I Love Equity Analysts

Research reports by investment banking are by far my favorite source of background research on companies and industries.  Thomson Research (formerly Investext) is the standard-bearer in this area, and I’ve made voracious use of it when I’ve had (highly expensive) access.  Finding a good “initiating coverage” report makes my day, for better or worse.

What makes them so good?

First, they’re much more in-depth than typical market research reports (DataMonitor, I’m looking at you).  When reading market research reports, I get the impression the analysts are filling out a template as quickly as possible.  The inevitable SWOT section tends to be extremely generic, to the point of uselessness.  Equity analysts, in contrast, do their homework.  They do channel and customer checks, even with difficult to reach constituencies like medical specialists.  They attend (and even organize) industry conferences.  They typically cover multiple leading companies in an industry segment and draw relevant comparisons between them.

More generally, market research report writers are trying to minimize their costs, while equity analysts are extremely well paid and are trying to show off how clever they are in order to get more underwriting and M&A business.  The latter leads to better results!

Second, equity analysts are forced to draw conclusions because they have to come up with a price target.  As a result, they have to come up with some kind of impact for all the factors they analyze.  That need to synthesize data and make a conclusion forces them to be much sharper in their thinking.

As an aside, compared to Forrester and similar IT analysts, I have to say that equity analysts tend to be less fluffy and full of platitudes.  I don’t have anything against the IT research firms, but when reading their reports I tend to find myself mentally arguing with their conclusions.  That happens less with equity analysts, perhaps because they are so focused on business fundamentals rather than more ambiguous concepts like mindshare and who’s the most innovative.

Where they still fall short of the ideal

Despite all my gushing praise, equity analyst reports do still have a few shortcomings for business research (I’m thinking of management consultants and managers internal to companies in the industry here).  First, reports focus on the overall company rather than business units or product lines.  That makes perfect sense for stock picks and price targets, but it’s not as useful for managing a product line or business unit, where you need more granular information and analysis.

Second, there’s limited functional focus.  The typical report barely scratches the surface on issues like customer lifecycle management, supply chain management, sales force strategy, and so on.

The best stock analyst reports transcend these limitations to some degree.  The worst devote the entire report to minuscule tweaks to earnings projections.  Nevertheless, equity reports are usually one of my first stops on a project.  They’re good stuff!  Now if only they weren’t so expensive.


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