How To Identify Good Research
Ask yourself these questions to spot the key characteristics of a good research report:
1. Is There a Disclaimer?
The SEC requires that everyone providing investment information or advice fully disclose the nature of the relationship between the information provider (the research analyst) and the company that is the subject of the report. If there is no disclaimer, investors should disregard the report. (For related reading on disclosures, see Disclosures: The Good, The Bad, And The Ugly.)
2. What Is the Nature of the Relationship?
Investors can get good information from pieces published by investor relations firms, brokerage houses and independent research companies. Using all of these sources will provide information and perspectives that can help you make better investing decisions. However, you need to evaluate their conclusions in light of the compensation (if any) that the information provider received for the report.
Can a Wall Street analyst who is even partially compensated by trading generated by the report be more objective than a fee-based research firm that is paid a flat monthly rate with no "performance" bonus? The answer to this question is left for each investor to decide, but both reports are available to use for evaluating a potential investment. The nature of the compensation will provide information to help you evaluate a report's objectivity.
3. Is the Author Identified and Contact Information Provided?
Generally speaking, if the author's name and contact information are on the report, it is a good sign because it shows that the author is proud of the report, and provides investors with a way to contact the author for additional information.
Research reports from legitimate brokerage firms post the author's name and contact information near the top of the front page. If the author's name is not given, investors should be very skeptical of the report's contents.
4. What Are the Author's Credentials?
Letters after a name do not necessarily mean that the author of the report is a better analyst, but they do indicate that the analyst has undertaken additional studies to expand his or her knowledge of finance and investing. (For more insight, see The Alphabet Soup Of Financial Certifications.)
5. How Does the Report Read?
If the report contains grandiose words and exclamation points, beware. This not to say that good analysts are boring, but good reports don't read like the National Enquirer. A reputable analyst would never use exaggerations like "sure things" or "rockets", and would never suggest that you mortgage your home to buy a stock.
Objective research reports provide reasoned arguments to buy or sell a stock. Key factors such as management expertise, competitive advantages and cash flows are cited as evidence to support the recommendation. (For more insight, read Research Report Red Flags.)
6. Is There an Earnings Model and Target Price With Reasonable Assumptions?
The bottom line for any recommendation is the earnings model and target price. The assumptions upon which the earnings model is based should be clearly stated so the reader can evaluate whether the assumptions are reasonable. The target price should be based on valuation metrics - such as the price-to-earnings (P/E) or price-to-book (P/B) ratio - that are also based on reasonable assumptions. If a report lacks these details, it is generally safe to assume that the report lacks a sound basis, and should be ignored.(For more details about analyzing ratios, see the Financial Ratio Tutorial.)
7. Is There Ongoing Research Coverage?
A commitment to providing ongoing research coverage (at least one report per quarter for at least one year) indicates that there is a solid belief in the company's fundamentalstrengths. It takes a lot of resources to provide this type of coverage, so a firm providing ongoing coverage is a sign that it legitimately believes in the long-term potential of a stock.
This contrasts with one-time reports that are used to manipulate stocks. In these cases, supposed research firms will suddenly issue "reports" on stocks they have never reported on before. Generally, these reports can be identified as an attempt at stock manipulation because they will not contain the attributes of a legitimate research report (discussed above).
The Bottom Line
Unscrupulous short and distort tactics can leave investors holding the bag. Fortunately, high-quality stock reports are relatively easy to spot, and needn't be confused with stock manipulators' dramatic claims. Keep your cool when analyzing a stock, and avoid getting caught up in online hype. By analyzing potential investments carefully and objectively, you can protect yourself from falling prey to S&D players - and make better stock picks overall. |
