The Genesis of Palladian's Approach

Over the last decade, stock coverage in traditional equity research departments has become increasingly fragmented. This trend has been due primarily to the demand for equity analysts who could speak knowledgeably about a narrow group of stocks to potential investment banking clients. Most Wall Street equity research departments hired multiple senior analysts under broad industry rubrics like telecom, technology, healthcare, energy and finance. Each analyst covered a defined universe of stocks that were often narrow sub-sectors of larger industry categories. This resulted in "silos" of stock coverage, where analysts often issued reports that discussed their companies in very limited contexts and did not consider a larger industry perspective.

Conflicts have not disappeared even today, as highlighted in the recent press. Despite the collapse of investment banking and the decisions made by the SEC and New York's attorney general, analysts' views on stocks remain compromised by firms' corporate finance business. Investors remain skeptical about how much independence analysts really have. The "Global Settlement" is a misnomer.

These factors have created an opportunity to redefine the equity research process in order to address more effectively the needs of investment managers, who are in fact the real clients of equity research organizations, rather than investment bankers. Palladian Research was created with this in mind.

Putting Humpty Dumpty Back Together Again

Palladian's theme-based approach to equity research is unique on Wall Street as it eradicates artificial stock coverage delineations. Rather than look at the effect of a particular event as it affects a particular company in isolation, Palladian analysts assess what kind of domino effect an event or factor can have on players across an industry landscape. They look at themes, catalysts and companies across general industry sectors such as healthcare, technology, industrials, energy or financial services. They first identify the trends in a particular sector, then identify the characteristics of the companies that are likely to succeed or fail based on this trend. Finally, they formulate stock recommendations, long and short, based on which companies they believe will or will not benefit from those trends.

Trends and events that may at first glance affect one company in a particular industry can often impact competitors in that industry as well as companies in related industries. Palladian analysts use this not only to pick stocks but also help clients to "connect the dots." Palladian avoids giving clients contradictory analyses of industry events because one team of analysts is responsible for assessing the effect of an event or catalyst across the spectrum of sub-sectors within an industry.

Palladian analysts base their stock recommendations on industry sources and do not rely on company management teams for significant data. Research reports highlight unique information and do not regurgitate company rhetoric. Although Palladian's analysts keep track of company management opinions, their research reports and investment recommendations are not based on choreographed company presentations.