Ways to look beyond the “buy” or “sell”
Sell-side analysts working at firms that do investment banking sometimes get looked at somewhat suspiciously. There’s a concern, sometimes warranted, that the sell-side research analysts are being overly bullish on companies because they’re clients of the firm. And in the past, such wrongdoing has been found.
But ignoring the work of sell-side analysts, simply because of a risk of con- flict is a mistake. Remember: Sell-side analysts have the time to really dig into a company. Most sell-side analysts also follow several companies in the industry so they can spot broad trends that have ramifications on short-term movements of the stocks.
Anyone who uses the research coming out of investment banks can put these reports to best use by:
✓ Focusing on everything but the recommendation: Sure, it’s easy to just look at the front page of a report and scan for the buy or sell. But doing so leaves out much of the most valuable information sell-side analysts provide. Look at how the price target is arrived at. What assumptions is the analyst making? The thinking behind the recommendation is more valuable than the recommendation itself.
Sell-side analysts are often criticized for never meeting a company they didn’t like and have a “buy” rating on seemingly every company in exis- tence. And it’s true that sell-side analysts traditionally rank many more companies as strong buys than strong sells. That’s just a natural bias of the industry that anyone working with the investment banking industry needs to keep in mind. Also, remember that sell-side analysts rarely call stocks a “sell.” With many analysts, hold is actually the euphemistic term for “sell.”
✓ Not overlooking independent research: Although large Wall Street firms with giant investment banking operations dominate research, they’re not alone. There are firms, like S&P Capital IQ and Morningstar, that generate research that aren’t connected with any investment banking. Compare the opinions of independent analysts with those of sell-side analysts to see where they differ.
✓ Concentrating on larger industry analysis reports: Many leading sell- side analysts periodically (sometimes once a year) put out monstrous reviews of an industry. These reports are usually the best work many analysts put out. Because the reports are broad, the analysts don’t have to be as mindful about potentially upsetting companies that happen to be big clients of the firm. These reports also give the analysts more freedom to share their insights about the business. And don’t overlook the research from boutique investment banking firms, which typically focus on a narrow number of industries. These firms can share profound insights about an industry you don’t want to miss.