BREAKING NEWS: stock analysts are not necessarily working in your best interest (unless you’re a hedge fund)!
Interesting report highlighted by the Wall Street Journal that basically quantifies something you probably already knew…
- Asked who was their most important group of clients, 81.5% of analysts picked “hedge funds.” Only 13.3% chose “retail brokerage clients.”
- Fewer than a quarter of the analysts said that the “accuracy and timeliness” of their earnings forecasts were very important to their compensation. Only 35% said that the profitability of their stock recommendations was crucial in determining how much they earned. Their “standing in analyst rankings or broker votes,” however – essentially how they score in media surveys, “broker votes” and other annual popularity contests among clients – was very important in shaping compensation for 67% of the analysts.
- Approximately one in four analysts has been pressured by a supervisor to lower earnings forecasts, presumably because that makes the forecasts easier for companies to beat – thereby pleasing investors and companies alike.
- Only half of analysts said that primary research, like discussions with customers and suppliers, was very useful in forecasting earnings or recommending stocks.
- Nearly 40% of analysts said that it was very likely that they would lose access to management or be “frozen out” of question-and-answer sessions on conference calls if they issued an earnings forecast well below the Wall Street average.
- More than two thirds said that private phone calls with management were far and away the most important factor in their work.
- It’s customary for analysts to have private phone discussions – one-on-one – with a company’s chief financial officer shortly after the company’s public conference call to discuss its quarterly earnings.