I have been involved in the investment industry for almost 29 years. The first 13 I spent with Dean Witter Reynolds (now Morgan Stanley (NYSE: MS)) and the last 16 years as a senior partner with two investment banking-research boutique firms. I have worked with over 150 stock research analysts just on the sell-side and another 200 plus on the buy side. Categorically, the title research analyst does not make an analyst a rocket scientist. There are a few myths that need to be explored and more importantly, explained.
There are two and only two types of analysts in the stock research world. 1) those that "get it" and are ahead of their particular industry and can pretty accurately predict what is "going to happen" within the sector they follow, and 2) analysts that are strictly reporters of the news affecting their sectors and do not think outside the box.
Case in point: Stewart Barry of ThinkEquity Partners (my alma mater) has been absolutely brilliant in the internet services sector. Forward thinking, cutting edge research and the ability to separate the news from the noise. Stewart nailed the strong possibilities of Aquantive (NASDAQ: AQNT) and 24/7 Real Media (NASDAQ: TFSM) being acquired. Both are getting acquired. What Stewart nailed wasn't the rumor mill about these two -- he was dead-right on the fundamental issues affecting Microsoft (NASDAQ: MSFT) and Google (NASDAQ: GOOG) and how AQNT, TFSM, and DoubleClick could fill those needs. Stewart Barry is an all-star analyst because he is ahead of the curve and ahead of his peer group. Stewart has reiterated his buy rating on ValueClick (NASDAQ: VCLK) not because it may be acquired, but because the basic fundamentals are superior and the company's growth rate is accelerating.
Since the Aquantive announced acquisition by Microsoft, a few analysts, who shall remain nameless, moved ValueClick to a "hold" rating due to the valuation. Talk about missing the forest from the trees. These analysts are looking-backwards and thinking the stock is too expensive. The company is experiencing accelerating revenues, earnings and a general industry growth rate and these guys are out to lunch. It never ceases to amaze me.
What do you do as an investor?
When your broker/adviser brings you a recommendation from "my analyst" ask a couple of key questions. Tell me about the analyst? Tell me the analyst's background? Is the analyst from industry or just follows it after getting his MBA? Tell me about the analyst's last 5 recommendations--the timing of the recommendations. Did the analyst accurately predict the revenue and earnings model? Does the analyst have an industry theme piece laying out the dynamics and driving forces of the sector? I think you get the idea--ask meaningful and poignant questions. As an investor, you need and should know these critical data points about any research analyst's recommendations.
Like portfolio managers... all analysts are not created equal...
Georges Yared is the CIO of Yared Investment Research. For well thought-out growth stock ideas please visit the web site
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