Thread by @Srasgon

So I’ve seen this tweet & thread going around, and debated whether or not to weigh in on this (as I am of course biased).

But I think it’s worth a discussion, as the nature & purpose of the sell-side job is frequently misunderstood, by retail investors and (it seems) CEOs alike

https://twitter.com/tobi/status/1523425879908442112

(For many of you here on fintwit the following will be obvious and basic, for which I apologize)

First, to answer the question of “Is there a place where financial analysts track records are kept?” Yes, of course there are, as has been answered many times in the original thread (Bloomberg, Tipranks, etc all provide an accounting).

And yes, the act of providing financial estimates, ratings, and target prices makes up the most publicly visible part of the sell-side financial analyst’s job.

But it is only a part of the job, and arguably not anywhere near the most important part of it.

Institutional clients of the sell-side use analysts in many ways. They use them to get deeper, more concentrated knowledge on a company or industry. They use them for data and analysis. They use them for corporate access. They use them simply to talk through things.

Clients will be interested in a sell-side analyst’s estimates and ratings. But in general they are not basing their own investment decisions on these very much (they have their own estimates, as I’ll get to in a moment).

At most, they may look at sell-side numbers as an indicator of an analysts conviction perhaps.

But picking stocks to buy or sell is the (buy-side) investors’ job.

But yes, when a company reports you will see results compared to “consensus,” which is an average of the various publicly-available sell sell-side estimates as aggregated by the likes of Bloomberg, Factset etc.

And often the stock will react in line with how actual results and guidance compare to these estimates.

But not always. In fact, quite often you will see a stock go up on a “miss” or go down on a “beat.”

This is because the stock is not reacting all that much to how results compare to sell-side consensus; rather it is more a reflection of how results compare to BUY SIDE consensus (which is not a publicly reported number).

In fact, quite often a large part of the sell-side job is to understand what “buy-side consensus” actually is (the individual buy-side investors may not know either!)

https://twitter.com/Srasgon/status/1276724650806927360

As far as the "accuracy" of the estimates themselves goes, you have to remember that sell-side incentives and buy-side incentives on that front are NOT the same

Buy side investors are incentivized to make sure their numbers reflect their absolute best view, as the stock will rise or fall (and they will make or lose money) based on how accurately they predict how the company will do relative to everyone else’s buy-side expectations.

The sell side is different, and (for better or worse) is often not incentivized to have the most accurate estimates. Note that I am not defending this, but it needs to be understood.

Sell side estimates are public, hence there is a fair amount of crowding (if you’re wrong, but everyone else is also wrong, it feels safer).

Often there is a narrative that is being pushed, which can shape the estimates. Remember, the job of a sell side analyst is to be interesting, not necessarily right!

https://twitter.com/Srasgon/status/1276672166948298752

Often analysts with a bone to pick will try to set estimates strategically, which can appear strange.

For example, bullish analysts will want to leave room to take their numbers up over time as their narrative plays out. Bearish analysts will want to leave room to take their numbers down over time for the same reason.

Hence bullish analysts often set their numbers low, while bearish analysts often set them high (the opposite of what you might think).

Companies themselves get into the game. For example, were I to hypothetically decide to set an estimate next quarter well above a company’s guidance, I can almost guarantee I’ll get a call from IR asking me why the hell I'm doing that.

These types of things can interfere with measurement of “accuracy” or “track records” on the sell side; in fact the entire concept of “success” as a sell side financial analyst does not necessarily correlate (at all!) with success at picking stocks or forecasting estimates.

Hence, in some sense talk of analyst “track records” etc, sort of misses the point. While it is the most visible part of the job, it is not, in fact, the job, and there are a myriad number of ways that analysts add value to their clients that do drive “success.”

Now as to myself, I wear every stock call on my sleeve. I do my best with them. But will I claim to have the most accurate estimates and greatest stock calls for all my companies? No, of course not.

But do I try every day to add value to my clients, in ways that will help them with their own investment decisions.

And THAT is ultimately the sell-side job. To help your investor clients make better decisions on what they ultimately choose to buy and sell.

Hence "successful" sell-side analysts are the ones that help their clients be successful in their own forecasting of estimates and picking of stocks, in whatever ways they can manage to do that.

I think we’ll close it out there.

@tobi I hope this helped to give you a bit of a view as to the role the financial analysts covering your company are playing, what their estimates mean, and what you should expect (and not expect) from them.