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What in the world
are buy-side/sell-side analysts?
By Bob
Dunn • Bankrate.com
While the term "analyst" is one of simpler ones to
come out of the jargon-infested world of Wall Street, its very simplicity
often causes new investors a great deal of confusion.
It's actually pretty easy: Analysts analyze. They
are responsible for determining the value of a stock, based upon
its current valuation in the market and their expectations of the
company's future earnings per share. Just to keep you on your toes,
though, they've been divided into sell-side analysts, also known
as Wall Street analysts, and buy-side analysts.
Sell-side analysts are employed by brokerage firms
to follow specific stocks in industries in which they have an expertise.
They research every angle of a company and attempt to predict future
earnings per share, maintain a recommendation on the stock (the
self-explanatory "buy," "sell" or "hold") and look for possible
investment banking opportunities for the companies, such as mergers
or other strategic acquisitions. Sell-side analysts sell their investment
ideas and picks to investors via the brokers at their firm.
In general, when you're researching a stock or when
you read an article detailing an event that could impact the earnings
of a company you hold, sell-side analysts are the ones being quoted.
They're the ones who make Institutional Investor's "All Star Team"
and are on television talking about the industries they cover.
Buy-side analysts, on the other hand, work for money
management firms, such as mutual funds, investment advisers, family
trusts and pension funds. Their job is to find stocks that their
institutions can purchase and make a profit on.
Now, here's the rub: If you look at a cross section
of sell-side analysts' picks, you'll find an unusual number of analysts
having posted "buy" or "strong buy" monikers as opposed to "hold,"
"sell" or "strong sell" on the stock of companies they follow.
Why? Sitting between investment bankers, who find
companies to take public and brokers, who need to sell the stock
of the companies that the brokerage firm's investment bankers have
taken the time to underwrite, sell-side analysts are stuck firmly
between a rock and a hard place. If an analyst has begun following
a given stock, then that company either has a relationship with
the brokerage firm via an underwriting or the firm can execute trades
in the stock.
If you believe a brokerage firm or investment bank
that has had one of its analysts issue a negative recommendation
on a company is ever going to get any more investment banking business
from said company, I've got a bridge I'd like to sell you.
Defenders of sell-side analysts argue that the pressure
felt by the investment banking division is balanced by the need
for brokers to supply their clients with solid investing ideas.
Analysts can't be pushing inferior stocks because brokers would
eventually suffer the wrath and loss of business from toasted clients.
But, since brokers make money on commission, analysts may feel pressure
to recommend stocks that have high trading volumes as this allows
more chance to trade and more room for high commissions.
Who's an investor to trust?
Well, while buy-side analysts may seem less biased
since they not only take into account sell-side analysts' picks,
but also do first-hand research and, by acquiring large blocks of
stock, are often privy to company inside information, your chances
of getting their well-guarded picks are pretty slim. Money managers
zealously protect those picks since they're footing the bill for
the analysts' salary and travel.
So, what's an individual investor, without a personal
team of analysts, to do?
As with most stock-related questions, the answer is
research. By following a company and its analysts carefully, you'll
be able to tell which Wall Street analysts generally come closest
to the mark.
Beyond figuring out the relatively few sell-siders
willing to go out on a limb, check out analysts' consensus reports
published by groups such as First
Call. They compile and average the earnings estimates of sell-side
analysts for the companies the analysts cover. First Call publishes
this information prior to the company issuing its estimates of earnings
for that given quarter.
Ultimately, following analysts is similar to tracking
stocks; know the analysts that cover the stocks you own, and look
at the other companies they follow. Available in most libraries,
Nelson's provides
reference books that list companies, the analysts who cover them
and what their track records are. It takes some work, but all informed
investing does.
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