A Paucity of Sell Ratings on the Financial Sector?

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NEW YORK — On Dec. 3, Bloomberg reported:

Anybody who followed the advice of Wall Street’s top-ranked analysts, none of whom would say “sell” for a single company in the securities industry this year, is reckoning with subprime-like losses.

Merrill Lynch & Co.’s Guy Moszkowski, UBS AG’s Glenn Schorr and Sanford C. Bernstein & Co.’s Brad Hintz maintained either buy or hold recommendations on Bear Stearns Cos. as it fell 39 percent in 2007, the most since the firm went public in 1985. Moszkowski and Hintz had buy ratings on Morgan Stanley while the stock shed 22 percent in New York trading. Moszkowski and Schorr advised holding on to Citigroup Inc. as it dropped 40 percent.

Shrinking fees from brokerage commissions mean fewer dollars for research and more pressure on analysts to hang on to paying customers such as hedge funds. While clients care little for ratings, they covet meetings with company executives — audiences that favored analysts can deliver. As a result, “sell” ratings on Wall Street are even scarcer than four years ago, when 10 securities firms paid $1.4 billion to settle allegations by then-New York Attorney General Eliot Spitzer that they used research to improperly promote stocks.

We decided to check the Investars performance database for the 1-year trailing performance of sell ratings given by analysts covering the financials sector. While many firms failed to produce sell ratings, we found a few standout performers in sell rating performance. In the following list, we highlight those firms whose sell ratings on the financial sector were consistently on-target:

Research Provider Batting Average of Negative Ratings  Average Daily Change in Negatively Rated Stocks  Average Time Period for a Negative Rating (in trading days) 
DA Davidson & Co.  100% -1.02%   14
Sanders Morris Harris   100%  -0.33%  259
Punk Ziegel & Co.  80%  -0.23%  64.9
Sterne, Agee & Leach  76.47%  -0.16%  57.5
Hoefer & Arnett  100%  -0.14%  259
JMP Securities  80%  -0.14%  159.8
Keefe, Bruyette & Woods  85.42%  -0.14%  101.8
Bank of America  77.78%  -0.13%  103.3
Stifel Nicolaus  86.36%  -0.13%  119
Deutsche Bank  83.33%  -0.12%  115.8

While some of these results seem to be impressive, it should be noted that for all of the firms on this list, less than 10% of stocks covered receive sell ratings. Although Bloomberg incorrectly implies a total absence of sell recommendations from Wall Street firms, the broader point about the relative scarcity of sell ratings is a valid one. Even where sell recommendations were on target, they may have been too little and too late to alert investors to the overwhelming weakness of the financial sector this year.

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