Why does Sell-Side Research affect stock prices?
Have seen stocks move up/down as much as 10-15% because of an updated price target or rating from sell-side ER. I thought the buy-side doesn't concern themselves too much with the opinion of the sell-side and they more so use them understand the 'street consensus' of a company. Why would a downgrade in rating or a lower target price cause a stock to go down? If HFs/LOs had conviction on a name that got downgraded, wouldn't they want to buy as the street view is now more pessimistic? What am I missing?
Because sometimes (I stress sometimes, not all the time or even anywhere close to most of the time) a big sell-side piece upgrading or downgrading a stock does contain some useful new information. E.g. I remember a broker ~5 years ago doing a big deep-dive research piece where they bought some new EV (I think it was a Chevy Bolt), took it apart with some auto industry consultants and looked at what the internal content of it was / how that compared to an ICE vehicle. Then downgraded some stocks (I think it was bearings manufacturers) based on there being much less of their content in an EV & EV's gradually taking share from ICE vehicles.
That was sell-side work but it contained a bunch of information that was new to the market, so the report that contained the ratings changes moved a bunch of share prices. It was probably more the 'new information' that moved the market rather than the ratings changes themselves.
Good to know, this was essentially my hypothesis as well
Pretty sure I know exactly what piece you're talking about, the EV teardown at UBS. So much great content came out of that one.
As a different take, I find that sell-side rating changes rarely contains new information. Instead, it usually enumerates a concern or bullish view that many investors already hold, and gives it a ton of publicity. While we like to think of the market as a rational actor, there's a lot of inertia in how people hold positions. Having someone spell out the concern they've been harboring and explain how it could impact valuations is all the catalyst needed sometimes for people to act.
I am no expert, but my perspective is due to the close relationships ER teams have with internal members of the company they are evaluating. In other words, if GS has two ER Analysts covering Apple and they are on the horn with them 3x a week or actually in Apple's facilities twice a month, they are likely obtaining some level of insight that isnt public. For example, their credibility of if Apple hits its quarterly sales or production estimates is likely much higher than any HF model, therefore they carry material weight. Take a < 1 bn diversified HF for example. odds are they dont have the tools, resources, or connections to get the inside scoop on many of the companies they invest in. While they have more advanced algorithms and share price forecasting methods, they probably dont have any unique, non-public information on the companies they invest in. Therefore, when the new GS ER report breaks on Apple stating they are expected to produce half of the iPhones forecasted at the end of Q2, suddenly the HF needs to adjust their model accordingly, and therefore that impacts the worth of Apple's share price.
Again, I am by no means an expert but just trying to take a stab at your question
People are rabid for information, and as mentioned here, information from entities working closely with the public client can imply unseen things. ER is an absolute hub of nonpublic information, and gauging their implied reactions can offer a lot of insight. If they are downgrading the stock, clearly they know something that everyone else doesn't, and that's worth imitating.
It's a black box understanding, it only really matters if it works. If this is a recurring pattern you can rely on, then selling downgraded stocks is a good way to generate alpha. That's really what matters in the end, and that's also why equity markets seem extremely irrational. In other words, it's not that deep. It's less about an artful and subjective assessment of opinion and more about the consistent and reliable effects of blips of information leaking out from inside public clients via established channels.
It was the exact same principle when I worked in IR. All an insider needed to do was publish bits and pieces of key internal info via the press to move millions in stock relatively quickly. I sincerely believe that information is the most valuable commodity on Wall Street.
Has this been a regular enough occurrence to garner serious interest? Cuz if it were a relatively rare occurrence, i'd say it's normal - perfectly fair for a HF to act on ER reports if they offer a different perspective. The landscape shows that sell-side research barely have material impact on stock prices - the only times when they do impact stock prices is a healthily reasonable occurrence. Thoughts?
Very interested in this as well. It may be possible that some mutual funds (which wield significant amounts of capital) keep tabs on sell-side reports and use it as a factor in their investment decisionmaking.
First poster is crucial. It's never that the rating changes, but it's about the information which is fielded that has come to light and resulted in the rating change. Given the amount of access sell-side analysts have with management at the companies they cover, the information which comes out from them is taken as just that - information to be interpreted as one sees fit.
From previous pod life: Whenever a ss analyst changed estimates on a position, we'd hop on the phone. 1/2 the time it was BS and 1/2 the time it was due to mgmt talking them down, industry reads, or some new factoid that they're weighing heavily.. Then from there you determine positioning, how you think it impacts estimates/guidance, etc
Et magni fuga numquam quia. Veritatis deleniti quia ipsum non quis rerum. Modi itaque tempora quis ut. Itaque et reiciendis excepturi sit.
Minus officia ipsam quam enim. Dolorem eligendi praesentium sint labore itaque.
Aut dolores minus deserunt omnis dolores et. Repellendus laborum eos optio minus. Illum nostrum incidunt quia corporis quam excepturi maiores. Consectetur ea laudantium cupiditate hic quaerat commodi placeat. Et voluptatem voluptas voluptas eaque voluptate sed.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...