Neil Baron had plenty on his mind and his to-do list when he retired as vice chairman of ratings agency Fitch in 1998. He took guitar lessons, played golf and studied Spanish in Mexico. He even wrote The Tip, a screenplay about insider trading.
Then in early 2002 he took a call from former Fitch colleague Jim Nadler, who wanted to leave the ratings agency to form an independent research firm. Now, after spending almost two years getting the venture off the ground, Baron is back in finance full-time as chairman of Criterion Research. Nadler is president.
The New Yorkbased firm aims to distinguish itself from the flood of new independent boutiques with a unique model for evaluating corporate earnings quality. It scores some 3,500 U.S. companies according to their future revenue and expense estimates. The more future revenue a company books today -- and the lower its estimates of future expenses -- the higher its score. Criterion back-tested the model over ten years and found that companies scoring in the highest 10 percent of the sample (those with the most aggressive accounting) turned in far poorer earnings and stock price performances than the group as a whole. Buying shares of the most conservative companies and shorting the most aggressive would have yielded an average annual return of 10.4 percent over the past 30 years, Criterion says.
Baron’s new firm has hired six analysts and signed up 200 institutions as customers, but he hasn’t forgotten his screenplay. He says he’s in “serious negotiations with a major studio” about bringing it to the silver screen. His plot is certainly timely: An ambitious U.S. attorney who wants to indict a public figure for insider trading but doesn’t have a strong enough case instead charges the suspect with lying to a federal officer. Baron, a former securities lawyer, says he came up with the idea almost six years ago, so any similarity to Martha Stewart’s trial is purely coincidental. Not that it’s unwelcome. “It shows what politically driven prosecutions can
do to relatively innocent people,” he says.
