Equity Research HANDBOOK

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All you need to know for a successful career on stock analysis or equity research.

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http://equity-research.com

Analyst Handbook

http://equity-research.com

Clients will pay us if we make them money or if we make them smart.

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http://equity-research.comThe Ten Commandments Develop proprietary opinions based on primary research. Regularly check with competitors, customers, and suppliers of each of your companies. Develop unique approaches to financial analysis. Perform proprietary surveys. Avoid at all costs simply repeating guidance or management opinions unless you disagree with them.

Be proactive. Strive to be the first to market with any new idea or piece ofinformation--if we arent, our competitors will. All information becomes a commodity very quickly. Each analyst should be in front of the institutional sales force no fewer than two to three times per week.

Be provocative. Playing it safe turns into a losers game over time. Itdulls our senses and results in lackluster analysis with no impact on our clients.

Follow and publish regularly on at least 12-15 institutional-quality stockswith market caps generally in the $300 million - $3 billion range and with an average daily volume greater than 200,000 shares. Write all research with an eye to the institutional market--it can always be encapsulated for the retail client.

Launch coverage on at least one new stock per quarter, pruningunproductive names from the list as required.

Maintain an above-average stock picking performance. According to aNelsons survey, the average Wall Street analyst is right about 55% of the time; our goal should be to be right 65%-70% of the time.

Develop a following with our top accounts. Each focus account should becontacted at least once per month. This list will be developed with the sales force and will be monitored regularly.

Cooperate with corporate finance. Every idea generated by corporatefinance deserves our attention, but be sure to operate within the regulations that require a gatekeeper to be present for most conversations.

Expand our relationship with retail. Only a small amount of retail's equitybusiness is in our names, and it can be much higher with a modest amount of additional effort. Treat the brokers that have substantial

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http://equity-research.compositions in your stocks as you would an institutional clientadd them to your contact list. Talk to April Langel regularly about your stocks, maintain an active Focus List, and speak to the entire retail department periodically about your group and your best ideas. Return all calls from brokers within 24 hours. There should be regular visits to the branches, with a goal of 5 10 visits per year. Take company management to the major branches and arrange field trips to local companies.

Keep trading informed about anything that you think will impact a stock'sprice and any clients who have indicated an interest in your stocks. Keep tabs on our positions in your stocks. If you believe that there are events that will substantially impact the price of a stock in the very near term, be sure that the desk is either flat or on the right side of the trade, being very careful not to front run the public disclosure of material, insider information.

Greenwich Survey FindingsGreenwich Associates regularly surveys clients about what they want from the sell-side and how they pay us. The following results should be used to guide us in developing our institutional business. Who controls commissions has changed radically over the last fifteen years. Where it used to be analyst votes that directed about 50% of commissions in the mid 1980s, that has fallen to less than 25%. Portfolio managers dont fair much better, accounting for only about 30% of commission flow. The big change over the last fifteen-plus years has been the emergence of the buy side trading desks as the leading source of commissions, now directing almost 50% of all commissions. This suggests that not only should we focus on our buy side analyst and portfolio manager counterparts, but we also need to focus on how we can help our sales traders increase account penetration. In todays voice mail world, our sales traders are the only ones who can get a live person on the other end of the phone with virtually every call. The top requirements for analysts to have credibility with clients havent changed much over the years--they dont want the sizzle, and they still want the steak. The top four requirements ranked are: Detailed industry reports Detailed financial analysisnot just models Ability to explain recommendations Detailed company studies

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http://equity-research.comCredibility alone, however, does not get us paid--it only gets us in the door. Ideas and access are what ring the cash register, with the following being the most important: Bottoms-up research with strong financial analysis Ideas Regular follow up Electronic access to research--85% name First Call as primary electronic source Telephone access to analysts is better than visits

Commission ProductivityOur productivity measured as nickel business per analyst is below our regional peers as shown in the following table Institutional Commissions Per Analyst ($ millions) First Albany 1.5 Janney 1.4 Advest 0.6 Stifel 0.6 BB&T 0.5 Ferris Baker Watts 0.5 Ryan Beck 0.4

This is not difficult to fix--more stocks, larger cap (not large-cap), more ideas, and more impact-oriented calls, and the regular commissions will take care of themselves.

