Something’s Rotten in the State of Capital Markets Companies

There are few things that can derail a company or an industry, what has happened among financial data providers in recent years is one of them.

Portrait of Luca Pacioli, attributed to Jacopo de’Barbari, 1495, oil on canvas (National Museum of Capdimonte)

I haven’t ever shorted a company. I don’t think I ever will. Most short events need to happen over relatively narrow time windows that I’m not sure I will ever be able to time correctly.

It is also why I’m not a huge fan of how short reports are delivered. They are more done in a way to affect the price of a stock (usually to the benefit of the writer) over a relatively short time. This doesn’t necessarily address the underlying issues of a business, and long-term investors may be unable to effectively benefit from short reports.

That said, more financial writing should focus on calling out bad business moves, poor management, and less than upstanding corporate governance as short reports do. Buy-and-hold investors who care deeply about the long-term sustainability of their investments should care dearly about these issues.

Unfortunately, too many trusted sources for financial information frequently hand waive away these issues. Financial writing scrutinizing businesses is especially important for businesses that may not necessarily be ideal targets for short reports. For long-term investors, avoiding underperforming stocks is just as critical as identifying the market-beating ones.

For decades, capital markets companies – S&P Global Inc. (NASDAQ: SPGI), FactSet Research Systems (NYSE: FDS), Refinitiv (now part of the London Stock Exchange Group (OTC: LNSTY), Morningstar (NASDAQ: MORN), Intercontinental Exchange (NYSE: ICE) and Moody’s (NYSE: MCO) – have been some of the best investments. Whether it be selling financial data terminals, issuing credit ratings, creating indices for benchmarking, and other data and consultancy services; they all operated in industries with high barriers to entry and had captive customers. They benefitted immensely from sticky customer relationships with unsurprisingly high margins and incredible returns on capital. You will be hard-pressed to find an industry that has collectively generated such superior returns to the S&P 500.

However, a recent wave of industry changes and corporate actions may have unwound some of the things that made these such incredible investments.

Let’s dig in.

---

But first. Speaking of financial data providers…

Let’s talk about Koyfin. In a prior job, I frequently used some of the financial data providers mentioned here. They’re all nice, but let’s get real. Are they worth the tens of thousands of dollars more than what it costs for Koyfin? I certainly don’t think so. I don’t think there is a financial data provider out there that offers more bang for your buck than Koyfin. That’s why I use Koyfin and continue to tell you about it here. Misfit Alpa readers receive 10% off the first year of an annual subscription by clicking on the link below.

Up your analysis process by Signing up for Koyfin.

Disclaimer: I have an affiliate partnership with Koyfin and receive compensation if you sign up via the link above. It helps me fund this endeavor. I would still recommend using it even if I didn’t have this partnership because it’s an awesome product, but I’d be stupid to turn down a revenue opportunity. You get a discount, Koyfin gets new business, and I get a commission. Win-win-win).