Zacks > Goldman Sachs, Nothing Will Change

While everyone’s going ga ga over General Motors (GM) and GQ’s assassination of Lenny Dykstra, this headline caught my eye this morning:

Zacks Beats The Major Brokers

 Here’s Zacks gloating:

Over a variety of periods, our long-term buy recommendations earned investors more money than those made by the major brokerage firms. Similarly, our sell recommendations helped investors identify which stocks to avoid.

Investars calculated that Zacks Equity Research's buy-recommended stocks rose 23.9% over the past 5 years, nearly 200% better than the Russell 2000.

To put this performance in perspective, let's look at how Investars says other firms performed. Following the buy recommendations from Goldman Sachs, Standard & Poor's, Deutsche Bank, Citigroup, Piper Jaffray, Raymond James, BMO Capital Markets and Ameriprise would have lost you money. Not a single one of those well-known brokerage firms had a positive return.

At the same time, Zacks Equity Research did a great job of telling you which stocks to avoid, or even short. According to Investars, Zacks' sell-recommended stocks fell 50% more than the Russell 2000. In other words, not only did Zacks warn you about the bad stocks, we helped keep you out of the worst of the worst - the ones that wreck your portfolio.

One interesting thing here – Zacks is comparing itself with the Russell 2000. I can only imagine that their relative performance vs. the S&P was not nearly as impressive. But if their quantitative methodology helped them pick small caps, it probably worked equally as well with large caps.

This is perfect marketing. This is the kind of data that speaks directly to individual investors who have been burned by the sell side’s constant stream of Buy recommendations, even when fundamentals and the economy are turning.

But will it change the institutional side of Wall Street? NO!

You might now know this, but a good portion of the sell-side research function is just as much about communicating information and setting hurdles than actually picking stocks.

A portfolio manager for a major hedge fund will not care about the bold-printed analyst rating on the front page of a report. They want the fine print that comes from being in the information loop - is a solar company’s plant in China down for a week at the end of a quarter? Did Verizon run out of the new BlackBerry? Is Sony about to drop the price of the PlayStation 3?

At the same time, to the novice eye, sell-side research is very well-packaged. In a typical initiation report, there are 50+ pages of  well-produced charts, graphs, financial projections, and in-depth industry data.

The numbers tell us Wall Street research is not particularly effective, but it looks and sounds good. That’s enough for some people.