Is talking to sell side a waste of time
It certainly feels like it. Always super nice people. But do they ever have good ideas
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It's sell-side to generate ideas, focusing on volume of it. So yeah, there are only that many really good ideas.
Pat Dorsey (ex head of Morningstar) puts it really well: sell-side's job is to say yes (to ideas), buy-side's job is to say no.
Sorry but your post sounds stupid. Are you not able to generate your own ideas?
Sell side is a great resource. Use them to get caught up to speed on companies you’re reviewing, industry dynamics, read-through from other co’s, etc. Do not ask them for ideas! See them as an external research assistant.
I always see people talk about ‘differentiated ideas’ as if that’s some sort of secret sauce for alpha. I think talking to sellside is pretty important as you want to know what the market is focused on. There’s going to be 1-3 things the market gives a shit about for a company at any point. You need to know what this is and be right about it. I always think it’s a waste of time coming up with something ‘differentiated’ that no one else mentions because if no one gives a shit about it, the market isn’t going to care. You end up focused on the wrong drivers. Obviously different if you catch something early before the market, but hard to tell in the moment. It’s just part of the game.
That’s not what it means to come up with differentiated ideas. You want a differentiated view on those critical factors and you try to get it by conducting your own surveys, value chain and peer read-throughs, a view on TAM expansion/contraction, etc. to enhance the research done by the sell side. If the conclusion of your value-add research results in a material shift in outlook, that is a differentiated view. Doesn’t always happen nor does it need to — ER analysts are pretty decent and get ~70% of the calls right, directionally.
ER gets it right 70% of the time? Lol no way.
I think it’s a mixture. Yes you should understand the bull and bear debate in the market, but when you find that third angle where bulls will be proven wrong (but not the reason the bears thought) it’s sweet nirvana.
The best is companies that beat and miss for Reason X (something broken in biz, fraud, a subsegment mix that’s not broken out, misunderstood unit economics).
Example: company A makes laptops and cell phones, they disclose units for each type, and then consolidate to “Electronics Revenue and Electronics Gross profit”. Mgmt has been touting a inhousing some cell phone components. Everyone tracks the same credit card data to forecast units of both types. Through your differentiated work you, however, have gained conviction that cell phones are only 10% GM and Laptops are 70%. So when you see they mixed to Cell phones hard in March, you know that 60% margin guide is gonna miss. Company missed. Stock gets crushed. What you’ll notice is everyone will discuss the event in the context of whatever kpi is disclosed and story is told by mgmt. you’ll see notes from sell side that inhousing efforts were delayed by covid which hurt margins and is only temporary. The market will accept this. Next time there’s a mix change you can do the same darn thing again cause no one ever figured it out. This is why differentiation is good, but your X factor still needs to make first-level thinkers capitulate, so you’re right need to know what mkt thinks. If you have the luxury of time in your research process you would be well served to make talking to the sell side or mgmt the absolute last step, it takes longer but what a feeling when you come out of your hole with an understanding of the company and it sounds like the finance world is talking about a completely dif biz.
Agree to a certain extent. Think the example is great hypothetically and people look to do this a lot but you’re often at the expense of what is disclosed. And to get further granularity, there’s a lot of guess work which works sometimes but not always. Getting conviction and sizing wrong there is scary.
If talking to the sell-side is a waste of your time, why do you have to pay them?
i think sell side is useful, but this is a terrible argument. sell side ER fees are in structural decline.
a big part of the reason is buy-side industry is declining
I tend not to use sellside for ideas -- not because I think they are dumb or that I don't want to, but because most of their upgrades/downgrades tend to be driven by things that are shorter-term in nature. That said, I still find tons of value in speaking with sellside. Usually, I find it helpful to just hear their POV or what they are hearing from others in the buyside community.
You have to know how to use the sell-side. Some analysts are really good at knowing the industry, some are good at channel checks, some have great models/modeling, and some are really good at knowing where positioning is (even better than some desk analysts). If you go to the industry guy/girl for positioning, you may think the sell-side is bad.
Like others here, I don’t really use the sell-side for ideas. The upgrades/downgrades are too short term and it seems like if they miss the quarter there is nothing on the other side to keep holding the long/short.
