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Have Analysts Gotten Honest?
By: Mark Mahorney

It caught my attention when I heard an analyst on a popular financial news program tell investors to sell a stock because too many analysts liked the company, citing the fact that there were no sell ratings.

It seemed perfectly logical to me that analysts wouldn’t be telling investors to sell 3M (MMM), which has one of the most consistent positive earnings records in the history of the stock markets. But being suspicious of conflicts of interest between brokerage firms and analysts I decided to do a bit of fact checking anyway.

While the stock did not have any sell ratings at the time of writing, there were quite a few hold ratings. Now I feel compelled to diverge here and say that the hold rating seems quite illogical to me. If a stock is good enough to hold it’s good enough to buy, and vice versa if you wouldn’t want to buy it then you shouldn’t want to hold on to it either.

As it turns out, the average analyst rating for 3M was only slightly and insignificantly better than the average for all stocks in the Dow Jones Industrial Average, of which the company is a component.

But what was most interesting about the ratings on Dow components was that, despite numerous and serious legal problems, AIG (AIG) was tied with General Electric (GE) and Du Pont (DD) for the third best rating, only bested by Citigroup (C) and Microsoft (MSFT). AIG was actually more highly recommended by analysts than J.P. Morgan Chase’s (JPM) and American Express (AXP).

This didn’t do much for my confidence in analyst ratings.

So I dug a little deeper looking at the more statistically significant S&P 500. What I found was that companies in the index with the worst revenue performance did actually carry more sell ratings than companies with the best performance.

At least analysts were using the sell rating, something they seldom did in the past.

There was, however, a significant bias towards the neutral ‘Hold’ rating for all stocks indicating reluctance on the part of analysts to commit to buy and sell recommendations.

Mark Mahorney
www.MarketSpectator.com
www.BlogginWallStreet.com
www.MarketBlog.com

About the author:

Mark Mahorney is a freelance financial writer for hire.

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