sellside ER and the "sell" recommendation
i was wondering: i understand that a role of the sellside equity analyst is also "marketing" the company he/she covers and therefore can't place many "sell" recommendations unless he/she wants to lose access to the management but, given that the major part of the money inflow comes from the buyside, shouldn't the analyst be a little bit more "brave" when it comes down to choose the recommendation?
i am well aware that many buyside professionals use the sellside analysts not for the quality of their financial models inputs but rather for the accuracy of information they acquire but still, isn't the buy/hold/sell present to mean something?
Regardless of whether it was meant to mean anything, it definitely lost all meaning after the 2008 debacle. I think independent shops are likely better at being "brave." See: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8bB1M8.VCjA
Sell-side analysts usually cover 1 sub-sector, and generally evaluate those companies on a relative basis. So they might not pick-up on the over/under-valuation of their vertical.
And analysts almost never make broader calls about the market - just about everything should have been rated "buy" in mid-2009.
There are aren't that many straightforward "sells". You might think "this stock is a awful unless XYZ event occurs." Well, there is probably a fund manager somewhere who is betting on that event occurring. So, for that guy, it is a "buy". As an analyst, you have a broad audience, so that stock might be a hold.
Buy/Sell/Hold ratings are really a gross oversimplification. It is almost impossible to put a company neatly into one of 3 buckets. You need to read the note, and ideally talk to the analyst. And if you're going to do all that, I'd say you should do your own work.
I would defer to analysts on a few niches (energy, financials, biotech/pharma, NatRes). But then you are also relying on the analyst to get you out of the stock... it's not a great situation to be in.
mm i see. just a little follow-up: why would you defer to analysts on energy, financials, biotech and natural resources and not on technology? i know the explanation might sound obvious to you but, as this post proves, i am still inexperienced!
Tech is honestly much easier. You don't need to understand exactly how a router works to understand CSCO. If you can understand their competitive positions, that's good enough. Most also trade on earnings (and the ones that don't tend to trade on perception).
The industries I mentioned require expertise. Biotech investing depends on you being able to understand the results of clinical trials and the FDA approval process, not to mention the end market for the product.
Financials and Energy/NatRes have their own issues. Models, metrics, and accounting are completely different. As a financials analyst, I can jump into a consumer goods niche and ramp up in a week or so. The reverse cannot happen. Some O&G niches (e.g. drilling rigs) are almost impossible to model effectively without some sector expertise.
I'd also say utilities analysts deserve some credit. The modeling isn't bad, but they need to understand regulation and the dynamics of public-private partnerships.
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