The Great Debate

Stock research is more than just a headline

May 18, 2009

ericauchard1– Eric Auchard is a Reuters columnist. The opinions expressed are his own –

Stock research analysts get no respect these days. An academic study has concluded that share recommendations have little impact.

A 51-page study entitled “On the information role of stock recommendations,” finds that buy and sell ratings are uninformative and often try to “piggyback” on actual news for their influence. This begs the dismal question: if professional analysts can’t get it right, what hope for the ordinary investor? Click here for PDF.

Sell-side research — driven by the need of the analyst’s employer to trade stocks — dominates daily market conversations. Recommendations are the signposts of these debates, without which many investors would be lost.

Analysts are not alone in selling their independence to the highest bidder, and their reputation has suffered after so many were exposed as marketers for investment bankers, favoured clients or company managements. But independence is not the same as efficacy of stock recommendations.

Equities analysts are not unique in showing herd behaviour Oya Altinkilic of the University of Pittsburgh and Robert S. Hansen of Tulane University are correct to protest that stock ratings too often rely on past returns, and are poor indicators of future performance.

However, stock ratings are only a distillation of the analysts’ work. Their reports help investors make sense of announcements and prepare them for upcoming news. As with journalism, there is plenty of slip-shod analysis, or useless ratings changes made after the fact. Yet investors depend on analysts for a lot more than binary buy/sell ratings.

The methodology may explain the findings. The data measured the impact of ratings changes only for the 20 minutes before and after analysts published new recommendations.

The Pittsburgh/Tulane duo might instead have interviewed directors of those thousands of companies which are not covered by any analyst. Their stocks often have zombie status, with low ratings and no trade, because investors fear they will never be able to sell if they buy.

Analysis is not a road to riches from blindly following recommendations, but it oils the wheels of share trading, and the last year has shown what happens when liquidity dries up.

Rather than produce trite conclusions from some questionable research, the researchers might investigate why so many analysts are leaving the business under the pressure of compliance and regulation. Their loss makes markets poorer, whatever their recommendations.

11 comments so far | RSS Comments RSS

I agree with the gist of the study although I haven’t read it. Buy and sell recommendations don’t mean anything to me. But I consider the general coverage useful so I can become familiar with the companies. For instance in the new Green section, the articles often mention specific project and proposals and specific companies. I actually print out those articles. But honestly if I detect a buy recommendation, I interpret that to mean that I should ignore the company until it is off the radar.

Posted by Don | Report as abusive

Analysts “talk” is just that, and nothing more. When they talk about all the good,or bad things in a company’s future and then relate it a future price; e.g., the stock’s now at $30, but, it’s going to hit 40 — that’s nonsense. The stock price will only reach that price if the market bids it up there.

Furthermore, just because a company has the prospect of sales or earnings growth, that shouldn’t make any difference. Why should increased earnings/sales automatically make the stock price increase in value? Ridiculously, AAPL, over a 15-20 year span came out with new products, had fabulous sales , and wonderful earning’s growth — and it’s stock price multiplied like crazy. Why should that happen, when AAPL never has shared theeir earnings with their stockholders?

Conversely, if AAPL’s earnings would now start to decline, year-to-year, its stock would surely decline. But, why? They don’t share their earnings with stockholders, anyways — so, what difference does it make?

Let’s face it — it’s simply the herd mentality that moves stocks, up, or down. The mathmatics of stock prices are really irrelevant.

Posted by Ben Golden | Report as abusive


I see your point but don\’t agree with you fully. Of course there is a herd mentality these days due to the amount of traders in the game, especially with the explosion of online trading. When everything came to a tipping point in the last few years, the mentality got even worse as the masses latched onto whatever news or financial bit they could get their hands on in order to try and ride the waves with everyone else.

But you can\’t totally null out the effectiveness of investment analysis. Minus the chances that much of it has or has seemed to become corrupt when the big corporations get their greedy hands on it, fundamental analysis of a company provides much needed information for those that are about to invest in it or decide to take their money out.

Maybe the investment analyst field has lost some credibility lately, but if no one is looking at the companies\’ numbers, then who will?

Posted by Kevin Rhodes | Report as abusive

Experts have no Expert Performance.I think if we do an analysis and which we have done at university for data over 30 years it shows that the experts cant beat the market its only insiders who do.
Anyways I think stock researching better especially for us, who aspire or are working in this profession, because otherwise we would never be able to afford those Porsche’s,Rolex’s and Armani’s.
I believe the problem is the fact that markets are very efficient( in the sense that there are no arbitrage oppurtunities).

Posted by Suleman Maniya,Goteborg,Sweden | Report as abusive

As a sell side analyst with 16 years tenure I both agree and disagree with the article. Coverage goes well beyond ‘Buy’, ‘Sell’ or ‘Hold’, and target prices. Deep industry knowledge isn’t something a trader is going to care much about, but it can be very useful for an investor.

I’d like to turn the story on its head, however. Almost all academic research on investing is flat out garbage. Either they comb databases to affirm a blindingly obvious ‘hypothesis’ (its better to invest in cheap stocks than expensive ones), or they cook up mathematical models they don’t understand (read the Black Swan) and which contain ‘assumptions’ which cannot exist.

Do sell side analysts add value? I imagine some do and some don’t. Probably the ‘average’ doesn’t do better than the market, which pretty much defines the market. I figure I probably do, because I haven’t held my job for as long as I have because of my looks, charming personality, or investment banking productivity. Besides, my boss has a chart which shows my ‘added value’ as a stock picker, and it goes up and to the right. Of course, that could be luck.

