Elements that should be Considered in a Company Analysis

A thorough company analysis should:

• Provide an overview of the company.
• Explain relevant industry characteristics.
• Analyze the demand for the company's products and services.
• Analyze the supply of products and services including an analysis of costs.
• Explain the company's pricing environment.
• Present and interpret relevant financial ratios, including comparisons over time and comparisons with competitors.

How to analyze real estate developers***

Real estate stocks make up a significant number of companies in Asian stock exchanges and many of them are among the the most volatile stocks. Whether the real estate developer is listed or not, they are influenced by a host of cyclical factors ranging from government policies, interest rates, unemployment rates, affordability, etc. Hence, it is important to understand how real estate companies can be analyzed.

Profit Model

Real estate industry can be separated into the following sub-industries or types of real estate developers:

• Residential real estate developers
• Commercial and mixed use real estate developers
• Industrial real estate developers

Profit model of residential real estate developers

Residential real estate developers are more dependent on economies of scale than ever because of increasing land prices and declining rate of increase in residential property prices. In many developing countries, developers used to be able to acquire land at cheap prices and hope for rapid increase in home prices to make huge profits. In developed countries, land prices are higher, and price increases are more muted. Hence, brands and good management are playing an increasingly important role.

Profit model of commercial real estate developers

As prime real estate for commercial developments become more scare, commercial real estate developers tend to prefer to have rental incomes rather than selling units so that they can have consistent income and manage the properties. These developers are also more likely to sell their commercial properties to real estate investment trusts to free up capital and many are REITs that also develop properties.

Profit model of industrial real estate developers

Industrial real estate developers operate more like commercial real estate developers as they seek to have stable rental incomes and also sometimes selling their properties. Some industrial estate developers might even have a fund to invest in promising industrial companies so as to achieve higher profits.

Factors that Affect Value

• Land bank - the value of a real estate developer is directly influenced by its land bank. As the larger the land bank, usually means the developer can make more profits from developing the land banks later. Hence, the land bank that a real estate company has is always disclosed in detail in the listed companies' reports.
• Inventories - Real estate inventories an be separated into a few categories. Usually increasing values of construction-in-progress and land held for development will translate to higher future earningswill translate to higher future earnings for the company:
  • Completed developments - properties whose construction has been completed
  • Construction-in-progress - means the value of properties under construction.
  • Land held for development - value of land help for future developments.
  • Investment properties - properties held for rent or sale
• Customers deposits - for residential projects, it is often that developers will collect customers deposits or even prepayments of entire houses prior to completion of the units. As these properties are pre-sold and their profit and loss have yet to be recognized in the income statement, growing customer deposits could signal increasing revenue and most likely profits in the coming years ahead.
• Housing prices - the profits from real estate developers that primarily sell their developments come from selling the units at above costs. Hence, the moving of housing prices have direct impact on the profitability of residential real estate developers. Usually the stock price of real estate developers have high correlation with the anticipated housing price direction.
• Rental rates - Rental rates are especially important for commercial and industrial real estate developers as most of them do not sell all the units that they developed but they keep these units for rental returns. Rental rates have direct bearing on stock prices of such developers and REITs.
• Industry consolidation -  as economic difficulties mount and economies of scale becomes more important, mergers and acquisition activities will also drive prices of real estate companies as the merged entities might be more efficient given a larger land bank.
• Macro economic factors - government policies play a huge role in controlling property prices as the following factors will determine the direction of property prices. We have listed

Factor	Movement	Likely Effects
Interest rates	Up	Negative
Land supply	Down	Positive on short term price but will affect future profitability if land bank dries up
Loan Quantum	Up	Positive
Reserve ratio	Up	Negative
GDP	Up	Positive
Unemployment	Up	Negative

 

Valuing Real Estate Developers

A common method to value real estate developers is using the Revalued Net Asset Value ("RNAV") approach which basically determines the net asset value of a real estate developer by adding up the change in value of the investment properties held by the company, the surplus value of properties held for development using Discounted Cash Flow method and the net asset value of the company with any other adjustments that are deemed necessary.

Usually a discount or premium percentage is multiplied with the RNAV base on the developers other qualities such as management capabiltiies, branding, track record, etc. A smaller developer with poor record of continuously generating consistent income is usually given a significant discount to its RNAV.

