If you invest in stocks, you may want to check out a recent column in The Wall Street Journal titled Why Wall Street Can’t Handle the Truth. In it, Mike Mayo, a sell-side analyst offers one reason why so few stocks are ever slapped with “Sell” ratings:
Analysts almost never said to sell specific companies, because that would alienate those firms, which then might move business for bond offerings, equity deals, acquisitions, buybacks or other activity away from the analyst’s brokerage firm. Say the word “sell” enough times, and you win a long, awkward elevator ride out of the building with your soon-to-be-former boss.
Mr. Mayo also says that analysts such as himself who nevertheless brave “sell” ratings on the stocks they cover are “yelled at, conspicuously ignored, threatened with legal action and mocked” by company executives with the intention of silencing them. Fear of getting into trouble may not be the only reason why analysts are almost never negative on the stocks they cover. As Preet Banerjee pointed out in a recent column, analysts put lipstick on every pig due to herding behaviour. Career-wise it is much safer to move with the crowd because while going against the crowd can make one a hero, it can also make one a goat.
Analyst reports may be a good source of useful data on stocks but investors should keep the conflict of interests in mind when looking at stock ratings.