Questions for mid-term exam :
a. What is a 'buy-side analyst' ?
b. What is a 'sell-side analyst' ?
I thought sell-side analysts teach you how to short stocks, and Mercury News is obviously not Street.com's friend :
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Posted at 2:03 a.m. PDT Monday, April 13, 1998
Investors need cautious ear in heeding analysts
BY ADAM LASHINSKY
Mercury News Staff Writer
ONE of the more confusing aspects to being an investor is deciding whom to trust for stock advice. Perhaps most perplexing is that species of Wall Street animal called the research analyst. As with many things financial, it's important to take a moment to understand the lingo. Too often, financial press reports refer simply to what ''analysts'' are opining about a company and its stock. That doesn't really help the uninitiated investor discern the viewpoint of the person conducting the analysis. There are two important kinds of equity research analysts: ''buy side'' and ''sell side.''
A buy sider picks stocks for a fund and isn't all that interested in sharing information with anyone not connected with the fund. An example would be someone following semiconductor stocks for Fidelity Investments, the giant Boston mutual-fund company.
That analyst's ''clients'' are portfolio managers for Fidelity, and the analyst typically is rewarded for making good calls on stocks. In other words, the buy-side analyst gets paid purely to advise an in-house audience as to which stocks will go up and which ones will go down.
A sell-side analyst is the breed we're more interested in here. That's because they're the ones far more likely to be quoted in the press, to be seen jabbering on CNBC or to send you a report if you've got a brokerage account with their firm.
Sell-side analysts ''sell'' their research to clients of the firm, who pay for the brokerage's trading and asset-management services. Many sell-siders like to see their name in print and their mugs on the tube because it enhances their reputations as experts on the industries they follow -- and leads to more trading business for their companies. Of course, they also want to make the right calls as to which way the wind is blowing the stocks they follow.
There's another reason this type of analyst wants to be seen. The other lucrative business the analyst's firm is involved in is investment banking. Investment bankers earn their fees by underwriting stock sales -- like initial public offerings, or IPOs -- and by giving advice on mergers and acquisitions.
An analyst is crucial for such deals because investment banking clients want a respected and influential analyst to help sell the deal to the public. So even though an analyst's main job is giving advice to trading clients, their route to fortune as well as fame is through helping land big deals.
As one wise trader (who's too chicken to anger his sell-side-analyst pals) says: ''The driving force of brokerage earnings is investment banking.''
The upshot is that many analysts pay attention mainly to companies with which their firms have banking relationships and are loathe to urge any investors publicly to sell a stock. That's why brokerages develop goofy stock ratings like ''neutral,'' ''hold,'' or ''underperform.'' All these mean SELL, or, alternatively, DON'T BUY.
So does this mean sell-side analysts can't be believed? Well, that would be inordinately cynical. Many are extremely well informed and up to speed on critical issues facing the companies on their beats. And an analyst who helped put together an IPO truly will know the client company better than any competitor because of the sweat equity invested in the deal.
What savvy investors need to do, then, is to be mindful of an analyst's relationships and to understand that what an analyst says isn't always what he or she means. Investment banking relationships are disclosed in the prospectus a company files with the Securities and Exchange Commission.
A good analyst, offering advice about a company his or her firm handles, will add the caveat: ''You know they're an investment-banking client,' '' says Kevin Landis, a tech-oriented portfolio manager for mutual-fund company Interactive Investments in San Jose.
A final word of caution. Beware of ANYONE who predicts which way stocks will move in the short term. That includes witty stock columnists you enjoy reading thrice weekly.
Last week, an article in the hard-hitting financial Web site TheStreet.com urged investors in Advanced Micro Devices Inc. (NYSE, AMD), which reported improved semiconductor manufacturing yields in a late-Tuesday conference call, to ''look for the stock to get a sizable boost from the call Wednesday morning.''
But AMD's stock dropped more than $3 that day. Investors apparently were more concerned by AMD's bigger-than-expected loss and the suggestion that a rumored investment from International Business Machines Corp. (NYSE, IBM) wouldn't materialize.
Get your (legal) information on stocks to buy anywhere you can -- from the paper, sell-side analysts, even your neighbor who uses the company's product.
But understand the biases of your source and watch out for folks who purport to have a crystal ball.
VOLATILITY WEEK: Some weeks are more important than others for trying to understand which way the market for technology stocks is going. This is one of those weeks.
A slew of tech bellwethers will report first-quarter earnings. No report will be more important than that for Intel Corp. (Nasdaq, INTC), which already has advised Wall Street to lower earnings estimates.
Intel reports on Tuesday. As is often the case, veterans of the earnings game warn that the recitation of widely expected results isn't the most important data point investors should expect to receive from company management.
''What people should be focused on is how they're doing in the second quarter,'' says Charles R. Hill, director of research for First Call Corp., a Boston research firm that tracks analysts' estimates.
If Intel makes negative comments on the outlook for the computer industry -- as Motorola Inc. (NYSE, MOT) and AMD did last week, -- look out. Almost no technology-related stock would be safe.
Intel won't be the only important company disclosing fresh financial information.
Semiconductor makers Altera Corp. (Nasdaq, ALTR) and Texas Instruments Inc. (NYSE, TXN) will report, as will equipment makers KLA-Tencor Corp. (Nasdaq, KLAC) and Lam Research Corp. (Nasdaq, LRCX).
Two other major companies reporting earnings will be Compaq Computer Corp. (NYSE, CPQ) on Wednesday and Sun Microsystems Inc. (Nasdaq, SUNW) on Thursday. Digital Equipment Corp. (NYSE, DEC), which Compaq is acquiring, reports earnings on Thursday.
Contact Adam Lashinsky at the San Jose Mercury News, 750 Ridder Park Drive, San Jose, Calif. 95190 or siliconstreet@sjmercury.com or (408) 271-3782. |
