{"id":30240,"date":"2012-06-14T13:49:27","date_gmt":"2012-06-14T17:49:27","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/06\/buy-sell-hold-what-it-really-means\/"},"modified":"2012-06-14T13:49:27","modified_gmt":"2012-06-14T17:49:27","slug":"buy-sell-hold-what-it-really-means","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/06\/14\/buy-sell-hold-what-it-really-means\/","title":{"rendered":"Buy, Sell, Hold: What it Really Means"},"content":{"rendered":"

Article by Investment U<\/a> <\/p>\n

\"Buy,<\/p>\n

Don\u2019t be taken in when an analyst says, \u201cBuy.\u201d I\u2019m certain they believe it, but there are other factors and conflicts you should be aware of.<\/p>\n<\/div>\n

In early May, I was intrigued when a few brokerage firms \u201cinitiated\u201d coverage of Facebook with \u201cBuy\u201d ratings and price targets in the mid-$40 range \u2013 even before the stock was publicly traded. Now, if the stock were to trade near its $38 IPO price, is it still a \u201cBuy\u201d if it\u2019s only going to get to the mid-40s?<\/p>\n

Given the disappointing post-IPO performance<\/a> of the stock and questions about what a particular analyst said or didn\u2019t say to some clients, I thought it would be a good time to look at what makes a sell-side technology equity research analyst tick.<\/p>\n

More importantly, how do they generate revenue for their firms?<\/p>\n

For the most part, a technology equity analyst (which I have been for the past 14 years) is an honorable, hard-working person trying to make a decent living in a highly competitive environment where trading commissions are declining. But what you need to know is that, in most cases, the analyst isn\u2019t compensated if they make you, John or Jane Q, money on stock picks.\u00a0 From a purely economic standpoint, they simply don\u2019t care.<\/p>\n

Billy Crystal used to have a recurring skit when he was a regular on Saturday Night Live called Fernando\u2019s Hideaway. That\u2019s the one where he coined the phrase \u201cYou Look Mahvellous!\u201d In the skit, he would frequently utter the saying, \u201cIt is better to look good than to feel good.\u201d<\/p>\n

For the typical sell-side analyst, it\u2019s better to look good than to be good. It\u2019s more important to be interesting<\/em><\/strong> than it is to be right<\/em><\/strong>.<\/p>\n

My point is \u2013 don\u2019t be taken in when an analyst says, \u201cBuy.\u201d I\u2019m certain they believe it, but there are other factors and conflicts you should be aware of.<\/p>\n

\u201cBuy,\u201d \u201cSell,\u201d or \u201cHold\u201d<\/strong><\/h2>\n

To understand why, let\u2019s review what an analyst does. The analyst works hard to produce a report, sometimes fairly detailed, sometimes with a unique perspective, sometimes merely updating investors on current events, but almost always with a \u201cBuy,\u201d \u201cHold,\u201d or \u201cSell\u201d recommendation attached to it.<\/p>\n

This report is summarized in \u201cThe Morning Meeting,\u201d where the analyst conveys the essence of the message to the sales force. The sales force then may ask questions of the analyst to better understand the message. Ultimately, the salesperson then gets on the phone to their clients to deliver the message \u2013 \u201cwe say \u2018Buy\u2019 XYZ today, and here\u2019s why.\u201d<\/p>\n

In many cases, the top clients are the large mutual funds and hedge funds. Why? They\u2019re the ones that pay the most commission dollars. If the portfolio manager at the fund finds the comment interesting, he may place a trade with the brokerage firm issuing the research report. And that<\/span><\/em> is primarily how the cash register rings.<\/p>\n

Now, please notice that I said \u201cfinds the comment interesting.\u201d I did not say \u201cfinds the comment convincing.\u201d Let\u2019s look at why.<\/p>\n

When asked what they value in sell-side research, portfolio managers typically point to \u201cidea generation\u201d and \u201caccess to management.\u201d<\/p>\n

They do not say, \u201cWe look for the best stock pickers.\u201d There are two obvious reasons why they don\u2019t say this.<\/p>\n