Wall Street sales research is an important part of the financial markets and is written by analysts who work for brokerage firms, investment banks and other institutions. These analysts rate companies and make recommendations to help investors – usually institutions – make informed decisions. Buy-side research (by money management firms) is a different story, produced entirely in-house by institutional investors themselves and not intended to be shared or distributed or otherwise sold, and intended solely for the use of that firm's own money managers. Here's an overview of how the sell-side research process works and how you can use it to your advantage: The Role of Sell-Side Analysts Analysts are financial professionals, often holding qualifications such as a Chartered Financial Analyst designation, who have in-depth conduct research on listed companies. In healthcare research, it is not uncommon to find analysts with medical training. Sometimes analysts come from the private sector. The work involves analyzing financial statements, industry trends, management performance, business strategy and macroeconomic factors affecting supply and demand. The purpose is to assess a company's future performance and make investment recommendations to the investment bank's clients, whether they are institutional investors such as pension or hedge funds, mutual funds, insurance companies or private investors. Research Reports An analyst's published research report may include a company overview with basic information about a company's operations, products, and position in the relevant market. This is especially true when an analyst is researching a particular company or industry for the first time. In addition to the basics, the report will examine a company's financial health and analyze its income statement, balance sheets and cash flow. That includes the analyst's own financial model and estimates of future years' earnings; profit margins; net income; income adjusted for one-off items; earnings before interest, taxes, depreciation and amortization (EBITDA); cash flow; and a large number of secondary measures. That analysis will lead to a discussion of valuation, using methods such as future cash flows discounted back to current dollars; price-earnings ratios based on current results and expected figures in the future; and other benchmarks to decide on intrinsic value. Against that backdrop, an investment thesis will provide arguments for why a stock is a good or bad investment, and highlight the potential risks to that thesis that could affect a company's performance or the price of its shares on the open market. The highlight of the report is a recommendation to buy, sell or hold a security and provide a target price that is expected to be realized within a specified time period, usually the next twelve months, but sometimes even longer. Recommendations Ultimately, what a client wants to know is whether they should consider buying, holding, or selling a stock, using the analyst's insight to guide an investment decision. A buy rating means that an analyst believes that a stock is undervalued and likely to increase in value. Variations include “strong buy” or “outperform” to indicate an even higher or lower level of confidence depending on a particular company's specific nomenclature, or simply that a stock will outperform others in its sector or the market as a whole. A 'hold' recommendation simply means that an analyst believes a stock is fairly valued near its current price and has limited room to move forward, so the advice is to hold a current position, but not to to buy or sell more. Variations on this theme include ratings such as 'neutral' or 'market performance'. The rarest call on the Street is “sell,” where an analyst essentially says a stock is overvalued today or will soon face downside risk. Variations here could include 'strong selling' or 'underperform', which again means more or less confident, reflects a company's own internal hierarchy, and that a stock will lag its sector or the broader market. Analyst recommendations affect stock prices every day, especially if an analyst or her company has a very good reputation or is believed to have expertise in a particular area. This is also often the result of marketing and salesmanship by an investment bank's brokers and traders alerting a firm's clients to a remarkably bold call on the part of the research department. As with so many other things on Wall Street, sometimes it's just a matter of trust. A stock can rise after a positive report and a buy rating, or fall after a negative report and a sell rating, simply because many investors trust the analyst's expertise and follow her advice. A wink is as good as a nod Keep in mind that sell ratings on Wall Street are so scarce that a downgrade of a stock's rating from 'buy' (or 'neutral' to 'outperform', etc.) is often interpreted as veiled advice to abolish a holding company entirely. In other words, as a 'soft sell'. It's a diplomatic way for analysts to express a negative view on a stock without seeming too pessimistic. How can a 'hold' become a 'sell'? Because of potential conflicts of interest, an investment banker who dreams of being hired to help a company sell stock or advise on a merger or acquisition, and an analyst who makes a sales recommendation, could jeopardize that relationship. Or because an existing client, such as a pension or hedge fund, has a position in that stock and a formal sell recommendation will hurt their portfolio. And because a “sell” recommendation could cut an analyst off from contact with a company's management, or otherwise compromise her flow of information from the company. As a result, “hold” recommendations can be code for “sell,” and their use has increased over time as a catch-all category for stocks that analysts say investors should avoid, but without the stigma of an outright ” sale'. .” So while perhaps 50% to 60% of all street recommendations from all analysts are for stock buys, somewhere between 30% and 40% might be hold advice and only 5% to 10% a sell recommendation. Contrarian indicators Analyst recommendations can also occasionally act as a contrarian indicator. In the same way that investor sentiment indicators can signal a possible top in prices when opinion is too optimistic, and a possible bottom when opinion is too optimistic. is too bearish, so too does Wall Street research on the sell-side. When a significant majority of analysts issue a buy rating on a stock, it could mean that all the potential good news is already priced into the stock, indicating that little upside potential remains. Or when analysts are largely bearish on a stock and recommend no more than hold or sell, it could mean that expectations are low, that most or all of the bad news is already reflected in the stock price, that it share may be undervalued and sentiment is under pressure. can improve. Analysts also sometimes arrive too late. By the time a stock has received a large number of buy recommendations, it may have already risen. Or vice versa: by the time a share receives many hold or sell recommendations, the price has already fallen. Finally, investors may also view too many Buy ratings as a reflection of analysts' desire to ingratiate themselves with the companies they follow, helping the investment banking side of the business acquire customers and grow revenue. Regulation, Compliance and Ethics To counter this, analysts and their companies are now subject to numerous regulations aimed at ensuring transparency and reducing conflicts of interest. That was largely a response to the Dot Com bubble of the late 1990s and the subsequent crash in the early 2000s. At the time, many sell-side analysts were criticized for overly optimistic research reports that were accused of contributing to the bubble. A wave of regulatory reforms, including the Sarbanes-Oxley Act of 2002, followed. Sarbanes-Oxley, among other things, requires analysts to disclose any conflicts of interest. More formally, the Global Analyst Research Settlement of 2003 grew out of investigations by the Securities and Exchange Commission and the attorneys general into conflicts of interest between the securities research side and the banking side of investment banks. The $1.4 billion ($2.4 billion in 2023 dollars) settlement required 10 of the nation's largest investment firms to pay hundreds of millions in restitution to injured investors and hundreds of millions in fines, and to agree to reforms in the way they do business to avoid future problems. conflicts. As part of the settlement, Merrill Lynch Internet analyst Henry Blodgett agreed to a “letter of acceptance, waiver and consent,” which stated that for three years Merrill “published investigative reports on two Internet companies that violated the anti-fraud provisions of the federal securities laws, and published investigative reports about five other internet companies that expressed views that were inconsistent with [its] the private expression of negative opinions of analysts,” which violates the advertising rules of the National Association of Securities Dealers. “These rules require, among other things, that published research reports have a reasonable basis, fairly present investment risks and rewards, and not make exaggerated or unsubstantiated claims,” the settlement says. Transform your portfolio with reviews from expert analysts! Click here to to become a member of CNBC Pro.