The Wall Street Analyst’s Guide to Research and How to Use It Like an Investing Pro | Wilnesh News
Wall Street sell-side research is an important part of financial markets and is written by analysts working for brokerage firms, investment banks and other institutions. These analysts evaluate companies and make recommendations to help investors, primarily institutions, make informed decisions. Buy-side research (conducted by money management firms) is another matter entirely, is produced in-house by the institutional investors themselves, is not meant to be shared, distributed or otherwise sold, and is for the sole use of that firm’s own money managers. Here’s a detailed explanation of how the sell-side research process works and how you can use it to your advantage: Role of a Sell-Sell Analyst Analysts are financial professionals, often holding qualifications such as the Chartered Financial Analyst, who conduct in-depth research about listed companies. In healthcare research, it’s not uncommon for analysts to have medical degrees. Sometimes analysts come from private companies. Work involves analyzing financial statements, industry trends, management performance, company strategies, and macroeconomic factors affecting supply and demand. Its goal is to evaluate a company’s future performance and provide investment advice to the investment bank’s clients, whether they are pension funds or institutional investors such as hedge funds, mutual funds, insurance companies or retail investors. Research Reports Research reports published by analysts may include an overview of the company, as well as basic information about the company’s business, products and related market position. This is especially true when analysts first begin researching a specific company or industry. Beyond the basics, the report will explore the company’s financial health and analyze the income statement, balance sheet, and cash flow. This will include the analysts’ own financial models and estimates of revenue over the next few years; profit margins; net profit; earnings adjusted for one-time items; advance earnings before interest, tax, depreciation and amortization (EBITDA); cash flow; and a host of secondary criteria . The analysis will lead to a discussion of valuation, using methods such as discounting future cash flows back to today’s dollars; price-to-earnings ratios based on current performance and future expected numbers; and other benchmarks for determining intrinsic value. In this context, an investment thesis will provide an argument for why a stock is a good or bad investment and highlight the risks the thesis may present that could affect the performance of the business or the price of its shares in the public market. The final section of the report is a recommendation to buy, sell, or hold the security and gives a target price that is expected to be achieved within a given period of time (usually the next 12 months, but sometimes even longer). Advice At the end of the day, what the client wants to know is whether she should consider buying, holding, or selling a stock, and to use analyst insights to help guide investment decisions. A “buy” recommendation means the analyst believes the stock is undervalued and likely to appreciate in value. Variations include “Strong Buy,” or “Outperform,” to indicate a higher or lower level of confidence, depending on a particular company’s own specific terminology, or simply to indicate that a stock will outperform its industry or the market as a whole. of other stocks performed better. A “hold” recommendation simply means that the analyst believes the stock is valued close to today’s price and has limited upside, so the recommendation is to maintain the current position but not buy or sell. Variations on this theme include ratings such as “Neutral” or “Market Perform.” The rarest call in the market is a “sell,” where analysts are essentially saying the stock is overvalued today or will face downside risks soon. Changes here could include “Strong Sell” or “Underperform,” again indicating increasing or weakening confidence, reflecting the company’s own internal hierarchy, and the stock will lag its industry or the broader market. Analyst recommendations affect stock prices every day, especially when the analyst or his or her firm has a strong reputation or is considered to have expertise in a particular area. This is also often the result of the marketing and sales techniques of investment banking brokers and traders, who alert the firm’s client research department to a very bold call. Like so much else on Wall Street, sometimes it’s just a matter of trust. A stock may rise after a positive report and a buy recommendation, or fall after a negative report and a sell recommendation, simply because many investors trust the analyst’s expertise and follow her recommendations. A wink is as good as a nod. Note that sell ratings are so rare on Wall Street that a stock downgrade from Buy to Hold (or from Outperform to Neutral, etc.) is often dismissed. Interpreted as an implicit recommendation to get rid of holdings altogether. In other words, as a “soft sell.” This is the analyst’s diplomatic way of expressing a negative view on a stock without appearing too pessimistic. How does “Hold” turn into “Sell”? Because of the potential for conflicts of interest, this relationship could be jeopardized if an investment bank insists on being hired to help a company sell stock or advise on a merger or acquisition and an analyst issues a sell opinion. or because existing clients (such as pension funds or hedge funds) have a position in the stock and a formal sell recommendation would harm their portfolio. Because a “sell” recommendation might cut off the analyst from the company’s management or otherwise jeopardize the flow of information she receives from the company. As a result, a “hold” recommendation can become a codename for a “sell,” and over time they are increasingly used as a catch-all category of stocks that analysts believe investors should avoid without There is a shame of completely “selling out.” So while maybe 50% to 60% of all analysts’ recommendations on Wall Street are to buy a stock, 30% to 40% of the recommendations may be to hold, and only 5% to 10% of the recommendations are to sell. Contrarian Indicators Analyst recommendations can sometimes serve as contrarian indicators. Likewise, when views are too bullish, investor sentiment indicators can indicate that prices are likely to reach a top, and when views are too bearish, investor sentiment indicators can indicate that prices are likely to be at a bottom, as does Wall Street sell-side research. When an overwhelming majority of analysts rate a stock a Buy, it likely means that all the potential good news has already been priced in, indicating that there is little upside left. Alternatively, when analysts are mostly bearish on a stock and recommend only holding or selling, it may mean expectations are low, most or all of the bad news has already been priced in the stock price, the stock may be undervalued, and sentiment may underestimated. Analysts are also sometimes late. When a stock receives a flood of buy recommendations, it’s probably already moving higher. Or conversely, when a stock attracts many hold or sell recommendations, the price has fallen. Finally, investors may also view too many buy ratings as analysts’ desire to curry favor with the companies they cover, helping investment banking businesses win clients and grow their business. Regulation, Compliance and Ethics As a balancing act, analysts and their firms are now subject to myriad regulations designed to ensure transparency and reduce conflicts of interest. This was largely a response to the dot-com bubble of the late 1990s and its subsequent collapse in the early 2000s. At the time, many sell-side analysts were criticized for overly optimistic research reports that were seen as fueling the bubble. A wave of regulatory reforms followed, including the Sarbanes-Oxley Act of 2002. Among other provisions, the Sarbanes-Oxley Act requires analysts to disclose any potential conflicts of interest. More formally, the 2003 Global Analyst Research Settlement resulted from investigations by the Securities and Exchange Commission and state attorneys general into conflicts of interest between the investment bank’s securities research divisions and banking operations. The $1.4 billion settlement ($2.4 billion in 2023 dollars) requires the 10 largest U.S. investment firms to pay hundreds of millions of dollars in damages and hundreds of millions of dollars in fines to harmed investors and agree to The way it operates is reformed to prevent future conflicts. As part of the settlement, Merrill Lynch Internet analyst Henry Blodgett agreed to sign an “acceptance, waiver and consent” that said within three years Merrill Lynch “published information about two companies that violated federal securities laws.” The settlement agreement said: These rules require, among other things, that published research reports must have a reasonable basis, fairly describe investment risks and returns, and must not make exaggerated or unfounded claims. ” Transform your portfolio with expert analyst ratings! Click here to join CNBC Pro.