Using the RNAV approach only takes into account of what the developer can earn with the assets that it has in its books at the time of the valuation. If properly applied, it is usually more conservative than the market approach such as P/E multiples.

However, to use this method, it requires a lot of work in revaluing the properties held by the developer, making it difficult to implement by most people as information needed to determine RNAV needs some skill in obtaining.

The price earnings ratio method could also be useful to cross check the RNAV method.

Source: http://roccapitalholdings.com/content/how-analyze-real-estate-developers

http://secret-gems.blogspot.com/2013/04/how-to-analyze-real-estate-developers.html

The Day Ahead: The Perils of Bottom-Fishing

By Brian Sozzi | TheStreet.com – Tue, Oct 23, 201

By choice, I will stitch together earnings-season notes and play in Excel from the comfy confines of a space no bigger than a restroom in a one-bedroom apartment. To some this would appear akin to self-torture, but to me if offers a physical bubble around any harmful toxins that want to enter the analyses I'm conducting. Stupidly, I allowed a toxin to cross through to the other side on Monday evening, and its name was "Bottom Toxin." After the Dow gagged Friday, we've heard that the world's economic growth rate is now bottoming, and we must quickly welcome an array of earnings-season violators into the portfolio -- or, if you are me, onto the client watch list.

Snauseges? I comprehend that everyone in the #FinServices sphere wants to be the next rock star, that person of perfection who predicts that a market or a stock will likely head higher or lower by 10%. Sure, my dudes, we have to justify fees, be they for execution (research is an add-on, the ultimate "intellectual capital") or some other business being promoted through Google'sGOOG search algorithms.

But as a person who has been trained to first-smash a company's fundamentals into small pieces and then be the pitchman for or against exposure to the stock, I have to ask this simple question: Do the masses truly grasp the characteristics of a "bottom" in a company's performance or in country's economy? Further, for those identifying bottoms all over the place, I fancy there should at least be more than a few data points to support the brick-laying that are alleged to have brought us to financial spoils.

I took a momentary trip to the "bottom," and this is what I learned.

A Bottom, Deconstructed

● Pricing power is hard to come by, as companies become promotional to maintain market share. If Company A is ramping promotions, best believe that Company B and Company C will promote. Inside of that, it's hard to tell which company is winning and with what detriment to margins. Specific to this earnings season, the chatter was that third-quarter profit estimates would be eclipsed with ease. Guess what? That isn't happening, and it's starting on the top line. Are you willing to model for an  expansion in the price-to-earnings multiple in this scenario?

● There are excess goods sitting in end markets. This leads to a mouse-eats-snake development as goods bulge in factories and stockrooms. In upcoming 10-Q releases, skip to the inventory section and target the "finished goods inventory" component -- it's unlikely to be pretty for many companies that had earnings shortfalls. It requires time to sell off products collecting dust, even if a price discount has been enacted.

● There is this natural tendency for executives to believe an improved macroeconomic environment will alleviate the aforementioned issues, but they are hesitant to share this with analysts and shareholders for fear of over-promising and under-delivering. As a result, we are left exposed to potential false reads by the market -- as is currently the case, with stocks reacting harshly to earnings misses.

These are the primary takeaways to my trip to the bottom. I don't want to completely ruin your day with zillions of earnings bullets flying by. You see, the bottom is an ugly place to be, a barren wasteland where the slightest bit of rain brings hope. Stock-pickers will play with their discounted cash flow models, modeling in "reasonable" free cash flow and P/E multiple assumptions -- yet there is no real assurance they are reasonable enough.

At some point, yes, we will have to circle back to the industrial complex, call the big names oversold and then plunk down wagers on brighter quarters in 2013. However, I remain hesitant to call that in names such as Caterpillar CAT and Texas Instruments TXN , as the market is not telling us that should be the game plan right around now.

Deep Thought

Caterpillar traded off the lows of the session in response to earnings. If that was a type of stealthy bullish tell, am I a complete whack job in saying that the action should have spilled over to comparable companies in industrials -- for example, General Electric GE ? Heck, shouldn't the stock have closed at session highs? Theoretically, if a name like Caterpillar is moving counter to conventional wisdom -- that the world stinks -- then sentiment must be mirrored elsewhere in terms of sectors.

