That note that just dented your favorite stocks? Where did it come from? Cleveland, you say? Since when did the Midwest hold sway over Wall Street?
Well, since the start of the millennium, as things have been quietly heating up in Cleveland. A handful of research firms have popped up in the Midwest. Longbow Research, Cleveland Research and Northcoast Research, among others, call the city on the shores of Lake Erie home -- and they are moving the market. Here are just a couple of calls those firms made this month:
- Thermo Fisher Scientific (TMO) downgraded to Neutral on Sept. 9 as Cleveland Research reports softer trends in channel checks; stock tanked 4.63%.
- Stericycle (SRCL) downgraded to Neutral from Buy on Sept. 20 by Northcoast Research; stock fell 5.21%.
- Restaurant Brands (QSR) downgraded to Underperform from Neutral on Sept. 26 as Longbow Research reports comp growth slowdown in its core markets of Canada for Tim Hortons and in the U.S. for Burger King; stock dropped 3.36%
Those three firms, aside from their market-moving abilities, also have the same roots: FTN Midwest.
FTN Midwest was established when FTN bought Midwest Research in 2001 and put its letters at the front of the name. But within a few years the Midwest in FTN Midwest was leaving in droves.
Longbow Research was founded by the former CEO of Midwest Research David MacGregor. He, along with dozens of employees, left FTN in 2003. This move was echoed just a three years later when Eric Bosshard and Chris Byke took their own group of employees, about 40, to form Cleveland Research. The main reason for the second mass exodus was that the Cleveland Research group wanted to "operate independent of any investment-banking or trading conflicts," according to a 2006 Wall Street Journal report. The third firm that emerged was Northcoast Research, which was founded in 2009. (One year later FTN's research department was shut down).
All three tout their channel checks, which was the foundation of Midwest Research. Longbow states on its website that the firm provides unique insights on specific companies, supply channels and industries. That information is collected by conducting more than "100 periodical market surveys, supply channel checks, retail polls and an extensive network of industry contacts."
Cleveland Research similarly states that its "discipline includes establishing multiple relationships throughout the channel ... talking to suppliers and customers, developing contacts, and conducting surveys day after day, month after month," all of which allows its analysts to spot trends and inflection points.
For its part, Northcoast says that its "analysis combines the information received from our network of contacts with our own propriety data sources to develop time-series data that helps identify inflection points." Northcoast also stresses that its analysts have "direct conversations" with its contacts rather than rely on mail surveys.
Furthermore, when these firms were founded, particularly Longbow and Cleveland Research, the big boys on Wall Street were not really conducting such intensive channel work, which made their service valuable -- so valuable, in fact, that Cleveland Research set a minimum cash rate of $250,000 annually for its equity research. Cleveland also increased the value of its product even further by limiting its client list to about 150 of the "top" hedge funds, pension funds and mutual funds. There's no indication that Longbow and Northcoast do the same.
After managing to get a hold of more than a dozen of Cleveland's highly coveted reports, it's immediately clear that there is extensive channel work. On some reports there are "Anecdotal Comments" from competitors and suppliers, which is just a list of anonymous quotes one would assume come from competitors and suppliers that support Cleveland's investment thesis.
These companies also boast award-winning analysts, proving that not everything has to happen on Wall Street to be noticed. Longbow's Garik Shmois was the third-ranked earnings estimator for construction materials in 2016. For Cleveland, Scott Bender was the third-ranked stock picker for food and staples retailing. But Northcoast had two award winners last year, Charles Cerankosky was the second-ranked stock picker for food and staples retailing and Edwin Snyder was the top earnings estimator for health-care equipment and supplies.
Longbow's MacGregor believed that working in Northeast Ohio has its advantages, such as it being more conducive to independent thought than the "shallow idea pool" of Manhattan, he said in a July 2008 interview. Similarly, Cleveland's Bosshard said the distance from New York allows his analysts to take a fresh approach to research, adding that there tends to be a group-think mentality at "money centers."
But it's clear that those "money centers" listen to the Midwest boys. So, while many would've never thought Cleveland would be a source of some of the market's moves as the research, in particular the channel checks, continue to be a low-profile resource for Wall Street.