Independent stock researchers made better recommendations over the last year than brokerage firms with investment banking ties, according to an in-depth analysis by, a subscription service that tracks analysts' buy and sell recommendations.

Investars, whose chief executive officer testified before Congress in July 2001 about conflicts of interests on Wall Street, has compiled a survey indicating that Callard Asset Management, a little-known independent research firm, was the best stock picker among 26 U.S. firms that track at least 500 companies.

The continuously updated survey is based on the returns that investors would have received if they had followed all of the stock recommendations of a particular firm for the 12 months ended today. An investor who followed all of Callard's recommendations for the year would have earned an 8.67% return, far outpacing the

S&P 500


Nasdaq Composite

, which fell 16% and 27%, respectively, over the same time period.

Among the 10 highest-ranked firms in the Investars analysis, six are unknown, pure-play research houses, like Ford Investor Services and Alpha Equity Research.

A.G. Edwards

(AGE) - Get Report


Raymond James


, which are headquartered off Wall Street and have investment banking operations that contribute less than 11% of their revenue, were ranked Nos. 2 and 3. They recommended stocks that garnered a 5.9% and 5.3% annual return, respectively.

Wall Street's top investment firms, by comparison, produced inferior returns for those who strictly followed their research, according to Investars' analysis. The study made no attempt to correlate investment returns and potential investment banking conflicts. Still, the Investars analysis suggests that the best stock pickers have little or no interest in investment banking.

Merrill Lynch


, which is currently under the scrutiny of the New York state attorney general for emails that show analysts were privately disparaging companies while publicly recommending them, actually ranked highest among the largest Wall Street firms with substantial investment banking operations. It came in No. 10 in the Investars survey, eking out a 0.27% gain over the last year.

(In a related matter, the

Securities and Exchange Commission

will meet Wednesday to

consider adopting new regulations designed to curtail potential conflicts of interest between securities firms' research departments and investment banking divisions.)

Robertson Stephens, CIBC World Markets and RBC Dain Rauscher rank last among the 26 firms covering the widest universe of stocks, with negative returns of 9.78%, 9.69% and 7.86%, respectively.

Investars, which also tracks more than 100 firms that cover fewer than 500 stocks, creates a hypothetical portfolio based on all the recommendations from a single firm. (

Investars doesn't track individual analysts, but it does provide a breakout for sectors such as telecommunications and financial services.) It theoretically buys stocks at market price when an analyst initiates a buy rating and shorts a stock when a sell rating is issued.

One reason for the strong performance of A.G. Edwards over the last year was its sell recommendation on



, issued as early as November 2000. Had investors sold the stock short, Kmart would have reaped a hypothetical 815% return if they covered their positons at current prices, according to Investars. (To see Investars' formula for valuing short positions,

click here. ) Indeed, because most investors don't sell stocks short, the Investars survey probably overstates what the average investor would earn by following the recommendations or firms in the study.

As for

Salomon Smith Barney

, its persistent optimism about

Global Crossing


was a key in dragging down its overall results. Salomon was the lead manager on Global's initial public offering. .(Salomon's specific ranking wasn't available because Investar's evaluation included a stock that Salomon had dropped coverage on but not publicly disclosed.)

The Human Touch

Some observers argue that a lack of human bias rather than the lack of banking ties is what really separates independent researchers from the pack. Independent analysts are more inclined to punch numbers into a computer and have less personal attachments to the companies they follow.

Callard's best stock recommendation, for example, was to sell


on Aug. 13, when the stock was trading at $43. Selling the stock short and covering at current prices would have produced a hypothetical 1,505% return over the last year, according to Investars.

Callard also advised selling Global Crossing well before the stock collapsed.

By comparison, recommendations from

Goldman Sachs

(GS) - Get Report

, Credit Suisse First Boston and

Bear Stearns


on Enron would have resulted in declines of 85% or more. Advice from Salomon,

Lehman Brothers



Morgan Stanley


on Global Crossing would have rendered a 90% loss.

"We didn't predict Enron would go bankrupt," said Chief Investment Officer Ricardo Bekin, one of just four employees at Callard. "We looked at the data, and it told us it was overvalued."