Uncensored

On Sept. 5, I said this on Decker's Outdoor DECK : "I'm not feeling how its outlook is shaping up on cost of goods sold, nor on what this means to consumers." On Oct. 23, I say this: Stay far away from this stock. Holiday-quarter guidance will be slashed, inventories are likely to be elevated (again), and core Ugg brand sales will be weak. But why stay far away? Well, there is an outside chance lower prices cleared some excess inventory, and that could trigger hope consumer appetite still exists for the brand -- which would crush the shorts.

http://finance.yahoo.com/news/day-ahead-perils-bottom-fishing-120000614.html

Buy, Sell, Hold: What it Really Means. Just remember as an individual investor not to put too much value the next time you see a report stating an analyst rates a stock a “Buy,” “Hold,” or “Sell.”

Gary Spivak, Tuesday, June 12th, 2012

Your Money >>> 

Buy, Sell, Hold: What it Really Means

In early May, I was intrigued when a few brokerage firms “initiated” coverage of Facebook with “Buy” ratings and price targets in the mid-$40 range — even before the stock was publicly traded. Now, if the stock were to trade near its $38 IPO price, is it still a “Buy” if it’s only going to get to the mid-40s?

Given the disappointing post-IPO performance of the stock and questions about what a particular analyst said or didn’t say to some clients, I thought it would be a good time to look at what makes a sell-side technology equity research analyst tick.

More importantly, how do they generate revenue for their firms?

For the most part, a technology equity analyst (which I have been for the past 14 years) is an honorable, hard-working person trying to make a decent living in a highly competitive environment where trading commissions are declining. But what you need to know is that, in most cases, the analyst isn’t compensated if they make you — John or Jane Q — money on stock picks. From a purely economic standpoint, they simply don’t care.

Billy Crystal used to have a recurring skit when he was a regular on Saturday Night Live called Fernando’s Hideaway. That’s the one where he coined the phrase “You Look Mahvellous!” In the skit, he would frequently utter the saying, “It is better to look good than to feel good.”

For the typical sell-side analyst, it’s better to look good than to be good. It’s more important to be interestingthan it is to be right.

My point is — don’t be taken in when an analyst says, “Buy.” I’m certain they believe it, but there are other factors and conflicts you should be aware of.

“Buy,” “Sell,” or “Hold”

To understand why, let’s review what an analyst does. The analyst works hard to produce a report, sometimes fairly detailed, sometimes with a unique perspective, sometimes merely updating investors on current events, but almost always with a “Buy,” “Hold,” or “Sell” recommendation attached to it.

This report is summarized in “The Morning Meeting,” where the analyst conveys the essence of the message to the sales force. The sales force then may ask questions of the analyst to better understand the message. Ultimately, the salesperson then gets on the phone to their clients to deliver the message — “we say ‘Buy’ XYZ today, and here’s why.”

In many cases, the top clients are the large mutual funds and hedge funds. Why? They’re the ones that pay the most commission dollars. If the portfolio manager at the fund finds the comment interesting, he may place a trade with the brokerage firm issuing the research report. And that is primarily how the cash register rings.

Now, please notice that I said “finds the comment interesting.” I did not say “finds the comment convincing.” Let’s look at why.

When asked what they value in sell-side research, portfolio managers typically point to “idea generation” and “access to management.”

They do not say, “We look for the best stock pickers.” There are two obvious reasons why they don’t say this.

First

If they admitted that they got their stock picks from listening to a sell-side analyst, they would be failing to justify their own existence.

Second

The sell-side analyst who truly is a great stock picker ends up on the buy side. That’s where the decisions are made, and that’s where a good stock picker is worth the most money.

So, whether it’s self-serving or not, the buy side will admit to paying little attention to whether an analyst has a “Buy” rating or not. They’re looking for the incremental things — is this analyst looking at something differently, have they spoken to somebody I haven’t that may have a particular insight, have they recently spent time with the management team?

Believe it or not, there’s nothing sinister in this. It’s just a natural result of the environment for an analyst. Just remember as an individual investor not to put too much value the next time you see a report stating an analyst rates a stock a “Buy,” “Hold,” or “Sell.”

