Analysts...Help me figure this out
Its evidently clear that famous large cap stocks (Apple, Google etc) have many analysts (on both sides) covering them and they also happen to have the most daily trade volume on average. All these companies started small and gradually grew, attracting more analysts and investors over time.
I came here to ask what influences an analyst's decision to cover a stock and how does that stock end up being covered by 50 other analysts (thus becoming more liquid)?
I have another question which I hope will not offend some of you. In terms of those stocks with 50 analysts covering them. How is it possible that 43/50 are able to each post a buy recommendation, one after the other (over a space of 5 months) and then continue to post consecutive buys, holds and sells (rare but it happens sometimes) almost in single file?
Larger firms get more analysts because the firm is more likely to purchase associated services from the Financial Institution of the analyst. Positive recommendations are only a part of that. Analyst coverage leads to 1 on 1s with company executives etc. This face time exposes the large firm in question to members of the financial institution.
What you're explaining is essentially a chicken and egg situation. But it mostly has to do with the firms success leading to a higher valuation --> higher market cap ---> higher demand for financial services --> more analysts (and thus firms) trying to get a cut of the pie.
It makes a lot more sense now you've mentioned the "higher demand for financial services" part. Do sell-side analysts ever cover a company without ever meeting its management?
Not really, the whole point is that they have information others don't. A HEAVY reason for sell side analysts coverage is the associated services portion though.
Thanks for the info. So would it be a long stab in the dark if I were to say "sell side analysts receive information that others don't have, which makes them most likely to recommend a buy because they believe that information is special"?
Would that be one of the dozens of reasons why there are many buy recommendations?
Main reason there are like 90% buy recommendations is because the sell side analysts only cover firms which they want to do business with them. If they issue a buy/hold the firm will have a friendlier view of the financial services company. Thus, they will choose that firm when it comes time to issue bonds, do M&A, etc etc. But don't say this to sell-side analysts of course.
Tricky situation, those clever CFA dudes should have figured it by now (since they're all about ethics/conflicts of interest) but anyway.....the world keeps spinning.
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