The Sell Side Still Says ‘Buy’


Here’s another interesting news item that slipped in under the radar: The Sell Side Still Says ‘Buy’.

As the accompanying table (courtesy of Barron’s) makes clear, fundamental Analysts have become somewhat less inclined to say “Sell.” Analysts gave “Sell” or “Strong Sell” ratings to only 9.4% of stocks in March 2004, compared to 10.3% a year earlier.

I’m the last person to defend my Fundie brethren; However, the time to cry “Sell” would not be at an early phase of what many believe (but not me) to be a multi-year expansion. Indeed, it would be silly to have a lot of sells in the midst of a powerful rally.

So what we really are complaining about here is this: People who’s job it is to analyze individual companies within a narrow sector do not have a good ability to determine when the economy’s overall expansion (or contraction) begins to end and subsequently reverse. Phrased differently, these folks cannot tell the difference between a mere Market Rally and a more enduring Bull Market. (Not that its really their jobs to tell)

Of course, there must be some stocks worthy of the “Sell” rating — but more than 1 out of 10? I dunno . . .

Wall Street Bulls Ahead

As of March 1, 2003 As of March 1, 2004
  # of Recs % of Total # of Recs % of Total
Strong Buy 5,092 20.9% 5,824 21.3%
Buy 5,979 24.5% 6,422 23.5%
Hold 10,769 44.2% 12,472 45.7%
Sell 1,884 7.7% 1,942 7.1%
Strong Sell 641 2.6% 632 2.3%
  24,365   27,292

Source: Thomson First Call

The Sell Side Still Says ‘Buy’
Allison Krampf
Barron’s Weekday Trader, April 8, 2004,,SB108146056717578357,00.html

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  1. tom carter commented on Apr 13

    See link for some of my comments relating to this topic. Would just add here that there are arguably still more disincentives than incentives for analysts to *publish* “sell” recommendations. The buyside does not want me as an analyst to publish sell reports and of course issuers do not appreciate it. The buyside will ask analysts behind closed doors what their short ideas are. Now, that can translate into trading revenue and some sell side firms, StarMine Monitor clients for example, do compensate analysts in part on the performance of their recommendations – that may be the biggest and best incentive for analysts to publish “sells” but unfortunately we are still early in the overall transition to pay-for-research-quality performance on the sell side. In fact you can make the case that the average mid sized investment bank is going to generate more in banking fees than in trading commissions in 2004 and to the degree that the analysts’ bonus is a function of overall firm revenues, the economic incentives for analysts at some firms are still tied more to banking than to “published research quality” (read: earnings accuracy and recommendation performance).

    Have fun doing your own research and trading.

    These views are my own and not necessarily those of my employer.

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