Market Cap TargetsWe could be ultra competitive at the lower end of the market cap range, but there are simply not enough funds under management nor enough trading volume in this area to make it a profitable business longer term. Data as of February 2004 shows that only about 1% of institutionally invested funds measured by market cap and 4% by trading volume were in nano- and micro-cap stocks.Percent Of Total Mega (10 Bil Plus) Big (3 -10 Bil) Mid (1 - 3 Bil) Small (300 Mil - 1 Bil) Micro (100 - 300 Mil) Stocks 6.0% 8.1% 13.5% 20.4% 17.6% Mkt Cap 72.7% 14.4% 7.6% 3.9% 1.1% Volume Inst Mkt Cap Inst Volume 35.9% 68.9% 40.1% 20.7% 17.2% 25.5% 15.9% 9.1% 19.1% 11.6% 4.0% 11.0% 6.4% 0.9% 3.2%

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http://equity-research.comNano (Less Than 100 Mil) Total 34.4% 100.0% 0.3% 100.0% 9.5% 100.0% 0.1% 100.0% 1.1% 100.0%

At the other end of the spectrum, we could become competitive on a research basis in the mega- and large-cap arenas, but we do not have the capital to make major markets or to do block trades in this high-end segment. Net net, we are only able to leverage our research efforts in institutional commissions and other areas of the business in the small-and mid-cap segments of the market. We do need, however, to follow a handful of mega- and large-cap bellwethers to establish our industry expertise and to facilitate our vote penetration at large voting accounts. Our current mix is very reasonable, but somewhat meaningless since we have so few stocks under coverage. At a 150-stock coverage level, the targeted mix would give us about 100 mid-, large-, and mega-cap stocks that we need to effectively collect votes on a broad base, while still being heavily concentrated in the small and mid-cap areas that will allow us to differentiate our coverage.

Mega Large Mid Small Micro Nano

Ryan Beck Research Coverage Current Mix 2-year Target Mix 2% 5% 32 15 25 40 31 25 9 10 1 5

Morning MeetingThis is our most crucial interaction with the sales force and trading--without a highimpact morning meeting, we cannot leverage our research, and ultimately will fail as an organization. Every analyst should strive to be in front of the sales force at least two to three times per week. At first blush, this may seem like a difficult goal, but lets look at a typical example: The basics: There are 22 trading days in the average month and lets assume that a given analyst is following 13 stocks (the average for all of Wall Street). Ratings: Lets assume that of the 13 stocks, one is on the Focus List, seven are Buys, four are Holds, and one is rated Sell.

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http://equity-research.comFrequency: At a minimum, all Focus List, Buys, and Sells should have a call two times per month. Holds can be only once a month. Not every call has to be action oriented, although the more action the better. The sales force (and the clients) need to be constantly updated as events unfold to reinforce our point of view, and to give early warning of a change in our point of view.

Content:

So, where does this leave us as to the number of calls? Focus List Buys Holds Sells Total calls 1x2= 2 7 x 2 = 14 4x1= 4 1x2= 2 22, or 1 per day for every day of the month.

Why two calls per month on Buy/Sell rated stocks? First of all, we arent doing our job if we dont speak with every company we follow at least once a month, preferably midmonth so that the company has had time to look at its results for the previous month and may be ready to change its guidance. Assuming you make this minimum level contact, then you will have something to say to the sales force if it is nothing more than I spoke with management today, and everything seems to be on track. Its really that simple, and theres no excuse for not taking the high road on this issue. You also get at least two freebie calls on each company near earnings release time-first an earnings preview, then a first-impressions call if the company releases results first, followed by a conference call later in the day, and then the analysis of the quarter. As to the requirement for two or more calls on Buy/Sell rated stocks, lets presume that you want the sales force to know these stories better than your Hold rated stocks and that you want them to make regular contact with the clients. The only way to accomplish this is to give them fresh meat. Make your mid-mont