Taking a bet on analysts' stock tips

John Collett

April 30, 2011

Track records ... investor newsletters are a difficult game. Photo: Nicolas Walker

Many self-directed investors rely on the stock tips and advice offered by investor newsletters. But there is no real way to gauge which one has the best strike rate, writes John Collett.

Investor appetite for share tips is growing strongly, spurred by the flight to DIY super. Many self-directed investors rely on the stock tips and advice offered by investor newsletters.

But how good are their recommendations?

While the performance of fund managers is easily established by looking at independently audited performance data, the same is not true for these analysts.

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Only a few have their performance audited. And to complicate things further, all use different methods to measure their success rates. Of the leading players, only Fat Prophets has its numbers independently audited by an accountant.

''Nothing hums like a paper portfolio,'' says Ben Griffiths, co-founder of Eley Griffiths Group, a small-companies manager. ''When the dollar is alive, it's not as easy.''

Demand is growing for these services, particularly from the swelling ranks of DIY super fund trustees looking for advice on how to make money in the sharemarket.

Whereas 10 years ago the newsletters offered a printed publication with recommendations of stocks once or twice a week, these days, the subscribers can access the advice any time as they are updated almost daily.

Investors pay up to $900 a year for their flagship, web-based reports; more when the newsletter is bundled with specialist reports such as mining and small companies.

Fat Prophets has 20,000 subscribers. More than 13,000 of those are based in Australia, with the rest in Britain, where it has a London office, and a small number in the US. In 2005, Fat Prophets had about 7000 subscribers in Australia.

Angus Geddes, who co-founded Fat Prophets in 2000, says a big part of the growth in his business has been the rise of DIY super funds.

''We also attract a lot of people who are disgruntled with the big broking houses,'' he says.

In recent years, Fat Prophets has added a share brokering service and a funds management arm to its stock-tipping services.

Huntley's Your Money Weekly, started by Ian Huntley in 1973, has a loyal following, many of whom are DIY fund trustees and small-business owners. Morningstar bought Huntley's business in 2006.

The head of retail at Morningstar, Paul Easton, says: ''Subscribers are high-net-worth individuals who like to take control of their finances.''

Strike rate

When it comes to the tipsters' track records, it is difficult to make meaningful comparisons - some account for a portion of the costs of investing and others do not.

The Rivkin Report says its recommendations have produced an average annual return of 13.2 per cent against a total return (including dividends) from Australian shares of 9 per cent between mid-1998 and the end of 2010. While the cost of brokerage is deducted from the ''estimated'' return, the performance is not independently audited.

Intelligent Investor's stated return between May 2001 and December 31 last year - a total of 521 recommendations - is 8.9 per cent, compared with the market's return of 8.4 per cent.

Huntley's main model portfolio for the 20 years to the end of last year produced an average annual return of 11.9 per cent, compared with the market return of 11.2 per cent.

Fat Prophets says its recommendations have produced an average annual return of 24.6 per cent, compared with the All Ordinaries Accumulation Index of 8.2 per cent between October 2000 and the end of last year. The numbers for last year have not yet been audited - but they will be.

''It [auditing] is expensive to do but you have to do it, particularly if you use it in advertising,'' Geddes says.

Fat Prophets was pulled up by the regulator in 2002 after using potentially misleading performance figures in its advertising and was required to engage an independent expert to devise a methodology for measuring performance.

Whether the numbers are audited or not, the performance of the tipsters on all their recommendations may not mean that much, since investors could not possibly trade on every one of the tipsters' choices.

Model portfolios

To help subscribers replicate their recommendations in their own portfolios, the tipsters have ''model'' portfolios.

The model portfolio contains a limited number of the newsletter's best stock ideas and is constructed to be balanced between the various industry sectors of the sharemarket.

Each stock holding will be ''weighted''. Stocks they favour most will make up more of the portfolio. The performance of the model portfolio is published to the tipsters' subscribers.

The performance of the Rivkin model portfolio, for example, accounts for the cost of brokerage, interest on the cash balance and franking credits.

''Model portfolios provide a transparent method of reporting our performance and provide valuable advice as to capital allocation,'' says the chief executive of the Rivkin Report, Kristian Dibble.

