Cracking the Wall Street Research Monopoly

An analyst is an analyst, right? Maybe on Wall Street -- but not on the Internet. There, an analyst is likely also a lawyer, a stay-at-home parent or a college student. These are the sorts of freelancers who are doing their own research and trying to sell it on the Web.

So far, Mary Meeker has nothing to worry about. Her employer, Morgan Stanley Dean Witter, and the other big Wall Street houses, with their huge staffs, star analysts and unparalleled access to corporate executives, still rule.

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But the Net may be changing that. Online brokers, competing for the accounts of full-service firms, have begun to offer research as well -- for free or on a per-report basis. And in early 1999, Multex.com began selling Wall Street research as well as reports from independent analysts to anybody with a credit card.

Now freelance analysts may be getting a better chance to face off against the pros. At iExchange.com, for example, anyone who registers and agrees to some basic rules can post a report on a stock, slap a price tag on that research and try to sell it online. iExchange.com, a privately held company, is accesible through the investing section of portal Lycos(LCOS Quote - Cramer on LCOS - Stock Picks).

This summer, Motley Fool, which already sells research from its own staff as well as from members of its online investing community, is planning to launch a separate paid research site called Soapbox.com. A trial report from the Soapbox site will cost $20, but the researcher who writes the report will set its price -- so the next report a customer buys might cost more or less. Motley Fool research is also available through Multex.

Internet Research Blends With Wall Street

Pros and Cons

Can the upstarts really compete? First, they'll have to distance themselves from the message-board posters and scam artists who claim to offer stock analysis, but who are simply trying to boost shares of companies they hold or slam those in which they hold short positions. Remember the notorious case of Tokyo Joe? His "research" often moved stocks, but eventually resulted in charges of securities fraud by the Securities and Exchange Commission, which accused him of convincing his followers to buy a certain issue, then immediately dumping his shares.

And even if the independents aren't outright criminals, their research is also subject to the type of conflicts that can color Wall Street research. At the big firms, the problem is the need for analysts to keep covered companies from taking their lucrative investment banking elsewhere. Investor research isn't plagued by that particular poison, but it does have its own dangers: Most investors research stocks they own, so they don't put out too many screaming sells.

Still, there are signs that legitimate independents are finding an audience on the Web. Consider Greg Carlin, a 29-year-old law student and investor in biotech Celera Genomics (CRA Quote - Cramer on CRA - Stock Picks). Last December, he wrangled a guided tour and a one-hour session with company President J. Craig Venter by describing himself as a representative of the Motley Fool investing community.

He later used that fact-finding mission in a freelance biotech research report that the Fool sold on its site in February alongside other biotech reports prepared by Fool analysts.

Carlin stresses how much bottom-up research he did. "I'm not interested in professional analysts. I'm interested in professional scientists." He is indeed; Carlin's report ran to 23 pages.

Then there's George Nichols, another crossover artist. Now 24, he joined the mutual fund research giant Morningstar in October 1999 after having run his own Web site, which focused primarily on the Kinetics Asset Management (WWWFX Quote - Cramer on WWWFX - Stock Picks)Internet fund, then managed by Ryan Jacob.

"I interviewed a few mutual fund managers. I read news articles and pointed to them," Nichols says. At Morningstar, where he's one of 20 analysts who provide coverage of 400 equities for subscribers to the firm's Web site, he has access to the data that Wall Street firms use. And he has direct access to the companies he covers, such as Intuit (INTU Quote - Cramer on INTU - Stock Picks) and Doubleclick (DBLK Quote - Cramer on DBLK - Stock Picks).

Now that he's made it to the big time, however, Nichols says that independents should be used judiciously. "At this point, such research can be useful supplemental information, but investors totally reliant on a poster riding a hot streak could find disaster," Nichols says.

iExchange, which sells everything from snippets to full research reports, relies on the track record of its "analysts" to direct investors towards good research. According to Soapbox.com's Web site, it plans to do the same thing. For example, on iExchange.com, among analysts with more than 30 picks, an analyst who goes by "yogi" recently had iExchange's highest average return at 58%. Before buying any report, the investor can use this information to check out how the poster's picks have panned out in the past. This, acting chief executive Heath Schiesser says, is key in creating the accountability that doesn't exist on message boards.

But, as in any transaction, you get what you pay for -- if you're lucky. For example, one report on Rambus (RMBS Quote - Cramer on RMBS - Stock Picks) set a price target of a split-adjusted 1000 by Oct. 1, 2001, on a day that the stock closed at a split-adjusted 111 17/64. The analysis, which sold for $5 and ran to 1,397 words, looked at Rambus' manufacturing deals as well as demand in the electronic game sector. The stock, however, had been nearly halved since then before staging a recovery in the last week. Another report on Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) -- sold for $4 -- put forth the following insight: "An old axiom says to buy a stock when no one wants it, and with the panic the last two days, I think MSFT fits that bill! :)" And a report by "a-doggy-dogg" on Phillips Petroleum (P Quote - Cramer on P - Stock Picks) set a price target of 50 for Nov. 18, 2000, when the stock was at 54 15/16 on June 7.

The analysis began "This is a stock which could hit the target price by the target date."

All that for $10. Then again, the next day, the stock closed down 7/16 to 54 1/2.

So, maybe there are a few wrinkles to work out in this new business of selling short-and-sweet research on demand.