Friday, February 17, 2006
Majestic Research finds favor with hedge funds
NEW YORK, Feb 14 (Reuters) - Stock tracker Majestic Research doesn't talk to company executives or visit malls to get a handle on retail trends. Nor does it make stock recommendations.
But the New York-based research firm is winning converts among hedge funds who say its brand of Web-based quantitative analysis can be more accurate than traditional Wall Street research forecasts.
With e-commerce now comprising a larger share of consumer spending than ever before, Web-based data mining has become a rich source to track products sales and generate sales leads.
But instead of sales leads, Majestic uses Web data to track sales and forecast financial results for target companies - ahead of quarterly earnings releases.
"It's really been an invaluable service," said Isabelle Fymat, partner in the $1.2 billion hedge fund Crosslink Capital, referring to Majestic. Fymat, who tracks e-commerce stocks like Yahoo (YHOO.O: Quote, Profile, Research) and Amazon.com (AMZN.O: Quote, Profile, Research), said Majestic supplies "a lot more reliable information on what is driving or hurting revenue."
Majestic, which was founded in 2002, uses "quantitative" analysis that it claims can do the job better than traditional stock research methods, at least for consumer-sensitive companies that utilize the Internet in some way.
From modestly-furnished Majestic offices overlooking Manhattan's Central Park, several dozen math Ph.D.s, statisticians and other quantitative analysts evaluate data spewed from computers using "Web crawling" programs track sales and other information from tens of millions of Web pages or other on-line resources.
The information is used to get a better and more timely picture of sales for roughly 60 companies Majestic tracks, including Yahoo, Carmax (KMX.N: Quote, Profile, Research), JetBlue (JBLU.O: Quote, Profile, Research) and Carnival Corp. (CCL.N: Quote, Profile, Research).
The firm's methods differ from traditional Wall Street research, where analysts make forecasts based on conversations with company executives, advertisers, suppliers and mall visits to forecast company results and make recommendations.
"This firm did to research what Instinet (INGP.O: Quote, Profile, Research) did to trading," said Majestic chief executive Doug Atkin, referring to the electronic stock exchange he headed for a decade prior to joining Majestic. "We offer very differentiated research."
While some might dismiss such comments as hyperbole, some hedge funds say Majestic's analysis gives them a proprietary edge in a hyper-competitive hedge fund world. Wall Street investment banks are skimping on stock research in the wake of a series of regulatory probes, making it of limited value to active traders like hedge funds, they say.
"The Street is not paid for research anymore and the quality of research is diminished greatly," said Dan Frank, portfolio manager for Cerberus Capital Management, a $16 billion hedge, buyout and lending firm.
Frank said he uses Majestic for its drug prescription sales data generated from some 3,500 physicians. With that information, he can get a sense of how new drugs are selling and predict stock performance for drug stocks before they disclose quarterly performance.
"It's just raw data," said Frank. "I don't want their opinion on stocks. I want particular data on a particular product."
Still, even with access to billions of bits of information, Majestic isn't always right. Majestic was off on forecasts for Google's fourth-quarter results last month, along with most other research firms, according to Crosslink's Fymat.
"It's not 100 percent accurate," said Fymat. "But historically they have been very very close. And it's way better than Wall Street research."
Some experts said hedge funds won't ever replace Wall Street research with quantitative methods developed in-house or provided by Majestic. But fund managers can be quick to adopt new kinds of research, said Justin Dew, senior hedge fund analyst at Standard & Poor's.
"Conceptually, there is always a need for whatever is the next cutting edge in identifying inefficiencies in markets," said Dew. "Hedge funds tend to be first or early adopters."
source:http://today.reuters.com/investing/financeArticle.aspx?type=fundsFundsNews&storyID=2006-02-14T191858Z_01_N14387237_RTRIDST_0_FINANCIAL-MAJESTIC-HEDGE.XML
