On the 27th floor of One Cleveland Center, its large windows providing views overlooking the downtown and the not-too-distant shores of Lake Erie, there resides an independent research firm that's capable of making waves on Wall Street.
Cleveland Research boasts on its website of having 150 of "the largest institutional investors in the U.S." as its only clients. But even with these major institutional clients that have extensive market exposure, its research is still able to catch the market by surprise. On Sept. 9, Cleveland Research analyst Steve Willoughby downgraded Thermo Fischer Scientific (TMO) stock to Neutral after channel checks suggested softer trends for the third quarter. Based on that note alone, TMO dropped 4.6% on the day-- a massive move for just one note to inflict on a company with a market cap of more than $60 billion.
Who are these equity researchers in the middle of the country?
Cleveland Research has been around for a decade and is among a treasure trove of financial resources in the Midwest. The firm was founded in 2006 when Eric Bosshard and Chris Byke took about 40 employees from FTN Midwest and set up their own shop. Bosshard told the Wall Street Journal at the time that the new firm would be independent of "any investment-banking or trading conflicts" -- something that holds true to this day. Cleveland Research states that it is "committed to a singular focus on research, with no need to seek additional revenue via investment banking or trading."
But with the move away from FTN Midwest and investment banking brought more insulation and more opacity. The approximately 80-person firm is vague on its coverage, merely listing four sectors (Consumer, Industrial, Healthcare and Technology) and the sub-sectors within those. If you wanted to find out who was actually covering those stocks in that sector, you had better be a client because Cleveland Research puts its staff behind a portal. But on a Bloomberg Terminal, the names of 22 Cleveland Research analysts show up: 21 men and one woman.
When Real Money reached out to Cleveland Research for an interview, we were told that the firm has a "strict no media policy." Even former employees that we contacted for this story were hesitant to talk on the record given the strict media policy at Cleveland.
The firm prides itself on its core competency: channel checks. (Channel checks were also the bread and butter of Midwest Research prior to its sale to FTN.)
"We are talking to suppliers and customers, developing contacts, and conducting surveys day after day, month after month allowing us to spot trends and inflection points in the end markets we cover," the firm states on its website.
Former Cleveland Research technology research analyst Bradon Slapak told Real Money in a phone interview that those channel checks involved cold calling, brute effort and leveraging internal resources. Slapak said what really sets Cleveland Research apart is its ability to put together "different pieces that other people don't have -- not illegal -- through conversation."
So, not quite like Bud Fox dressing up in a janitor's uniform.
When Cleveland Research's note on TMO dropped earlier this month, we wanted to see exactly what it said about the channel checks. But like other boutique research firms, Cleveland Research's reports were not easy to come by.
Yet, Real Money was able to obtain 14 of Cleveland Research's equity research reports and it's immediately clear upon reading them that channel work is the focal point. On some reports there's a section called "Anecdotal Comments" from competitors and suppliers, which is a list of anonymous quotes that support Cleveland's investment thesis.
When Cleveland Research was established, right before the financial crisis, many firms didn't conduct intensive channel work, which made this Midwest firm's product very valuable. Even in 2006, Cleveland Research set a minimum cash rate of $250,000, as the Journal reported. That figure is eyebrow-raising, because while other firms cap their cost of equity research in the hundreds of thousands of dollars, that is just the starting point for Cleveland Research.
The firm increases the value of its research even further by limiting its client list to 150 of the "largest" hedge funds and mutual funds. Cleveland Research does not define "largest," but if you take that to mean firms with the most assets under management, that would include the likes of Fidelity, Millennium, Goldman Sachs Asset Management, J.P. Morgan Asset Management and Soros Fund Management. Real Money reached out to all these firms: GSAM and Fidelity declined to comment; and J.P. Morgan, the Soros Fund and Millennium did not immediately respond to request for comment. So, it appears that the firm's possible clients are even tight-lipped.
Some of the big boys on the research block are now using channel checks more frequently -- such as Jefferies, Wedbush and Pacific Crest. And yet, Cleveland Research is still able to collect millions of dollars from clients.
Even if New York's biggest firms are conducting similar channel work, it won't stop Cleveland Research from moving the market, as demonstrated earlier this month by Thermo Fischer. Could Cleveland Research be the future of boutique research firms? And how does such a small firm -- far from the financial epicenters -- influence the share price of companies with market caps in the billions of dollars?
Investors who ignore Cleveland Research -- however much it prefers to fly under the radar -- do so at their own risk.