable versus a fixed cost basis.  Input from our clients says that many, if not all, of their research relationships will have to offer that dynamic so that they can easily scale their research payments based on how much the use the resources. 

At least CS has done something to try and evolve into the model.  There are plenty more moves coming soon.  We expect more research for fee distribution elements to move mainstream in Q4 and more broker/dealers will try and rationalize their research efforts even further.. 

 

Greenfield Online (SRVY) is a long-suffering online survey company that has just been acquired by Microsoft for $486M.   At first we were a bit surprised because in the past it’s been hard to justify high valuations for online survey companies but in this case Greenfield was valued as much if not more for their online shopping comparison sites than for the traditional online survey business.

As a research company ourselves we watch this space fairly closely, especially in terms of strategy, exits and valuation.  To be sure high quality survey research is valuable.  There is a perception however that it isn’t that hard to replicate or worth paying that much for.  What’s interesting about Greenfield is that they entered a fairly related field that had a better business model and created a much more favorable exit for the company than they would have ever had as an online survey company, almost no matter how well they executed.

A closer look at the business shows that the comparison shopping business was about 1/3 of revenue but nearly 60% of profits.  At the same time the growth rate of 50% YoY compared to overall flat revenues in the online survey business.  (All this based on company reported numbers from May 2008.) 

The purchase price represents about 3.2-3.5x sales depending on whether one looks at LTM or management projections for the current year ($148M).  The 12x EBITDA number and 48x LTM earnings are fairly generous.

Research continues to evolve and with every year it’s clear that data and primary information is far more valuable than the traditional content of analyst opinions.    At the same time the exit strategy may need to incorporate elements that would appeal to non-traditional buyers like Microsoft in order to generate higher valuations.

It’s a good time to be an independent research company.

The NYT noted in a recent article some comments by Frank Quattrone highlighting some of the dysfunction visited on the Wall Street research world several years ago. 

It does a good job of highlighting one reason that Research 2.0 and the Creative Destruction Fund are such a good fit in the current environment.  Investors want and need high quality independent research that focuses on emerging technology trends, disruption and company investment opportunities.  It’s not likely to come from any major Wall Street firms anytime soon.

Maybe the dramatic public unraveling of the Spitzer persona will help others see the folly of some of the most extreme reforms visited on Wall Street research.  It wouldn’t be hard to extend the enforcement of skills, standards and certification on publishing Wall Street research analysts and ensure their independence and integrity.   No good analyst would resist it and the best ones would welcome it.

This has been brewing for a while but has reached truly absurd proportions. For those that don’t know technology companies divide their analyst "relationships" along the lines of industry (Gartner, Forrester) and financial (Goldman Sachs, Morgan Stanley.)  This means that analysts talk to different people, attend separate meetings and receive distinct types of information and contact points in the company.

Besides having no real foundation in the first place, today this practice has taken on a mantle of irresponsible idiocy that remains somewhat characteristic of large companies.  Here are the key reasons:

1. Why would any industry analyst disregard the financial and business aspects of a technology vendor?  Why would a financial analyst attempt to do their job without a deep understanding of the technology, product strategy and other "technical" details of the business opportunity?  Can one do a restaurant review using just the prices on the menu and not tasting the food? Can you write up the food and ignore the prices of the items?  Silly.

2. Industry analysts are no longer distinct from financial analysts in terms of talking to public market investors.  Gartner has a huge business built around serving up their analysts to discuss companies with investors.  Firms like Gerson Lehrman blur this distinction even further.  Everyone is part industry analyst, part business/financial analyst.  Every single "industry analyst" firm we know has a substantive business where analysts service institutional investors.

3. Companies holding industry analyst meetings no longer provide any extra information that is financial in nature. They cite the "black out period" the same way they use it in financial analyst meetings.    Another distinction without a difference.

Obviously companies have lots of stake when talking to analysts which is why they work so hard to craft their message and information to market the image they want analysts walk away with.  Of course the primary job of the analyst is to find the reality and relate it to the needs of their own clients, not to grasp and simply repurpose the information.

Analyst meetings are certainly valuable and should continue.  But they should be open to both types and a detailed agenda allows analysts to decide how well the program fits with their needs.  Pure financial types may elect to skip product briefings and industry analysts may pass on the CFO presentation if there is one. 

We realize that the "blackout period" is a dumb invention to comply with "FD" regulations but since there is no objective definition of it nobody knows how to use it intelligently.  CXO executives refuse to talk to financial analysts for long periods while customers and prospects continue to get detailed information and participate in regular briefings with the company.  All it does is prompt analysts to develop relationships with the clients, channel partners, competitors and prospects for a company which end up being more useful anyway.  However company managements lose out because they miss the advice they can get back from analysts who spend time with clients, prospects and investors.  The dialog is greatly reduced.  Some companies actually pay over $100K for "advice" on how to script their quarterly calls but do poorly at understanding expectations. 

We could certainly go on but today most of the problems don’t impact us anymore now that we are outside the oppressive and unproductive broker/dealer research sector but the industry/financial analyst distinction gets more silly every day.

– Kris Tuttle

Tags: Research, Company Managements, Analyst Meetings

We’ve been documenting a broad range of sources and services we have adopted to perform our regular research tasks.  In the process we have hit upon what we think is an important question for us and anyone else who is actively investing capital in the public markets.

Years ago the hedge funds helped cement the concept of the "mosaic" for a particular stock idea or market condition.  When looking at buying or selling a name these portfolio managers consulted a few sources that created a picture for them from a set of well defined aspects.  The classic case was a set of inputs that suggested near-term business was tracking better than consensus expectations, insiders are buying, new analysts have been visiting the company implying that new coverage is coming, and the valuation is attractive.  A set of consistent positive inputs means an informational mosaic that says "buy." As we have said many times before a successful analysis includes fundamentals (business trends), expectations (consensus thinking) and valuation.

There’s been a huge proliferation of information sources, sources that vary by type, scope and quality.  There’s also been a continuing trend of increased specialization.  Now institutions regularly consult firms like Gerson Lehrman for internal morale or insight on a potential investment, use another to do channel checks, get models and consensus thinking from brokers, bring in raw data from services like NPD, or Majestic, commission a custom survey, use a too like Bloomberg, or Reuters for insider transactions, lock-up expirations and so on.   Some are using consumer services like Google and Yahoo more to get a retail view of stocks and the market.  Add to that the growing number of interesting alternative sources of information like Monitor110, Covestor, Stockpickr and other ways to glean changes in sentiment or market adoption.  The full range of sources often also shifts based on whether an institution is in "idea generation" or "due diligence" mode. 

As we begin to document and semi-automate aspects of our own investment process we are forced to consider some architecture to pull these diverse and changing elements into our universe of knowledge and analysis so we can further optimize our portfolio and the quality of our decisions.

Every week we find and try to incorporate more good information sources, additional industry experts and smart people, different methods of getting and sharing information (first email then Skype now Twitter?)

We’re trying to incorporate a few overlapping layers and a fairly comprehensive view but even doing the basics begs for a simpler way to match fundamentals with consensus and valuation.  Why aren’t the online tools better?  Who has a simple and flexible architecture to put all these research elements in a context for decision making?

Better tools are needed.  Right now it looks like we need to develop most of what we want ourselves.  If nothing better appears we’ll produce them for the rest of the world when we are done.  Meanwhile, we welcome any good ideas.

– Kris Tuttle

Tags: research, investing, technology