Analyzing Analyst Recommendations

In the space of investments there are highly followed equities (stocks) with analyst recommendations. These highly followed stocks are monitored closely by analysts. Stock analysts are salaried employees and intermediaries between investment banks, publicly traded corporations, and the investing public. This fact leaves much room for conflicts of interest as explained below. Although analysts give great insight and clarity to major industry events, investors should always be cautious .

Analyst functions

A stock analyst for highly followed stocks will periodically include a prediction for future sales revenues and net income along with a host of other important key company figures like capital expenditures and other spending. Overall, the stock analyst is an intermediary between the corporate officers of companies and essentially the public trading space of the markets with the banks.

Analyzing analysts

There are third party companies like Starmine that analyze analysts. This can be a tremendous tool for casual investors who want an edge in trading stocks. Take for example, an analyst who has been spot on when predicting sales revenue, this can give an easy clue to what the company revenues might be. You can analyze further for instance the average recommendation from all the analysts which can give greater insight to the sentiment of the company which is based on fundamentals and not just spur of the moment news revelations. 

Analyzing analyst recommendations is best for investors who trade for earnings expectations and especially options traders who trade during these periods of earnings season.

Conflicting interests

There is a downside, however, because analysts are salaried employees to the banks. Their reputation and livelihood rests on their laurels which can only be as steadfast as their companies' accountability and integrity. With unethical dealings and bankruptcies analysts have a major conflict of interest to be rightfully naive to major issues in order to maintain a reasonable covering of their companies. Imagine if an analyst covers five companies in one industry and that entire industry is  suffering with looming threats from the leader of that industry. Well, it should be obvious to everyone like a cloud hovering over a small city that there may be a major storm, or in this case an industry fallout. Unfortunately, analysts will have a conflict of interest to pander to the corporations in order to keep things under wraps from public investors because much of the market's movements is based on public perception.

To make matters worse, investment banks have been commonly known to create conflicts of interest between their capital supporters and the public by working underhandedly with their corporate clients who have been great clients for public offerings and other capital market deals.

With that said, one should really take a look at who the analysts are working for. For example, if the analyst works with an bank that underwrites the companies he is covering then there is a major conflict of interest. It may not be apparent when times are steady, but it is only a matter of time when this will be a thorn in the side of investors.

 

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