A sale advice by an analyst applies only to those clients who already own the stock (and to that tiny minority oriented to short selling).
A sale recommendation has a much smaller business-generating potential. Reseach analysts are employed and compensated on the basis of the accuracy of judgement and on the amount of business their reports generate. So analysts have a buy bias too.
Individual brokers face yet another dilemma when making a sale recommendation. The investor tends to blame poor results more on a sale than on a buy. That tendency can get brokers into trouble with their clients (and analysts into trouble with a firm's brokers). Another way for a broker to get into even more trouble is to suggest redeploying the funds in another stock that goes down.
In summary, there are five ways a sale advice can backfire on a broker:
1. It can offend the client who is emotionally attached to this stock.
2. Selling can close out a painful transaction (a loss).3. The sale can be followed by a price rally, which would have provided greater profit or a reduced loss if the stock had been held.
4. Funds liberated by the sale might be reinvested unprofitably, making the sale a double troublemaker.
5. Unless the sale price proves nearly perfect, the broker is resented for generating a commission by suggesting the action.
It is also worth noting that penny-stock houses never recommend a sell unless it is to generate funds to buy something else. The major reason is that they themselves must buy what investors sell because they, virtually alone, make the market in the stock.
The most prudent practice is never waiting to hear sell advice. Assume it will not be heard, and plan to make your personal selling-versus-holding decisions based on your own rules.
Euphemisms
Other words for sell, however, commonly do appear. Brokerage firms have devised a variety of ways to describte a corporate situation that indicates a sale is the best option.
- One of them is to write a report covering a corporate finance client, which is labelled a follow-up to the underwriting and carries no opinion or recommendation. Follow-ups need to be read closely.
- Even if the official policy is to give no recommendation, the tone of the report needs to be evaluated carefully. If it is less glowing, suspect that the research analyst is not impressed with this stock and, while constrained from saying so, really thinks it should be sold.
- Another way, short of uttering the Sell-word, is for the firm to drop analyst coverage of a company altogether. Such silence is not golden.
- Another diplomatic approach is to give a recommendation other than buy that is kinder and gentler than the Sell-word itself. The best euphemism for sell, ironically, is its operative opposite: hold. When an analyst does not want to say buy and is not allowed to say sell, the only option remaining is hold. Consider hold almost always as a danger sign. In fact, hold really should generally be interpreted as meaning, do not hold.
- hold
- accumulate
- long-term buy
- market performer
- market weight
- perform in line
- under perform
- underweight
Another coded way of saying sell is a carefully worded message such as: The stock is probably a worthwhile long-term holding despite some near-term uncertainties. That is translated by teh cynic as: If you hold for quite a while, maybe you will not lose. All such euphemisms should be taken as signals to cash in.
On the other hand, don't place too much hope on an analyst's postings titled: "Why I like stock XXX a lot?" Remember the analyst's buy bias and always to do your own homework.
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