Thread by @FIGfluencer

1/ Sell-side analysts receive plenty of criticism from the buy-side and fintwit for being mostly garbage.

As a buy-side user of sell-side research and as an ex sell-side analyst, I wanted to opine on what gives the SS a bad reputation and provide insight into why.

2/ I’ll follow up at a later date with a post in support of the sell-side, discussing how I think the buy-side values the sell-side and why I think it isn’t going to be disrupted by newsletters (sorry fintwit substackers).

3/ Stock picking - Sell-side analysts have a reputation for being bad stock pickers.

At IB’s and independent shops they are positively biased due to IB and corp access conflicts, so they have too many buy ratings.

Example below of an analyst’s recommendations. So many buys.

4/ If they ain’t got a buy on it then they usually sit on the fence with a neutral rating. Typically it’s a ‘closet sell’ as they don’t want to piss off bankers and mgmt teams.

If they have a sell, it might be because they’re told by their bosses to have relative sell ratings…

5/ … which is known as the ‘research sell’ and the rationale is often a relative valuation call or pair trade idea, which rarely works.

Or they could be putting a sell on a stock to make noise and attract attention so clients will speak to them.

6/ In their defense, they are paid to provide research coverage and not pick stocks, the buy-side doesn’t care about their ratings (ofc a function of SS being historically crappy stock pickers) and they have a wide audience of investors (pods, HF, long only and never sellers etc)

7/ Lack of quality research - I’d say a only a few % of sell-side research is worth reading. The rest is mostly trashy maintenance research like previews, results and reportage of the news.

Even senior analysts that are supported by 3/4 associates rarely publish real research.

8/ This isn’t because they are terrible analysts (though there are many bad ones out there) rather there are too many constraints on time.

Let’s look at the example of this analyst. Covers 28 bank stocks but I rarely see any real research from him.

Why is that? …

9/ Mostly the senior analyst is spending majority of the day trying to call clients to stay visible and maintain their franchise.

Pre-covid, they would have been on the road seeing clients. Also factor in hosting corporate access meetings too.

So no time to do any research.

10/ Even with a team of associates, it’s 28 stocks. That’s a lot of maintenance (updating every model twice a quarter and writing previews/results) for the team.

Then add in other demands on time like responding to client requests, IPO work and updating marketing decks etc.

11/ The lack of time and resource is a key reason why there’s little good research out there. But also an element of doing the minimum required as long as they keep calling clients and getting access.

You can be a successful ranked and well paid SS analyst with awful research.

12/ The ppl that do publish good research do it because they like to do it, might be younger seniors building a franchise, think they are stock pickers and/or auditioning for buy-side, work at a shop that focuses less on maintenance or has a great team that writes the research.

13/ Estimates and price targets - SS estimates are crap, especially for out yrs and consensus clustered.

That’s mostly due to the analyst not wanting to be too different from consensus. Or they are anchored to company guidance, usually sandbagged for the beat and raise.

14/ and/or because the model is maintained by the analyst’s associate with like 2yrs experience that doesn’t know how to model the company properly.

For PTs, SS mostly solve for their recommendation, so the valuation models are fudged, challenging if valuations run away.

15/ If a stock you have a buy on misses numbers, you haven’t published on it in a while and market re-rating pushes stock beyond your PT but you want to keep the buy then you do the classic SS move…

Cut EPS but somehow up PT to give you 20% upside to keep the buy rating 😂

16/ Usefulness of speaking to SS limited - There’s many reasons I talk to SS analysts as they are experts in the stocks they cover and help with understanding investor sentiment and the key debates around a stock etc.

But there are limitations to their knowledge…

17/ If I want to dig deep into an industry or biz, I’m better off talking to an expert I find from a network as the SS analyst mostly has high level knowledge.

On the buy-side, I’m typically more informed on a stock than the SS as I have more regular access to management teams,

18/ + being a global investor across public and private gives me a better sense of the broader industry and competitive dynamics.

Also, I see a wider range of views from all the other SS analysts, therefore I have more inputs into my view around a stock.

19/ Lastly, I have probably spent way more time doing work on a company, whereas the senior SS analyst probably got their associate to write their last report or update their model.

20/ To wrap, SS research is flawed and mostly terrible. But it doesn’t mean the analysts are awful, rather it sucks due to limited time + resource and they focus on what gets them paid

Despite its flaws, SS still has value to the buy-side and I’ll address it in a later post.