Buy side firms traditionally rely on sell side analysts for earnings estimates on public companies. But many people feel the sell side estimates have become commoditized, so they are looking for differentiated data.
So, what if there was an earnings estimate site that calculated a buy side consensus? That is the goal of Estimize.com, an Internet startup that is experimenting with crowdsourcing to gather earnings estimates from a wide variety of professionals, and then calculating its own consenus.
Estimize is looking to disrupt the status quo by collecting earnings estimates from traditional asset managers, hedge funds and independent analysts, in order to calculate its own consensus. It’s also brought in students from different MBA programs that are researching companies and running funds and corporate financial professionals.
One of the main goals of the company is to produce more accurate estimates than the conventional sell-side estimates, according to Leigh Drogen, founder and chief executive, who created the idea. Drogen, 26, worked for a quantitative fund Geller Capital in White Plains, New York, then started his own asset management firm, SurfviewCapital, before becoming an early employee of Stocktwits, the social media stock commenting site.
“We’re looking to have various different people across a range of different professions and industries and titles contribute to the data set because we feel that you get a better representation of what the market is expecting if you have all different view points, explains Drogen.
Similar to the way that baseball teams use Moneyball statistics to find the best players, who may be unknowns, Estimize is casting a wider net to attract up and coming analysts who are drawn to the look and feel of its more transparent, social-media like platform. It’s also creating competitions between analysts and a leader board for sectors and industries.
“We’re finding the needles in the haystack. Because a we have all this data we can find out who are the most accurate analysts,” says Drogen.
Since it was launched in December of 2011 —after it came out of private beta— Estimize has grown into community of 2,200 contributing analysts who come from the buy side, hedge funds and independent research analysts. Currently there are a total of 12,165 users (up from 9,000 since September 2012) of which 1,842 are buy side.
The platform ranks and rates all of the analysts by accuracy. “You can go to any of the stocks and find out who is the most accurate analyst for a specific industry or stock sector,” says Drogen, who also is ranked on the site.
On average, Drogen says the Estimize consensus is more accurate two-thirds of the time for releases with more than four estimates.
While institutions must pay for sell-side estimates, and have a relationship with the brokerage firm, Estimize is free to consumer and contributors so that anyone who registers can see and send in their own estimates.
To make money, Estimize is selling a raw data feed through an API to quantitative hedge funds who are so secretive, they just want the data, adds Drogen. Down the road, Drogen plans to sell the feed to long/short equity firms to use in their models for valuation and volatility as well.
Rob DeFrancesco, an independent analyst based on Los Angeles who follows technology stocks, uses the platform as a research tool. “For me it’s the gamesmanship aspect. It’s fun to see who does the best with certain companies.” DeFrancesco, who is on Stocktwits, says, “It [Estimize] adds a different layer because it shows people making estimates as opposed to general opinions that people just write about on Twitter.”
The move to provide a more open financial estimate service comes at time when investment banks have been downsizing their research teams as part of the latest round of cost cutting measures, so if they are reducing their coverage of companies.
“This data set is so important right now because the sell side is covering fewer and fewer stocks per quarter,” says Drogen, adding that their business model is a loss leader to them and they keep cutting staff. “As there is less visibility into the market as to the expectation that these companies are going to earn, there is higher volatility and that is an issue for people,” says Drogen.
Several Internet sites have sprung up to cover whisper numbers by collecting data from traders and investors. For example, WhisperNumber collects earnings expectations (whisper numbers) from traders and investors that register with its site. It's not clear if these sites are utilized by institutional firms. According to Drogen, there are different ways to calculate whisper numbers. Often, the sell side is talking to buy side to find out their thoughts which factors into the sell-side's whisper number.
One of the ways that Estimize can help the buy side is to collect their expectations and create their own consensus.