Here’s a fascinating data point:
Only 5% of the fundamental research of the brokerage firms is a sell. That’s up from 2% in the 1990s. Despite having paid $1.4 billion to settle the analyst/banking scandals of the 1990s and early 2000s, Wall Street is still disproportionately afraid of the word "Sell."
That’s rather low, when you consider how many stocks underperform their
respective indices each year.
There’s a small sign of a potential change in this attitude: Merrill Lynch: "Starting in June, Merrill will require that its analysts assign
“underperform” ratings to 1 out of every 5 stocks they cover. About 12
percent fall into that category now."
"The bank [Merrill] analyzed stock performance over a decade and determined that from 1997 through 2007, on average, 37 percent of stocks in the MSCI world index and 40 percent of stocks in the Standard and Poor’s 500-stock index declined each year. The bank covers about 75 percent of the stocks in those indexes.
Under its new system, analysts cannot assign “buy” ratings to more than 70 percent of stocks they cover, “neutral” to more than 30 percent and “underperform” to less than 20 percent. (An underperform rating suggests the analyst believes the stock will either fall within 12 months or will rise less than competing companies with higher ratings.)
But some in the financial industry say it may be too late for research departments at Merrill or other investment banks to reclaim the credibility and prestige they lost after the technology stock bust. Hedge funds, which account for up to 75 percent of trading on some markets, conduct much of their own research and often pay twice the going rate on the Street for analysts. Many banks, by contrast, have cut research budgets." (emphasis added)
40% of the SPX? wow, that’s higher than I would have guessed.
It would be a interesting to see a longer data run — more than the 1997-2007 period, as it contained the bubble and crash period.
Also, I’d be
curious to see how many stocks underperform, in terms of their marketcap as well as their trade weighted volume
percentage on the NYSE and the Nasdaq.
Merrill Tries to Temper the Pollyannas in Its Ranks
JENNY ANDERSON and VIKAS BAJAJ
NYT, May 15, 2008