Sell-side share analysis is wrong

By The Economist online

“SELL-SIDE” analysts, whose firms make money from trading and investment banking, are notoriously bullish. As one joke goes, stock analysts rated Enron as a “can’t miss” until it got into trouble, at which point it was lowered to a “sure thing”. Only when the company filed for bankruptcy did a few bold analysts dare to downgrade it to a “hot buy”.

Economic research shows that there is some truth to the ribbing. The latest figures from FactSet, a financial-data provider, show that 49% of firms in the S&P 500 index of leading companies are currently rated as “buy”, 45% are rated as “hold”, and just 6% are rated as “sell”. In the past year, 30% of S&P 500 companies yielded negative returns.

Profits forecasts made more than a few months ahead have a dismal record of inaccuracy. According to Morgan Stanley, a bank, forecasts for American firms’ total annual earnings per share made in the first half of the year had to be revised down in 34 of the past 40 years. Studying their forecasts over time reveals a predictable pattern (see chart 1).

In theory, a diligent share analyst should do his own…

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Category: Business and finance, Approved, Finance and economics, FINANCE

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