Publication
Article
Author(s):
Old-time prospectors panning for goldwould spend weeks sifting throughdiggings in the hopes of finding a fewvaluable nuggets. Prospectors who hadvast experience and were familiar withthe regions in which they worked madenearly all of the significant finds.
The next time you're about to discard astock analyst's report with only a cursoryglance, you might want to think back tothose successful prospectors. Hidden withinthe reams of paper that analysts churnout could be valuable insights. Like theprospector sifting through piles of dirt tounearth a key find, look beyond the basicbuy, hold, and sell recommendations todiscover your own gold mine.
FORM YOUR OWN OPINION
Today, finding an analyst's sell recommendationon more than a select fewstocks is rare. But according to a recentstudy by 2 professors from the BostonUniversity School of Management, readingbeyond the basic recommendationcould reveal some potential red flags. Justbecause an analyst from a reputable firmgives a company's stock a high ratingdoesn't necessarily mean it's a 5-star buy.
BusinessWeek
For example, as noted in an article in, one analyst gave a troubledcompany an outperform rating. If aninvestor had stopped reading at thatpoint, they would have been in for a surprise.Within the report, the analyst notedthat "business is lousy and the company isbleeding badly." However, 2 months later,the company went bankrupt.
BusinessWeek
Similarly, some analysts still do proprietaryresearch that can be extremely usefulif you take the time to analyze theinformation. notes thatanalyst Bill Pecoriello of Morgan Stanley isalmost always bullish on PepsiCo. As such,it would be easy to dismiss a positivereport as being too enthusiastic. However,on further review, one of Pecoriello'sreports cites a Morgan Stanley survey of1000 consumers indicating a movementtoward healthy snacks. Beyond softdrinks, that could be a positive omen forPepsiCo brands like Quaker Oats andTropicana Orange Juice.
It's also important to form your ownopinion by comparing reports from differentanalysts. Consider that in January2001, one analyst at a very reputable firmspoke highly of WorldCom, saying itwould meet or beat expectations. A secondanalyst gently warned investors tostay away. WorldCom became the nation'slargest bankruptcy ever in July 2002.
SEC RULES CAN HELP
BusinessWeek
Some new SEC rules will also be helpfulfor physician-investors looking to separatethe wheat from the chaff. According to, the rules require that securitiesfirms define their ratings and informinvestors the percentage that are buys,holds, and sells, or their equivalents. This ispotentially valuable information.
For example, a recent report from Bancof America Securities indicated that whileonly 54% of stocks received a buy rating,95% of the buy recommendations wentto companies it had received investmentbanking money from in the past 12months. In that case, investors might beadvised to get an additional opinion onstocks from firms that do little or noinvestment banking business. These firmsinclude Value Line, Morningstar, A.G.Edwards, and Standard & Poor's.
BusinessWeek
Similarly, reports thatWall Street firms have now begun to flagpotential conflicts as a result of theirinvestment banking relationships. The followingdisclaimer, for example, nowappears on the cover page of many MerrillLynch reports: "Investors should assumethat Merrill Lynch is seeking or will seekinvestment banking or other businessrelationships with the companies in thisreport." It might be wise to compare theMerrill Lynch report with that of a firmnot needing to print such a disclosureregarding potential conflicts of interest.
All the rules in the world, however,won't help if you don't spend some additionaltime reading carefully through areport. In July 2000, an Internet analysttermed the company InfoSpace.com abuy. When the company's price soon fellfrom $500 to $9, the analyst was lambasted.However, careful reading of the analyst'sreport noted, "The stock is veryexpensive on all traditional metrics and,hence, is likely to remain volatile."
Warnings like that are not likely to beprinted in bold type on the cover of ananalyst's report. As with the experiencedprospector's careful work, taking the timeto sift through the pages can prove to bea rewarding and educational experiencefor a physician-investor.