Most of the investment banks and brokerage houses employ Stock Market Analysts. Their job is to research the firms in the industry they are allocated to, in an attempt to assess if the companies are worth investing in.
You can purchase the “Analyst Reports” from S&P, Moodys, The Street, Credit Suisse or the plethora of other information providers out there. The analysts usually attend the shareholder meetings for the companies they cover and probe the management team for further information.
Wall Street analysts come under constant scrutiny for the meaningless jargon and inaccurate ratings they put on stocks. There is no aligned meaning across the research houses as to the meaning of ratings such as:
- Strong Buy, Hold, Sell, Strong Sell
- Outperform, Perform, Underperform
- Overweight, Underweight
- Long, Neutral, Avoid
- Accumulate, Hold, Distribute
The analysts tend to avoid negative opinions as they tend to receive flack from the management teams and pressure that they may lose access to the companies they cover. Analysts are not paid for the performance of their stock ratings; therefore they have limited motivation to be really truthful.
“Wall Street Analysts are bad at stock picking”
Does “Buy” really mean buy the stock. What if the highest rating used is strong buy. Does that mean that buy is more negative than strong buy?
Wall Street is oriented towards increasing stock prices; they have to be positive in order to convince people to continue buying.
In a 2006 CFA Magazine Research article by Mike Mayo it was noted that of the recommendations on the Top 10 Largest Cap stocks in the U.S. There were 193 Buy Ratings and only 6 Sell Ratings. Systemic Bias…?
Do not take analyst ratings as literal, you cannot rely on them.
An excerpt from Course 102 Stock Market Investing