What motivates WS financial analysts following stocks to give out their recommendations for free? These recommendatins can be found on Mornigstar etc.
May 13, 2012 8:15 PM Subscribe
What motivates financial analysts following stocks to give out their recommendations for free? These recommendations are then shared by sites like Yahoo Finance, morning star etc. Also, most of these sites say analyst recommendation. Is there a way to see which analyst is making the recommendation? Which site would you recommend for researching analyst recommendations for stocks? I am curious because financial analysts don't seem like people who would give away information for free. I am curious about what motivates them to share such valuable info. Also, it would really help to know a reliable site that collects and shres these recommendations
Financial analysts love to have the whole world hanging on their insights so I don't think that characterization is quite accurate. Independent analysts put up paywalls because they need to eat. Research companies like Morningstar hire the analysts and put their content behind paywalls or sell them to institutional customers. Bankers like JPM or CITI see the publicly-released analysis as a way to keep the market hanging on their opinion and to keep up interest in stocks they want to see traded. It's a diverse market.
Also, keep in mind there are research reports you have never seen at all, and none of those are free, written for internal and external customers. You're seeing the tip of the iceberg.
posted by michaelh at 8:25 PM on May 13, 2012 [1 favorite]
Also, keep in mind there are research reports you have never seen at all, and none of those are free, written for internal and external customers. You're seeing the tip of the iceberg.
posted by michaelh at 8:25 PM on May 13, 2012 [1 favorite]
Er, the internal ones you haven't seen are usually free to other departments but they are not public. The external ones you haven't seen are never free and usually come in some sort of newsletter/daily updated website form.
posted by michaelh at 8:26 PM on May 13, 2012
posted by michaelh at 8:26 PM on May 13, 2012
Part of it is ego-tripping, but there is a wide variety of other ways they can make money off the "altruistic" recommendation. Disclosure rules close some of those loopholes (assuming the analysts play by the rules) but there's nothing to stop them from disclosing that a friend owns stock or has a vested interest in that company. (And one hand washes the other...)
posted by wolfdreams01 at 8:28 PM on May 13, 2012
posted by wolfdreams01 at 8:28 PM on May 13, 2012
Sorry, I meant "nothing to FORCE them to disclose" that a friend has a vested interest.
posted by wolfdreams01 at 8:30 PM on May 13, 2012
posted by wolfdreams01 at 8:30 PM on May 13, 2012
The recommendation (buy/sell/hold) and basic estimates (like earnings per share, revenue) are not the product being sold. It's useful for these things to be published because it forms a "consensus" view on a stock.
Also, almost no one pays directly for research. Research is a service that brokers provide to clients (primarily institutional investors) who steer transactions through that broker. What that service entails includes written research (which is often given away for free to possible clients), the underlying financial models that build up to the analyst's estimates, access to the analyst via phone or meetings, invitation to investment conferences and access to company/management visits arranged by the analyst.
I'd say that last thing is one of the most valuable--a very good sellside analyst has good relationships with the companies she covers and will accompany management teams on visits to interested investors.
posted by mullacc at 8:39 PM on May 13, 2012
Also, almost no one pays directly for research. Research is a service that brokers provide to clients (primarily institutional investors) who steer transactions through that broker. What that service entails includes written research (which is often given away for free to possible clients), the underlying financial models that build up to the analyst's estimates, access to the analyst via phone or meetings, invitation to investment conferences and access to company/management visits arranged by the analyst.
I'd say that last thing is one of the most valuable--a very good sellside analyst has good relationships with the companies she covers and will accompany management teams on visits to interested investors.
posted by mullacc at 8:39 PM on May 13, 2012
Response by poster: Any recommendations on sites that gather buy/sell/hold ratings from a large number of analysts. Lots of site provide this information. Not sure which ones deal with well respected analysts. Thoughts or recommendations?
How do I know that a consensus buy is a consensus reached by respected analysts? Thats why I am looking to determine which sources are more trusted than others. I realize there is no way to know for sure but I guess some are more reliable than others.
posted by r2d2 at 8:47 PM on May 13, 2012
How do I know that a consensus buy is a consensus reached by respected analysts? Thats why I am looking to determine which sources are more trusted than others. I realize there is no way to know for sure but I guess some are more reliable than others.
posted by r2d2 at 8:47 PM on May 13, 2012
Various sources publish "rankings" for analysts--Institutional Investor magazines being the most prominent. WSJ does it too.
Not sure which ones deal with well respected analysts. Thoughts or recommendations?
"Respected" is the wrong word to use here. For the most part, financial aggregation sites are pulling in analyst consensus estimates from a service like Thomson/First Call or Zacks. Consensus estimates from those sources are industry standard. That doesn't mean the analysts that make up consensus are all respected. But at least you'll be working with the same number as everyone else. You can extra layers of detail from Thomson or Zacks, but that usually costs money.
posted by mullacc at 9:02 PM on May 13, 2012
Not sure which ones deal with well respected analysts. Thoughts or recommendations?
"Respected" is the wrong word to use here. For the most part, financial aggregation sites are pulling in analyst consensus estimates from a service like Thomson/First Call or Zacks. Consensus estimates from those sources are industry standard. That doesn't mean the analysts that make up consensus are all respected. But at least you'll be working with the same number as everyone else. You can extra layers of detail from Thomson or Zacks, but that usually costs money.
posted by mullacc at 9:02 PM on May 13, 2012
And to be clear, Yahoo! and Google are likely paying for the consensus estimates, to bring people to the site so they can show them advertising.
posted by kindall at 10:14 PM on May 13, 2012
posted by kindall at 10:14 PM on May 13, 2012
Response by poster: Thanks!
