Employing Scuttlebutt research as a part of Investment Process

Employing scuttlebutt research as a part of the stock research process with valuations of large cap stocks approaching fair value or in an overvalued territory, investors shift focus to micro/small/mid cap stocks which offer strong growth prospects. These stocks are not on the radar of institutional investors and hence are not covered by the sell-side fraternity. While the return expectations are higher so is the risk element of investing in such stocks. However, risk taking investors and hedge funds are not averse to taking positions in these stocks in search of super normal returns. Hence it is very important for research firms like Maxim to identify “jewels in the haystack” of such microcaps which would not be extinct tomorrow but will be tomorrow’s mid/large caps. Maxim Research (www.research2win.com) specializes in doing independent research in identifying such ‘hidden jewels’. Apart from the traditional top-down fundamental research, Maxim employs techniques of scuttlebutt research and rigorous economic audit of financial statements to spot and identify earnings management techniques. The rationale is that during early stages of company growth, a detailed due-diligence is required on the strategic aspects (viability and sustainability of business model) and operational aspects (channel checks, check on product awareness etc) and on corporate governance (quality of financial statements, disclosures, check with bankers on cash balances, etc). The idea is to catch more than what meets the ‘eye’ to form a holistic view on the stock. This enables Maxim Research derive additional insights in the investment research process which are not available in the sell-side research available currently in the market. The activities undertaken by Maxim include conducting reference checks on promoters, Cold-calling suppliers, customers, competitors, etc., to get their perspectives on a particular company, visiting stores, plants, factories, etc. Hope the investment community is able to steer clear of innumerable financial frauds committed by erring corporations. The case in point is of Longtop Financial Technolgies, a Chinese financial software company, whose auditor was one of the Big 4 accounting firms and was rated Buy by big bulge investment banks. You have to raed the article below to understand the audacity of fraud committed.