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NASD Investigating Rating Systems

Posted By Barry Ritholtz On April 27, 2004 @ 6:10 am In Finance | Comments Disabled

WSJ.bmp [1]

We’ve mentioned [2] previously that much of the bulge bracket firms’ research is still overweighted to issue “Buy [3]” recs (pun intended).

According to the WSJ, the NASD is finally looking into the matter. The Journal sums up the issue perfectly: “This isn’t a trick question: Is an “underperform” stock in an “outperform” industry more attractive than an “outperform” stock in an “underperform” industry?”

The upshot for investors in the meantime is this: While at some firms a “buy” actually means a stock is expected to rise in value, at others it means the stock could fall — but less than its rivals. Common are words like “underperform,” “in-line” and “peer perform.”

The Journal uses some ratings on Intel (INTC) as a somewhat humorous example:

Un-INTEL-ligible

Wall Street firms think Intel stock will do well in the next year or so, but that’s not always easy to tell from their jargon. Their definitions don’t help much. Maybe we can.

Firm Rating What they say What they mean
Bear Stearns Stock:
Outperform;

Sector: Market
Weight
"Projected to outperform analyst’s industry
coverage… . Expect the industry to perform approximately in line
with the primary market index."
It’ll probably do better than other semiconductor stocks,
and that industry will be an average performer.
Morgan Stanley Overweight "Return is expected to exceed the average … of the
analyst’s industry coverage … on a risk-adjusted basis."
It could go up or down, but it should do better than
rivals.
Smith Barney Buy/Medium Risk "Expected total return of 15% or more." What they said.
UBS Buy 2 "FSR is >10% above the MRA, lower degree of
predictability."
It’ll probably go up by 15%-plus (yup) over prevailing
interest rates but they’re not as sure about it as other stocks.

Source: WSJ [4]

Simply stated, research is still too BUY oriented. Now, you have the added value of being confusing also.

UPDATE: April 27, 2004 9:10 am
Tom Brown [5] explains why they went indie here [6].

Source:
A Year After Firms’ Settlement, NASD Is Launching Inquiry Into How Ratings Are Applied [4]
Susanne Craig and Ann Davis
Wall Street Journal, April26,2004;PageC1

http://online.wsj.com/article/0,,SB108293059991992884,00.html


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2004/04/nasd-investigating-rating-systems/

URLs in this post:

[1] Image: http://online.wsj.com/home/us

[2] mentioned: http://bigpicture.typepad.com/comments/2004/04/the_sell_side_s.html

[3] Buy: http://bigpicture.typepad.com/comments/2004/04/same_old_game.html

[4] WSJ: http://online.wsj.com/article/0,,SB108293059991992884,00.html

[5] Tom Brown: http://www.bankstocks.com/

[6] here: http://www.bankstocks.com/about.asp?urlkey=why

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