Security analysts & insider trading

The better the job you do as an analyst, the closer you get to insider trading. Apparently. An old (2005) New York Times article about the drug approval process and the work of security analysts

Security analysts & incentives

Not surprisingly, there still seems to be some pressure on (sell-side) security analysts to provide an optimistic outlook. Here's Andrew Main (City Beat) on analyst Brett Le Mesurier leaving the industry.

Le Mesurier's form includes being the first analyst to have put a sell on Babcock & Brown -- "not early enough" as he ruefully put it yesterday.

He's got a reputation for calling things as he sees them, which may not be an instant hit with the big corporate brokers. Take his view on NAB: "It's the worst-performing bank, and they've consistently delivered in that department."

He admitted such lines don't make him instant friends on the sell side.

"But the fund managers love it."

Analyst coverage and small cap firms - Australian evidence

Yep, happening here as well. The Australian reports.

It all suggests that the firms themselves see analyst coverage as important, notwithstanding the recent (& ongoing) criticism that securities analysts have come under. Assuming that research on small caps is informative, or that the visibility from coverage is beneficial, there's some scope for the market to fill the demand for small cap research.

Analyst coverage matters?

Seems to, according to this Wall Street Journal article (subscription required to view full article). Here's how it starts:

A year ago, investment analysts from seven brokerage firms shadowed the financial progress of Intevac Inc., a small, Santa Clara, Calif., technology firm. Today, a lone analyst is all that remains.

"That coverage was pretty important to us," says Jeff Andreson, Intevac's chief financial officer. Among other woes, losing coverage "hurts liquidity, making it harder for our institutional investors to build or sell positions," Mr. Andreson says.

Intevac isn't unique. Whether due to layoffs, attrition, retirement or brokerage firms moving analysts around, Wall Street's map of corporate coverage is shrinking these days.

Analyst influences market...

Looks like it might still matter what analysts think. From The Australian

Asciano requested a trading halt yesterday after its shares plunged as much as $1.085 to a record low of 63.5c in the first 20 minutes of trading.

The sell-off was sparked by a massive downgrade from Citigroup analyst Sanjay Magotra, who slashed his target price on the stock from $6.08 to just 82c and reversed his trading recommendation from "buy" to "sell".

Not sure if this is a man bites dog or a dog bites man story...

Forecasting

Involves trying to work out what will happen in the future - a good starting point is to work out how things might change from what you currently observe. Here's an article that describes how analysts expect earnings to decline going forward.

John Durie highlights the problems in going from profits (largely capturing what has happened) to market price (capturing what the market expects to happen).

CORPORATE Australia is in a lot better shape than the stock market would indicate, but then that's due in part to the fact that the market is trying to predict a very uncertain future and that the profit results are yesterday's news.

Certainly, the numbers from high-profile companies released over the past week have done much to calm nerves, as shown by the dramatic turnaround in Wesfarmers' stock price yesterday from a 2.7 per cent fall to a 5.3 per cent rise in a matter of minutes after the release of its results.

Reporting season

It's half yearly reporting season, so plenty of articles about focusing on company profits. Note that most of these articles are going to compare actual profits with forecast profits, where the forecasts are based on what analysts anticipate.

Here's an example:
Coca Cola (The Australian)

Note also the use of 'pro forma' profits being used by managers. Pro forma earnings are GAAP earnings (i.e., determined in accordance with the accounting rules) with some adjustments. Usually the adjustments make the pro forma profit higher than the GAAP profit. Cochlear is an example.

Pressure on security analysts

Do analysts ever wonder about the consequences of downgrading their recommendation on a firm? What if it's death threats? Yep. I think the analyst made the right call. As long as they're not, you know, actually killed.