Back to Basic Research for Many Analysts
By Brian Kelleher
NEW YORK (Reuters) - For stock analyst Eva Radtke, life just got a lot tougher.
The reason: a new regulation that aims to ensure individual investors get as much corporate financial information as Wall Street's top fund managers and traders. That means analysts won't be getting first dibs on market-moving corporate news anymore.
``It's going to make the life of an analyst a lot harder,'' said Radtke, a bank and brokerage analyst at Prudential Securities. ``Its just going to make it more difficult to get information to distinguish yourself from competitors.''
The new rules, known as Regulation FD (Fair Disclosure), will make companies wary of telling analysts anything, Radtke and other analysts believe.
``Companies are basically afraid if they say the wrong thing, they're going to get in trouble,'' she said.
It's a sea change. Companies are cutting off analysts after years of supplying them with key information to help them with their earnings and revenue estimates. The new rules go into effect on Oct. 23, but many companies already have changed their policies.
Analysts -- which in recent years had estimated corporate earnings with increasing accuracy -- now have to rely on their own research. That's going to make analysts look a lot less smart, and they already are warning clients to expect less accuracy in their predictions.
``The lack of quarterly guidance will undoubtedly lead to a greater dispersions of earnings estimates as analysts no longer have the ability to consult with companies regarding earnings expectations prior to the actual release,'' said George Bicher, an analyst at Deutsche Banc Alex. Brown, in a research report.
RETURN OF CALCULATORS, LEGWORK
Analysts, who have become minor celebrities in Wall Street's decade-long bull run, now are back to using their calculators and spreadsheets. They once again are picking through numbers to come up with their assessment of a stock.
``Clearly, this rule means analysts have to act more like analysts,'' said Mike Mayo, a former bank analyst at Credit Suisse First Boston. ``The emphasis will switch more from 'what is the whisper number' to 'what's the conclusion of the fundamental research'.''
``Whisper number'' is Wall Street slang describing the informal, usually higher, earnings targets set by analysts and companies. Sometimes a company beats the ``official'' analyst estimates -- those put out by market research firms such as First Call/Thomson Financial -- but its stock price gets hammered because results missed the whisper number.
Analysts who may have enjoyed cozy relations with corporate chiefs in the past now must try to predict company shortfalls before they are put out in a press release. That will play into the hands of analysts who have long relied on their own research and data.
``It's a positive,'' said Vadim Zlotnikov, a technology analyst at Sanford C. Bernstein, a firm well-known for its in-depth analysis. ``As I talked to my clients, there is a growing premium on primary research.''
Primary research to Zlotnikov means as polling customers to see if technology products will take off, rather than taking the opinions of company executives at face value.
``I think that type of research grows in importance with this regulation,'' Zlotnikov said.
SOME COMPANIES STILL GIVE GUIDANCE
Companies sometimes singled out certain analysts to give news that could be material to stock prices, Radtke said, declining to mention any firms specifically.
``Does Company X favor one analyst? I think that definitely happens,'' she said, but also noted an analyst could be lucky in getting the scoop on a company.
``It could just be the right analyst, or if one analyst calls at the right time. It's pretty haphazard,'' she said.
Not all companies are clamming up in advance of the Regulation D start date, but in many cases prying information away from executives has become more difficult.
''You can still get to bottom-line numbers, you just have to do more courting to get there,'' said John McMillin, a food analyst with Prudential. ``It just requires a little more work.''
Analysts claim they always took corporate guidance -- or hints of how the quarterly earnings were shaping up -- with a degree of skepticism. But they acknowledge chats with company executives helped a lot.
Now, analysts are keeping a diligent eye on statements that companies file with the Securities and Exchange Commission, or SEC. These filings are necessary when a company has news that can move its stock price.
``The real story is having to read SEC documents,'' McMillin said. ``I've never read so many in my life.''
This should certainly put a kink in some golf games. |