Tipsters say their services are as much about giving their subscribers advice on what to do when shares they own are the subject of a takeover offer or a buyback from the company as they are about giving tips on stocks.

Dibble says the Rivkin Report's advice to buy BHP Billiton shares in the expectation of a buyback would have made about 26 per cent on the trade. ''It's an example of an event-driven trade,'' Dibble says.

Despite not having a single standard on measuring their performance, Griffiths says the tipsters generally do a good job.

They provide investor education and go into the smaller stocks that normally don't get much attention. However, their market timing on when you should be buying stocks is often less than ideal, he says.

''But the private investor could do far worse than have a copy of the tip sheet like Huntley's at the ready,'' Griffiths says.

Best calls

Fat Prophets' Angus Geddes says their best call was on gold in 2001, when it was at $US258 an ounce. It is now about $US1500. Their view on gold led to a number of gold stock recommendations.

One was Red Back Mining, which Fat Profits recommended in 2003 at between 30¢ to 40¢ a share. The Perth-based miner floated in late 1996 as a junior explorer. The share price of the company rose and the company was taken over last year by a Canadian-listed miner.

Other good calls include Oil Search and uranium miner Extract Resources.

One of Huntley's best calls was its "speculative buy" recommendation on Australian-listed copper miner Equinox Minerals in 2005 at about $1 a share. Huntley analysts recognised the risks facing the company in developing its copper interests in Zambia but liked the fundamentals.

Since Huntley's initial call, the company has been the subject of merger proposals, which helped lift its share price. Equinox is currently under a takeover offer, with its shares trading at more than $8.

Intelligent Investor's two best calls were Cochlear, which makes hearing implants, and ARB Corporation, which makes four-wheel-drive accessories.

The tipster first recommended Cochlear at $6.30 in 1998. Intelligent Investor stuck to its positive view on Cochlear even when its share price dipped in 2004, recommending the dip as a buying opportunity. Cochlear shares are now trading at more than $80.

Intelligent Investor first put a long-term buy recommendation on ARB Corporation in 2004 at about $3.50. It again recommended subscribers buy in 2006. The shares are now trading at more than $8.

Both companies have paid good dividends over that time.

 http://www.smh.com.au/money/investing/taking-a-bet-on-analysts-stock-tips-20110429-1e13s.html#ixzz1MT82Vxq4

British analyst fined £50,000 for misleading message

British analyst fined £50,000 for misleading message

January 13, 2011
LONDON, Jan 13 — A former investment analyst has been fined £50,000 (RM250,000) for sending misleading information via instant messages, pushing shares in a property company up sharply, Britain’s market regulator said today.

Christopher Gower, at the time a senior research analyst at MF Global Securities, sent messages to 14 clients, a Bloomberg reporter and MF Global salesmen implying he had obtained insider information about the REIT status of Enterprise Inns.

What Gower learned during a meeting with the head of Punch Taverns was, in fact, already in the public domain and portraying it as insider information misled the market, the Financial Services Authority said.

Starting his instant message “Hot off the press”, Gower said he had just had a meeting with the chief executive of Punch Taverns. “They have heard from HM Revenue & Customs that it is highly likely Enterprise Inns has been granted REIT status and ETI are due to announce this on May 13 at interims,” he went on to say in the message on May 7, 2008.

“Expect ETI to bounce, was up 10 per cent on previous HMRC news, but then fall back as (the market) realises it will take time to implement.... more on my meeting to follow,” he said.

Enterprise Inns shares rose 4.45 per cent after Gower’s messages were sent, amid high volume.

While the FSA accepted 34-year-old Gower did not intend to give the impression he had inside information, it said he had not observed proper standards of conduct.

“There is no excuse for a senior retail analyst to be so careless with messages that could have such an impact on the market,” Margaret Cole, the FSA’s managing director of enforcement and financial crime said.

“Gower’s dissemination of inaccurate information contributed to a large increase in the volume of shares traded and a disorderly market in ETI shares.”

MF Global was not available to comment. — Reuters

Never trust an Analyst or an Investment Banker

The reason given being they are self-serving. Although they will give you the impression that your interest is paramount, they too benefit from pushing their investment products.

