Friday, March 10, 2006

Stock Analysts: Make Better Use of Them?

A better use for analysts? No lawyer jokes, please.

Given the blogosphere's relative disdain of the use of stock analysts to provide stock picks that outperform the market - something I wrote about the other day - it occurs to me that the first few analysts considering a stock provide a valuable service in disseminating market information. In other words, they produce an opinion on, say General Electric (GE) that offers some usefulness. They can provide some insight for investors into the underlying business fundamentals, and the relative value of the stock in comparison to its current market price.

However, the marginal utility of additional analysts diminishes considerably: i.e. what does the sixth, tenth, or fifteenth analyst considering the merits of GE as an investment "bring to the party" that hasn't already mentioned by the others? On average, very little or, more likely, nothing.

So my question to some of the smaller investment houses would be this: Why use them at all for the larger covered companies? Wouldn't it simply be cheaper to open brokerage accounts at the largest investment houses such as Merrill Lynch, Morgan Stanley, etc. and gather their reports relating to the large firms. A writing or accounting student could be hired to provide a "synopsis report" of the thinking of the five largest ones, together with what those analysts think is the major opportunities and pitfalls with buying this stock. In this way, a client who wants to own the big issues could gain access to the current thinking on it.

So instead of hiring an expensive analyst to further cover an already over-covered stock, your analysts instead concentrate on the uncovered, undiscovered, or minimally covered stocks, where your people can truly add some value for your clients. Furthermore, how about basing some performance bonuses on how well those recommendations do in comparison to a peer group of stocks in the same sector or segment? In my opinion, this would be sure to produce "buy" ratings when they are more likely to fatten your clients wallets.

To those readers in the business: any comments?


The Confused Capitalist

Support this blog and our advertisers: check out the advertised listings.

No comments: