Before relying on an analyst’s report, understand that reading it without putting it into context may cause you to underperform. Many reports are a form of marketing that are intended to remind clients the analyst is still worth calling. The more reports that are published, the more frequently the analyst’s name shows up in searches on large institutional information systems.
Here are six things you can do to use analyst reports to make money:
- Get ahold of the initiating coverage report. These are the analyst’s best attempt to disclose the whole picture about the subject company. These reports are typically written once per company and are often not available.
- Determine if the analyst’s industry is better or worse than others. Analysts are confined to one industry. A typical report will not put the industry into context with other industries. Analysts typically have some buys, some sells at all times. Does this mean the group is going to do well? Most stocks in an industry move together. Yet analysts are encouraged to maintain a variety of ratings (some buys, some sells, some neutrals).
- Scan headlines of many analysts’ reports, looking for unique insights as well as general trends. This past week, headlines include systems makers talking about missing revenue for lack of parts (ala, Eric) and component makers running plants at 100% (vsh). At the same time, an analyst points out that his proprietary survey of Verizon store representatives indicates significant android demand.
- Know what the analyst’s “edge” is. Analysts each seek their own niche and choose what angle to write about in each report. One may be a “channel check” expert, while another may entice clients to pay commissions by focusing on big picture and long-range trends. Understand that analysts don’t paint the whole picture about the subject company in each report, or perhaps ever.
- Consider that the analyst might be telling prized clients some of what is in a report before it hits publication, or may be putting the report into context for special persons. To succeed as an analyst, it only takes 30 large clients – are you one of them? This means an analyst can communicate with only 30 clients and make a decent living. What does this mean when you read the report and you are not on the analyst’s weekly phone call list?
- Use finance.yahoo.com and look over the analyst ratings, EPs revisions, price targets of all analysts to put the report you are reading into context. Understand that Yahoo information is the same information professional investors obtain through more expensive sources.
Chris DePuy
About the author
Chris DePuy wrote one article on this blog.
Chris DePuy is a finance professional with 15 years experience as a sell-side analyst, hedge fund portfolio manager and venture capitalist. He co-authored The Internet Report while at Morgan Stanley and has developed several computer-aided analytics and trading systems in recent years.
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