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Why You Should Question Wall Street Research

By Linda McDonough on January 24, 2017

Small investors are smart to question the value of brokerage research. That’s because brokerage analysts want to keep access to the companies they cover and as a result a negative report might not be published until it’s too late to do investors any good.

A recent Wall Street Journal story reported that many public companies cut off analysts’ access to management if they issue even cautious reports on their stocks. The companies say  that management has limited time to devote to investor meetings and they reserve that time for “brand ambassadors,” a euphemism for the most bullish analysts from the Street.

Possible case in point: Goldman Sachs’ downgrade of GNC Holdings last week was too little too late. The stock, which hit a 12-month high of $35 last April, closed at $9.26 the day of the downgrade. Goldman, which was the lead underwriter of GNC’s April 2011 IPO, lowered its target on GNC from $12 to $8 and dropped its recommendation from neutral to sell.

But sell at around $9, when the firm’s target is only $1 lower? Thanks a lot for the advice. In fact, if investors had followed Goldman’s GNC advice over the last few years they would have bought the stock all the way up from its $16 IPO price to its $60 peak in 2013. If they had held on they’d be down 44% at best, and 85%, at worst, depending on their purchase price.

It’s inexcusable, but easy to see why Goldman waited so long to downgrade GNC. Not only did its analysts collect huge paychecks from the underwriting fees it earned via GNC’s IPO and the three, giant secondary offerings that followed, but staying on GNC’s good side all but guaranteed access to GNC’s inner management circle for its deep-pocketed clients.

As the WSJ said, compensation for many sell-side analysts is tied to the number of meetings they are able to coordinate between management teams of public companies and big investment clients. Most big institutional clients have ongoing conversations with the management teams of public companies. The much-publicized quarterly conference calls are just one bit of the communication some investors have with these companies. All of this is legal but access is reserved for investors who generate the highest commissions.

Reading the Tea Leaves

This doesn’t mean all analysts’ research is tainted. And some of their opinions and comments are an important part of my research. The trick is knowing what rating changes and comments you can believe, and which carry the most weight.

Stocks can move on upgrades and downgrades and some analysts hold more clout than others with certain stocks. At Profit Catalyst Alert, I’m constantly noting which analysts change their rating on my stocks and what direction and to what degree estimates are moving. Once a company suffers estimate cuts I immediately put it on a watch to be sold.

The flip side is I want to be long stocks that are gaining more attention from sell side analysts. As skeptical as I am regarding analysts’ loyalties, they do solid homework and have deep industry knowledge. A buy recommendation from a new firm is a strong signal that all is well with that public company. In addition, buy side firms constantly scour sell side research for new names in which to invest.  Just one new big new buyer can really lift a stock.


Some of my most profitable ideas for Profit Catalyst Alert trades have come from the IPO market, where stocks have yet to be blessed with any sell side ratings. This is a fertile ground for finding stocks that can get some air under their wings from new analyst coverage. My most recent buy recommendation is for a newly public company yet to be recommended by any brokerage firm. I’m just waiting for the sell side gods to bless it.

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