Guest Post: How To Profit From Brokerage Research

How to Profit From Brokerage Research

Though brokerage analysts are frequently wrong with their recommendations and price targets, there is value in their research. The key is to know what to look for and what to ignore. Here are three key items I discuss in my book, Better Good than Lucky: How Investors Create Fortune with the Risk-Reward Ratio.

The buy or sell rating is typically the most often quoted part of a research report. The inherent problem is that brokerage analysts are infatuated with the word “buy.” According to Zacks.com, approximately half of all stocks covered by analysts currently have the equivalent of a “buy” recommendation. Conversely, just 2.5% have the equivalent of a “sell” rating. (Obviously, if so many stocks are buy candidates, wouldn’t a more cost-efficient strategy for brokerage clients be to simply invest in an index fund, such as the S&P SPDR (SPY)? Such a strategy would certainly save on transaction costs, while still providing exposure to many of those “buy” candidates.)

The simple fact is that analysts loathe putting a sell rating on a stock. This is why you should look past the rating and instead pay attention to what factors the analyst is looking at. Specifically, focus on industry statistics, specific ratios and other criteria that shed light on how the business is doing. For example, if the analyst cites a specific industry report or publication, see if it is available on the Internet. Such data will give you a good framework for doing your own analysis of business trends. (more)