Can you explain what is meant by these consensus estimates and how Thomson/ Zacks acquire them?
Do they reach out to a specific set of analysts and then determine the consensus themselves?
I realize you may not know the exact process. I am just curious to know how this may work generally speaking.
posted by r2d2 at 10:34 PM on May 13, 2012
Can you explain what is meant by these consensus estimates and how Thomson/ Zacks acquire them?
Do they reach out to a specific set of analysts and then determine the consensus themselves?
I realize you may not know the exact process. I am just curious to know how this may work generally speaking.
posted by r2d2 at 10:34 PM on May 13, 2012
It used to be that first call actually had an application that the analyst would input their data into for upload. The thing you need to keep in mind is that those estimates are very often manipulated or managed by the companies being forecasted. There are reams of data showing there is very little value for investors in analyst numbers and reccs. Also bear in mind the psychology/ marketing at work in being in or out of the consensus.
posted by JPD at 4:18 AM on May 14, 2012
posted by JPD at 4:18 AM on May 14, 2012
I'd also add that you should not be using sell-side buy/hold/sell reccs in your investing. As Mullac points out that's not really what they get paid to do.
posted by JPD at 4:22 AM on May 14, 2012
posted by JPD at 4:22 AM on May 14, 2012
Can you explain what is meant by these consensus estimates and how Thomson/ Zacks acquire them?
It's just an average of estimates. For example AAPL consensus revenue for 2012 ($162B) is the average of 47 broker estimates. Thomson takes all the incoming estimates (which are uploaded by the brokers, as JPD says) and then just does the basic math. It excludes estimates which haven't been updated in, I think, 100 days.
But what brokers and why? Honestly I don't know. It seems pretty easy to get in, actually. But I have heard of companies lobbying Thomson to exclude certain brokers that don't appear to be legitimate.
posted by mullacc at 7:18 AM on May 14, 2012
It's just an average of estimates. For example AAPL consensus revenue for 2012 ($162B) is the average of 47 broker estimates. Thomson takes all the incoming estimates (which are uploaded by the brokers, as JPD says) and then just does the basic math. It excludes estimates which haven't been updated in, I think, 100 days.
But what brokers and why? Honestly I don't know. It seems pretty easy to get in, actually. But I have heard of companies lobbying Thomson to exclude certain brokers that don't appear to be legitimate.
posted by mullacc at 7:18 AM on May 14, 2012
I think stock analysis is pretty much worth what you're paying for it. Stock picking is basically a poker game, and if you can't tell who the fish is, it's probably you. There's almost no incentive for stock analysts to get their calls right. You can't sue them if they're wrong, and there are so many analysts out there picking so many stocks, there's really no way to know if they actually know what they're doing or if they've just been very lucky. Look at all the long-time bears who suddenly became geniuses when the market went to shit in 2008. And they've stayed bearish throughout the entire recovery, and have been wrong over and over again, until the market takes a dive again, and all of a sudden they're geniuses again.
posted by empath at 7:34 AM on May 14, 2012 [2 favorites]
posted by empath at 7:34 AM on May 14, 2012 [2 favorites]
Oh, and the other problem with analyst recommendations, is that the rest of the market sees the same recommendations you do and has the same information that he does. So let's say that the analyst is actually correct that a stock is undervalued. By the time you get the information and can act on it, the rest of the market who is likely to get there before you.
posted by empath at 7:38 AM on May 14, 2012 [1 favorite]
posted by empath at 7:38 AM on May 14, 2012 [1 favorite]
I don't think the strength of EMH has anything at all to do with why Sell-side analysts are bad stock pickers.
In order to make money on something there has to be some controversy surrounding it, but by their nature sell-side analysts are risk averse. As long as they have good relationships with their investment universe and their clients on the buy-side they've got a business for themselves. Once you start going out on a limb on anything you start to put those things at risk. Companies don't want to talk to you if you are negative on them, or too positive on a competitor, buy-side guys start to get tetchy if you are talking in a way that doesn't benefit their book.
Really the key thing to remember is that they aren't getting paid for being right on their earnings estimates and they aren't being paid for their buy or sell reccs.
posted by JPD at 7:46 AM on May 14, 2012
In order to make money on something there has to be some controversy surrounding it, but by their nature sell-side analysts are risk averse. As long as they have good relationships with their investment universe and their clients on the buy-side they've got a business for themselves. Once you start going out on a limb on anything you start to put those things at risk. Companies don't want to talk to you if you are negative on them, or too positive on a competitor, buy-side guys start to get tetchy if you are talking in a way that doesn't benefit their book.
Really the key thing to remember is that they aren't getting paid for being right on their earnings estimates and they aren't being paid for their buy or sell reccs.
posted by JPD at 7:46 AM on May 14, 2012
Note that a lot of analysts make their buy and hold recommendations public, because if they're right they look good and could drum up business, while keeping their sell recommendations private, because publicly badmouthing a company can result in less access to that company in the future.
posted by croutonsupafreak at 11:22 AM on May 14, 2012
posted by croutonsupafreak at 11:22 AM on May 14, 2012
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I think you're onto something, though; the reason these "analyses" are relatively cheap for the consumer is that they're usually fairly low-value.
posted by downing street memo at 8:20 PM on May 13, 2012 [1 favorite]