On Wall Street, Sell = Salmonella

If you read Dana Cimilluca’s story in yesterday’s Wall Street Journal titled, “Research Analysts: Best-Paid Concierges?” (click here for story) and thought, “That’s just absurd!” - you’re with us.

In the independent research world, we tackle this issue on a daily basis. Some independent research providers pride themselves on their abilities to set up company management meetings for their clients. In fairness to them – in many cases, this is what clients want. We are constantly surprised at the interest and desire amongst our hedge fund and bulge bracket firm clients to have such meetings. Not to suggest that company management doesn’t have anything insightful to say – but when have you ever been to a company meeting where the company provided insights into how they are falling short or worse - failing?

What is the true value of these meetings? And more importantly, are they really worth paying commission pricing for? Are there actually companies out there who are unwilling to sit down and meet with hedge funds and other institutional investors without a middle man (analyst) being involved? Wouldn’t it be much more simple and cost effective for these high powered investors to go directly to company management and arrange a meeting?

"The Catering Business"

We affectionately refer to our research counterparts who focus on company management luncheon schmooze sessions as ‘The Catering Business.” In the catering business approach to research, an analyst issuing a SELL (GASP!) recommendation on the host company is the equivalent of serving up salmonella to the black-tie crowd at Cipriani.

Besides the fact that regulatory rules won’t allow for companies to really open up in these meetings, does any party involved really expect an analyst to offer up an objective, insightful, potentially critical report after a company has played host to interested investors?

If so, we respectively contend these people reside in FantasyLand.

Since access to companies is important to analysts’ abilities to do their jobs, it’s no wonder sell recommendations this year have dropped to 7% (according to WSJ story). Our question is, why would anyone want such conflict-ridden research, let alone pay for it? Do these people still have Jack Grubman on speed-dial?

Isn’t it about time that analysts band together and raise the bar for objective research? Isn’t it up to analysts to manage companies’ expectations about what a company meeting entitles them to? It should be a chance for them to be heard – not an automatic guarantee of a buy rating.

Analysts should take a page from journalists and recognize that their job is to provide objective and insightful perspectives – not make friends. Fears of being stonewalled, bruised egos, and negative market impacts should not have any impact on the integrity of an analyst’s research.

StreetBrains believes analysts should leave the catering to Cipriani, and focus on writing insightful, objective research.