Well, that’s exactly who sell-side analysts target with their everchanging recommendations, EVERYBODY. First, understand that much of the stock trading each day occurs between large institutions. Those institutions, including pension and mutual funds, investment advisors, and insurance companies generally manage portfolios on behalf of their clients. To determine which stocks to buy or sell, they rely on the research and opinion of in-house and sell-side analysts.
For a long time, sell-side analysts have been pilloried for conflicts of interest and being primarily motivated by the commissions tagged to their biased pitches. Sell-side firms employ research analysts, traders and salespeople who generate ideas and provide investment services to buy-side asset management firms. Sell-side analysts, are industry experts who follow specific stocks, predict future EPS, and dispense “blanket recommendations” as they are not directed to any one-specific client, rather the general mass of the firm’s clients. They provide often-heard “strong buy” and “outperform” and seldom heard “neutral” or “sell” recommendations on the companies they follow.
Since sell-side analysts sell their investment ideas to investors via the brokers at their firms, every time a client makes a decision to trade a stock, the brokerage gets a commission on the transactions. Most importantly, we rarely find negative opinions in sell-side reports as it might jeopardize their relationship with any given company. At the end of the day, the firm wants to maintain its investment banking relationships as they will continue getting their commissions and have a bite from underwriting securities once in a while. Buy-side analysts, by contrast, are theoretically completely independent as their recommendations are for internal use only, almost exclusively to portfolio and money managers. A buy-side analyst is not a dealer, underwriter, or market-maker in securities and his interests are closely aligned with those of the corporation.
Simply put, imagine that you’re out to buy new computers for your company. The salesperson who tags along and describes the boring details of every single type of computer, would be the sell-side clerk. Meanwhile, the IT department at your company which gave you specific details of the company’s needs and their recommendation of the model type would be the buy-side. Who’s recommendations would you take, the commission paid or the interest aligned-clerk?
Also see Sell-Side Research Accuracy
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I have always been confused between Buy-Side and Sell-Side! Very well-put. I loved the computers example.
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Sal,
I agree with you that some sell-side or research based firms have some sorta biased opinions but not all do and the quality of a report varies with certain analysts and not the firm as a whole. Also, saying that PM’s only rely on sell-side reports is just your opinion and not a fact. Because if PM’s at a buy-side firm were relying on just the opinions of outsiders, than they would be out of a job. There has to be an investment process and what’s usually the case is the PM’s receive recommendations from the senior or junior analysts and from that they make their decision based on the analysts case or there experience.
Now I’m not saying they don’t read sell-side research, because sometimes you can find useful information on a company (i.e. background, future projects etc.) especially a company that you haven’t covered. But, in the end you have to form an independent opinion.
Thank you for the article.
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Market Neutral: Glad to hear that.
Leif: Thanks, I stated that PM’s rely on both buy and sell-side analysts. PM should never rely exclusively on sell-side recommendations, but only use them to support their own investment decision. At the end, sell-side’s only hope is that the buy-side will let them execute their large trades.
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