What’s behind Veritas Investment Research’s nearly 50-50 buy-to-sell recommendation ratio?
If you ask the research firm’s president and CEO Anthony Scilipoti, it’s an effort to cut through the numbers companies report to get to verified information his company’s clients can use. Of course, a refusal to issue ‘hold’ ratings plays a significant factor, as well.
Veritas – Canada’s largest independent investment researcher – was one of the lone voices to advise against the rush to invest in Valeant Pharmaceuticals (VRX.TO) in 2014 and has previously issued warnings on other market darlings including Concordia International (CXR.TO), DirectCash Payments (DCI.TO) and Royal Group Technologies.
“We’re not here to actually rat out companies,” Scilipoti told BNN on Monday. “In fact, we want to help them have better transparency so that their cost of capital goes down. The better their disclosure the more likely investors are to invest in it and that makes a better capital market system for Canada as a whole.”
Scilipoti has gone on the offensive of late, taking aim at how companies report their earnings. In an article published Friday in The Globe and Mail, he wrote that “investors need to stop believing blindly” in what comes out of companies’ quarterly reports.
“The truth is really what everyone believes it to be and that’s the danger,” Scilipoti told BNN. “A company reports its earnings, it gets repeated by the analyst, it gets included in the regulatory filing, it gets repeated by the journalists and investors just eat it up. Nobody questions it.”
“That’s really part of our mission - to improve the transparency overall.”
The issue, according to Scilipoti, is a divide between what regulators and investors need. Auditors and accountants rely on generally accepted accounting principles (GAAP) to verify what companies report, while investors sometimes rely on non-GAAP metrics in an attempt to look ahead to where a company’s stock might be headed.
“Basically, the problem that you have is that investors want to know what’s going to happen tomorrow and you have analysts and accountants and auditors that are busy verifying what happened yesterday, so you have this big expectation problem,” he said.
Scilipoti cited a Veritas study in his Globe and Mail writing that recently found that all but one S&P/TSX 60 company “present some form of adjusted number in their regulatory filings”.
“It started out as a decent idea,” Scilipoti told BNN. “I’m now standing up in 2016 saying ‘we have a problem’ because there [are] more companies in Canada reporting a number which is adjusted than a number which is GAAP and the challenge is for investors: What do they believe and not believe?”