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Stocktake: Be wary of analyst sell ratings

Study suggests the problem is many firms put little thought into their sell ratings

The sell ratings are often superficial and uninformative, a pretence to give the illusion of objectivity. Photograph: iStock

Proinsias O'Mahony's face
Proinsias O'Mahony
Tue Dec 22 2020 - 05:50

Many investors are sceptical when it comes to analyst buy recommendations, but a recent study suggests the sell ratings may be more problematic.

In the late 1990s, the study notes, US analysts feverishly issued buy ratings in order to curry favour with companies.

Buy ratings exceeded sell ratings by a ratio of 39:1, prompting regulators to step in and force firms to disclose their buy:sell ratios. It worked, with the ratio falling to 6:1.

The problem, the study suggests, is many firms are putting little thought into their sell ratings.

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When they issue a buy recommendation, they then look for a stock on which to slap a sell rating, even if there has been no change in the company’s earnings outlook.

In other words, the sell ratings are often superficial and uninformative, a pretence to give the illusion of objectivity.

See the full study here https://tinyurl.com/y9w8rwhr

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