One of the most interesting thing I came across which is worth sharing here is understanding the job of the analyst. We come across analysts' reports regularly. In the present cyclical bull market many of these reports are very bullish. However, recall how many of these analysts' reports were bearish, downgrading the stocks, even when the market was already at the depth of the recent severe bear market.

The most important point to take home is that the MAIN job of an analyst is not to analyse!!! It never was and neither is even today. Hear this, and repeat this often. Keep this in your mind whenever you read an analyst report. (Of course, ze Moolah's blog is an exception, he is not an analyst. Tan Teng Boo, Dali's blog and a few others are in this category. ;-0 )

In fact, an analyst is a salesman. His present job description is very much that of a stock-pusher. This is not unlike that of a drug dealer pushing drug. Of course, this is a rather poor comparison, but you do get the point.

They are there to dress up the report on the company to make it nice so that investors can buy or sell their products they have an interest in.

Who are these present analysts? Are they the white haired chaps who have worked for many years on the job. Most unlikely. They are often perhaps the young 23 to 25 year recently graduates from elite universities who have been given the task to produce the analyst reports on the various companies. They certainly lack the experience of the market.

However, let us not totally dismiss the roles of the analysts and the investment bankers in our investing. Of course, do read the reports but always invest based on your personal opinion and research.

Market strategy: Moving from recovery to expansion

The cyclical run in the market remains firmly intact throughout 1H2010 on three counts below:

• Market performance historically strongest when GDP accelerates
• Earnings-driven re-rating cycle never been shorter than 12 months from trough.
• Risk to earnings on upside, as economic growth accelerates.

Our economist expects GDP to expand by a robust 5.3% in 1Q10, and by 4.2% in 2Q10.  The macro growth momentum, however, is expected to decelerate, with GDP expanding by only 2.5% in 3Q10 and 2.1% in 4Q10 as the low base effect tapers off moving towards the second-half of the year.

The present rally is now coming to 10 months from lows seen in March 2009. 

Cyclicals are expected to deliver the strongest earnings rebound as end-demand and margin recovery kick in to accentuate the growth trajectory off a low base in 2009 where earnings were diluted by writeoffs and pre-emptive loss provisions.

Overweight stance maintained on the Glove sector, with buys on both Top Glove and Kossan

Despite meteoric share price appreciation for glove manufacturer stocks, valuation remains undemanding given robust earnings performance.  At current share prices, both Top Glove and Kossan are trading at PE of 11x and 10x FY10F earnings, well below its respective peaks of 30x and 18x.

Solid earnings growth as supplanted by

• capacity expansion, and
• positive newsflow

should lead to further expansion in PE multiples.

Key risks include

• a sudden surge in latex price,
• energy input costs or
• an unfavourable ringgit/US$ foregin exchange rate movement.

Benny Chew
AmResearch
Published in the Edge Jan 18, 2010

Testing 3 Types Of Analysts

Testing 3 Types Of Analysts
by Rick Wayman


There are several types of analysts on Wall Street, and they produce different kinds of reports because they have different kinds of clients. Let's take a look at the different responsibilities required for each analyst, so that you can do your own litmus test to see which ones you need to pay attention to.

Sell-Side Analysts
These are the analysts that are dominating today's headlines. They are employed by brokerage houses to analyze companies and write in-depth research reports, conducting what is sometimes called primary research. These reports are used to "sell" an idea to individuals and institutional clients. Individual investors gain access to these reports mainly by having accounts with the brokerage firm. For example, to get free research from Merrill Lynch, you need to have an account with a Merrill Lynch broker. Sometimes the reports can be purchased through a third party such as Multex.com. Institutional clients (i.e. mutual fund managers) get research from the brokerage's institutional brokers. (Keep reading about fund managers in Should You Follow Your Fund Manager? and Choose A Fund With A Winning Manager.)
A good sell-side research report contains a detailed analysis of a company's competitive advantages and provides information on management's expertise and how the company's operating and stock valuation compares to a peer group and its industry. The typical report also contains an earnings model and clearly states the assumptions that are used to create the forecast. Writing this type of report is a time consuming process. Information is obtained by reading the company's filings for the Securities & Exchange Commission, meeting with its management and, if possible, talking with its suppliers and customers. It also entails analyzing (using the same process) the company's publicly-traded peers for the purpose of better understanding differences in operating results and stock valuations. This approach is called fundamental analysis because it focuses on the company's fundamentals. This is a rigorous and time-consuming process that limits a typical sell-side analyst specializing in two or three industries and covering about 10-15 companies, depending on the number of sectors he or she follows.The challenge facing the brokerages is that it's extremely expensive to create all this research. Brokerages must recover the costs of paying sell-side analysts from somewhere, but deregulation has significantly reduced the ability to make a profit at anything except investment banking deals. The main result of these "forces" is that research departments cannot research any companies that do not have a potential investment bank deal of about $50 million or more. This leaves thousands of great companies without research. Couple this with the fact that research departments drop coverage rather than issue "sell" reports, and you'll get the perception that analysts only issue "buy" recommendations. (To read more on this, see Why There Are Few Sell Ratings On Wall Street and Stock Ratings: The Good, The Bad And The Ugly.)