Still, there is other evidence to suggest that a broker's banking relationship may impact the accuracy of its research. If investors followed company-specific recommendations from analysts working at firms that helped underwrite the same company's stock offering, they would have lost more than a quarter of their principal over a five-year period, according to Investars. In contrast, a portfolio would have returned 6.36% if it followed the recommendations of analysts whose firms did not participate in the underwriting of those stocks.

Robert Bricker, professor at the Weatherhead School of Management at Case Western Reserve University, has drawn similar conclusions about analysts' prejudices through different means.

He looked at several hundred publicly traded companies that delivered earnings surprises, and then slugged through the accompanying analyst reports. He found that, in general, analysts didn't downgrade companies when they delivered bad news as much as they upgraded them when they had good news. And he noted that this trend was more pronounced among those firms that have underwriting ties.

"It looks like those with investment banking relationships are being much more careful with respect to downgrading their recommendations and reducing future earnings forecasts," he said., another firm that tracks analyst research, performed a survey of the Russell 3000 over the course of six years from 1994 to 2000 in an attempt to determine just how deep those biases run. The firm found that "affiliated" brokers, or brokers that had an investment banking relationship on the particular stock they were recommending, were "unduly optimistic" in their stock picks. A stock was considered to be a banking client for 12 months from the date of the IPO or follow-on offering.

Still, the study also found that these analysts' earnings estimates were more accurate than the "unaffiliated" brokers.

"Maybe they are closer to the company and better able to forecast, or they were possibly lowballing estimates, so the companies could beat them, and lower estimates tend to be more accurate," said Starmine Vice President David Lichtblau.

Conflicts of interest among brokerage firms have been a hot subject for years. But the issue has come to a head amid mounting evidence that analysts talked up stocks with deteriorating fundamentals while reaping large fees from investment banking deals. The fact that fewer than 2% of all ratings on Wall Street are sell ratings has long raised eyebrows. Now it's a driving force in scores of civil lawsuits seeking class-action status.

One of the lower-ranked firms in the Investars study was Lehman Brothers. It ranked well below the median for the returns on its picks, yielding a return of -7% over the last year.

Lehman Lags

Consider Lehman Brothers' dealings with energy trader



. Lehman has maintained a strong buy rating on Dynegy for more than a year even though the stock has fallen to less than $13 from $50 a year ago. Meanwhile, Lehman helped orchestrate a secondary offering for Dynegy in December 2001, picking up $25 million in fees for its efforts, according to Thomson Financial.

In addition, Lehman recommended that investors buy



and Kmart even as the stocks began to crumble. Lehman split a $12.5 million fee with

Bank of America

(BAC) - Get Report

for a Tyco bond offering in early 2001 and also received a $1.25 million fee from a Kmart bond offering early last year.

Callard Asset Management, on the other hand, recommended that investors sell Dynegy on Nov. 3, 2001, and suggested selling Tyco on Jan 20, 2002. Dynegy has lost 61.5% since that call, while Tyco has shed 66%.

Callard also recommended that investors dump



on Aug. 14, 2001, when the stock was trading at $14.02. Since then, shares have fallen to $2.

It took Salomon Smith Barney more than six months from that date to issue a downgrade, by which time the stocks had fallen $10 a share to $4.01. Salomon received $34.5 million in fees from a WorldCom bond offering last year, according to Thomson Financial.

Salomon said telecommunications analyst Jack Grubman "was not alone in his enthusiasm for the future prospects of the company, and his coverage has been determined by information yielded in the process."

Lehman Brothers spokesman Bill Ahearn said the firm's banking relationships have not tainted the quality of its research.

"Why is this a conflict of interest?" he asked. "You can't do investment banking for a client and have an analyst view that client as a positive stock? That is not a de facto conflict of interest, and no one's saying that it is. What they're saying is you have to disclose those relationships."

Ahearn added that Lehman has been disclosing its banking relationships.

Still, Kei Kianpoor, CEO of, said greater disclosure is an inadequate remedy that will not address the conflicts of interest that he believes exist at most major brokers.

"A lot of regulation is focused on having these companies disclose their banking relationships, but that is not an end to itself," he said. "I really welcome the greater disclosure. but I don't think that's what's going to protect investors at the very end."

Kianpoor believes investors should be focused more on an analyst's track record, which he said "speaks for itself."