I can tell you one thing, however, and that is that finance professors and economists sure don’t add value!

Posted by Brian | Report as abusive

I have to agree with Brian. Although past performance is no indicator of future performance, if you’re not pouring over what has happened, and why, then on what basis are you making your future predictions? For this reason I like technical analysis too. It shows me where we are relative to where we have been over what time period. Even if I find a great fundamental play if the stock has already tripled or is trading at its multiple year highs then all the good news may already be priced in. May. Academics usually do not understand trading. As a trader I may use some fundamental analysis and some technical analysis plus money management skills and discipline towards risk taking. As a trader I would sooner take an opportunity cost than an actual loss. I also rely on tommy talk or what my gut is telling me after pouring over countless articles (up to 8-hours a day) that produce quite a few contradictory buy, sell, hold signals. The problem is not enough information, but information over-load, and trying to distill it all down into one coherent view. I have yet to see any academic use that type of rigour in their own analysis. I have, however, personally vetted academic research before publication where it was quite obvious to me that the academic had not bothered to talk to any practicioners, so there conclusions were either painfully obvious or their assumptions were hopelessly naive.

Posted by MrBill, Eurasia | Report as abusive

… their analysis… sorry.

Posted by MrBill, Eurasia | Report as abusive

The hypothesis of the research itself is questionable – all analysis moves stock price. We do not need research to say 90 to 95% is commodity. By definition that is what it will be. It is the other 5% that matters. That is what keeps both sell side and buy side interested. Also, it is the 95% that leads to the creation of the 5%. All this research is generated out of a complete misunderstanding of the business model


It is true recommendations don’t cause much movement as they used to, I blame that mostly on analysts who have not been right in their forecasts whether intentionially or unintentially, It reached a point where I would sell the day they upgrade and buy a week or so later. TV analysts have an axe to grind.

Posted by kOHN DOE | Report as abusive

I would like to submit that analysts are NOT repeat NOT capable of determining the market price of a stock.

Analysts like to project a number as the fair value of a stock. Based on this valuation the projections are made for the market price. The term fair value is actually no more than jargon used to arrive at a number arrived at by applying a particular valuation methodology. Use a different valuation methodology and the fair value will change as shall the projected price.

As a trader I have learnt one basic fact. The dynamics of the demand/supply for a stock are very different from the dynamics of the income statement of the company. Someone somewhere more often than not has the early bird advantage and is privy to impending change in the company’s fortunes. They usually walk into a stock at a leisurely pace, build positions without making waves and wait for the crowd to wake up to the story , which is when they bid up the stock and exit their position. Follow the trail of their money and that is where you will make money. This is only possible using technical analysis where you give due weightage to factors such as price ranges, volumes traded etc etc.

Posted by Rakesh | Report as abusive

In December of 2008 I decided that instead of spending my money at the video poker machines, so generously supplied by my State, that I would get me one of those “Online” stock trading accounts and see if I could make more $$$ there. I already had a company in mind to invest in. Their stock had fallen from a high of about $27.00 in 2004 (when I worked there) to a low of $.17 (that’s 17 CENTS per share!). And I knew people that worked there and had a good idea of what they did and what was going on there. So I put in my $1000.00 and within (no lie) three weeks had TRIPLED my money! So I said to myself, “Hell this is too damn EZ!” So I “cashed out” that ticket and bought another stock. And what do you think happened? I DOUBLED my money on THAT stock. From early December of 2008 to February of 2009 I had turned my $1000.00 into almost $6000.00! And I thought, “Hey, this is much better odds than video poker, and I don’t have to even leave the house!” After such a windfall I decided to start doing “research” to see if I could increase my chances of “winning” (as a “gambler” I knew that my 2 – 4 – 2 willing streak wouldn’t last). So I started reading the financial pages of newspapers and magazines. I started watching CNBC (Now there’s a laugh-and-a-half! Talk about your “Biased” so-called “Journalism”!). I even subscribed to the “Motley Fool”. After much research and eye strain, I decided to “split” my winning three ways ($2000.00 each). I’d listen to the advice of the “experts” and pick three stocks to buy. I mean after all I was just a beginner, even LESS than a beginner, and had made 6 to 1 on my money without ANY help. What could I do if I had the POWER of TRAINED ANALYST’S in my corner? Well . . . not so good is the answer. For instance, when I wanted to bet on Citibank at a buck a share, the Analyst’s were saying Questcor was a lock. It wasn’t – lost money on that deal. Citi tripled. The same with Las Vegas Sands, and Ford – The “Analyst’s” said “NO” while my heart was saying, “Yes”. THEY were wrong; I was right. So since then I have gotten off the advice of “EXPERTS” and gone back to my old method. And that is, “If it looks too good to be true, IT PROBABLY IS TRUE!!!” My experience has been (in life as well as gambling) DON’T OVER-THINK things. ESPECIALLY when the market (ANY market) is at a low, it’s a good time to buy. Case in point, I just cleaned-up with Tenet healthcare BEFORE it was upgraded to a “Buy”. Well it comes down to “YOUR” money, people, always beware of what “OTHERS” want you to do with it. And one more thing, does anyone know a good “tax” man? I think I’m going to need one

Posted by Apollo Sun | Report as abusive

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