Is Sell-Side Research Improving?


Darien, CT – In recent years, a variety of industry surveys have shown that many institutional investors don’t value sell-side research highly, pointing to decreased analyst experience, falling coverage, and various conflicts of interest.  However, some evidence suggests that the quality of sell-side research is on the rise.

According to data produced by Investars, and published recently in an article written by Bloomberg News, the research accuracy of a number of bulge bracket investment banks have improved markedly since the Global Research Analyst Settlement was reached.
In June 2003, the BUY / SELL recommendations of only two out of ten bulge bracket brokers beat the S&P 500.  However, that has changed significantly as the recommendations of seven out of ten of these investment banks have beat the S&P 500 over the past two years (since June 2005).

During this period, Bear Stearns and Lehman Brothers underperformed the index, while UBS posted a performance in line with the S&P 500.  Over the past two years, Merrill Lynch had the best performing BUY and SELL recommendations, recording a rise of 23.9%.

It is also extremely interesting that on an overall basis, sell-side research recommendations have turned much more bearish in recent months.  For example, in February 2007, the number of BUY recommendations as a percentage of total U.S. stock recommendations, has fallen below the number of HOLD recommendations for the first time ever.  The number of BUYS trails the number of HOLDs by 45.3% versus 47.8%, according to data Bloomberg began tracking in 1997. Sells have increased to 6.9% of all recommendations percent from 1.9% in March 2000.

It is interesting that sell-side analysts have become more pessimistic recently as the S&P 500 exceeded its March 2000 high, reflecting a concern that the risk in the markets has become higher than normal.  In March 2000 the number of BUYS exceeded the number of HOLDS by 3 to 1. The stock market plunged 49% through October 2002 reflecting the fact that the markets had become overly optimistic.

Today’s more pessimistic views of sell-side analysts could be seen as a constructive sign for investors as analysts have become less susceptible to becoming overly optimistic.


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