Buy-Side Analysts
Buy-side analysts are employed by fund managers like Fidelity and Janus, as well as pension funds. Like the sell-side analysis, the buy-side analyst specializes in a few sectors and analyzes stocks to make buy/sell recommendations; however, the buy-side differs from the sell-side in three main ways: they follow more stocks (30-40), they write very brief reports (generally one or two pages), and their research is only distributed to the fund's managers. Buy-side analysts can cover more stocks than sell-side analysts because they have access to all the sell-side research. They also have the opportunity to attend industry conferences, hosted by sell-side firms. During these conferences, the managements of several companies in a sector present why they are a better investment. After gathering this information, buy-side analysts summarize their case in a brief report that also contains an earnings forecast. These reports are only distributed to the fund's managers.
The sell-side provides research and conferences to the buy-side in the hopes that the buy-side will let them execute the large trades that the funds make when they act on the recommendation provided by the sell-side. Having access to the sell-side's primary research and the ability to attend industry conferences allows the buy-side analyst to follow many more stocks than a sell-side analyst. To compensate the firm for this information, the funds will buy and sell stocks with the brokerage firms that provide the best information.

Independent Analysts
Independent analysts are practitioners who are not employed by either brokerage firms or mutual/pension funds. "Indies", as they are sometimes called, are firms established to provide research that is "untainted" by investment banking deals. Some Indies focus on serving institutional clients and are paid a fee to follow certain stocks and/or to find new ideas that the sell-side is missing. In some cases, these institutional Indies have a relationship with a brokerage firm and are compensated by trades given to them by the funds. Sometimes it is a fee-only arrangement.Other Indies provide their research to both the institutional and individual investors. These firms may provide their research on a subscription basis or for free. In either case, it is important to understand the nature of the relationship between the research firm and the company that is being analyzed (generally called the "Subject Company"), even if the report is not free. Every research report is required to have a section called the disclaimer that discloses, among other things, the nature of the relationship between the research firm and the subject company. Every major brokerage firm and every Indie must provide this information. This disclaimer generally appears at the end of the report and is in small type. In it, the research firm must disclose if and how it is compensated for providing research. For example, major Wall Street firms will disclose that they provided investment-banking services to the subject company. Some indies will accept stock or other forms of equity as payment for their services. Other Indies will only accept a cash only fixed-fee.

Analyst Objectivity
The objectivity of research reports is a major question, one that is now asked of both the large Wall Street firms as well as the Indies. Is Wall Street research objective? Can an indie provide an objective research report if it is paid by the subject company? These are difficult questions to answer without reading the disclosure and the report and knowing something about the firm and the analyst. Just like on Wall Street, some indies strive to meet a higher standard of ethical conduct while others just try to manipulate stocks. But it is your responsibility to understand and evaluate this information.Indies play an important role in today's market by providing research on small/micro cap stocks that are ignored by traditional brokerage research departments. Wall Street has become myopic, focused on big cap stocks and pleasing big institutional investors. This has resulted in the majority of stocks becoming "orphans" despite their investment potential. Indies attempt to bridge this information gap by providing research on stocks Wall Street has orphaned. While the Internet revolution has increased the ability of individual investors to do their own trades and research, it takes time and experience to do a thorough job. Legitimate indies take the time to provide useful information. It is up to you to judge its worth.

by Rick Wayman, (Contact Author Biography)

http://investopedia.com/articles/analyst/052102.asp