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NASD Investigating Rating Systems
Posted By Barry Ritholtz On April 27, 2004 @ 6:10 am In Finance | Comments Disabled
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:
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|
|"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
|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
|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 
Simply stated, research is still too BUY oriented. Now, you have the added value of being confusing also.
A Year After Firms’ Settlement, NASD Is Launching Inquiry Into How Ratings Are Applied 
Susanne Craig and Ann Davis
Wall Street Journal, April26,2004;PageC1
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URLs in this post:
 Image: http://online.wsj.com/home/us
 mentioned: http://bigpicture.typepad.com/comments/2004/04/the_sell_side_s.html
 Buy: http://bigpicture.typepad.com/comments/2004/04/same_old_game.html
 WSJ: http://online.wsj.com/article/0,,SB108293059991992884,00.html
 Tom Brown: http://www.bankstocks.com/
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