I still look at relevant sell side reports from institutions / analysts that provide detailed overview of industry / company to get the coles notes. I don’t have enough time in the day to do the research myself, so reading through the ER reports (especially initiating coverage) gets me up to speed quickly so that I can focus on asking the questions that matter. In a more complex industry with nuance (regulations, technology, etc.) it’s particularly useful. Having spent time with analysts from a few banks as a client, I have the utmost respect for top analysts. Somewhat ironic, but what I ignore is sell side’s opinion on valuation and recommendations. It’s “sell” side after all. Useful to get you started, but you gotta form your own view / take responsibility for the decisions.
I use sell side for the runway ahead. I can look back at numbers and models and see how a company has done and screen for attractive ones looking back but I want to be able to know that those strong numbers have runway ahead. Sell side has good insights into the path forward for businesses and roadblocks along the way. Using this information, it can help me arrive at an investment decision. I don't really care about their rating or price target, I want to know things like how strong is management or competition in the space and how it will affect sales in the future.
The sell side by and large is useless. I no longer read anything other than from the specialist shops (Autonomous, Greenstreet, sometimes Wolfe). Rest of the group is largely brain dead
No, it’s not a waste of time, you don’t talk to them for ideas. You talk to them to build a deeper understanding of the business and industry fundamentals.
Some sell-side insight here.
Most valuations are built on comps which I personally disagree with in the sense that the ratings come out as just reflecting market sentiment and not really any differentiating information or ideas. In addition a huge issue are IPOs/SPACs. Often times we receive for example only 1Q20 and 1Q21 financials and literally no other information. You literally can't model on that. Any valuation on them is pure BS.
However, a lot of the people in my team have an unparallel understanding of the industry in general. They know exactly what everyone is looking for, what they're scared of, what trends are picking up. Some of my seniors actually do make great stock calls, which I wouldn't blindly follow but they do present differentiated ideas that clients often haven't thought of. We have the capacity to be extremely in-depth for the companies that we care about. This is also an important side note, do not expect anything important from the sell-side on names that have little market interest. The "boring" companies get their quarterly update and then we don't touch them until 3 months later.
I'd love to give more specific example but in any case the point is the sell-side adds value through differentiated research and not by telling you what stocks to trade... that is the buy-sides job.
I don't rely on sellside for ideas. But help me understand something. If most sellside analysts have deep knowledge of the industry, years of experience covering a specific name, and have a sense of what the buyside community is thinking about a name through the course of their conversations with them....shouldn't they be in an advantaged position to be able to make good recommendations?
So in terms of ideas, I mostly mean ideas during your research of a specific stock, not giving you ideas of which stock to trade. So for example when you look at ZG, the sell-side analyst might tell have a very specific reason of why the ibuying model can't work. It might be an angle you hadn't thought of before, or at least it might give you some direction in terms of which factors to watch out for.
In terms of their recommendations, I would say there is a big difference between trying to get a good rating and actually investing money. The way the system works, analysts are basically encouraged to go with the masses. Let's just say it's better to be long on Facebook today and get burned, than it would have been for an analyst to make a bear call before the start of IDFA. Now everyone is getting knocked down together. Previously you would've still had to deal with a lot of BS for a long time before you were right (also many good calls like in ZG's case were made yeeeaars ago). The bottom line is really that the buy-side needs to read between the lines when it comes to the sell-side. Even if there is a long call, an analyst probably has good ideas of what could cause a bear scenario.
[repeat]
A lot of good responses in this thread already. One thing you should always remember about the sell side is that they get paid from commissions. Commissions only come from trading, and thus, sell side ideas, work, and views are rationally incentivized to be short-term oriented and directed at higher turnover strategies. For me, while I spend a lot of time trying to figure out the long-term fundamentals of a business, you make money from price/valuation and getting entry/exit correct. I want to know how a stock is priced relative to my views and estimates, why is it priced a certain way, and how will that change? As a result, when/if I speak with the sell side, it is to get the short-term view and try to understand how that might shift and what that implies for the current risk-reward. As others have mentioned, I also spend a lot of time trying to figure out what other investors are asking them about or keyed in on. I like to try and figure out what kind of call velocity they are getting on a name and whether or not it is elevated or depressed vs 'normal'.
I really do not care what their actual view is or price target; I never rely on the sell side for idea sourcing. They are purely a mechanism for trying to understand short-term sentiment and positioning outside of quantitative gauges of such variables. Some analysts also get very close to management, and will say things in a verbal conversation that they would never put in writing in a public report.
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