Survey Suggests Analysts’ Fear of the ‘Sell’ Rating Is Ill-Founded

“Sell” is a four-letter word on Wall Street. And the reason only 1% of analysts’ investment recommendations are “sells” is another four-letter word: “fear.”

At least that was the finding of a new poll of almost 1,000 analysts and research salespeople.

Eighty-eight percent of brokerage analysts said the companies they cover would retaliate against a sell recommendation by cutting their firms out of lucrative stock offerings and merger deals.

But the survey, conducted by Tempest Consultants over the last three months, said analysts may be overreacting.

Only 31% of the 378 companies polled said they have or would exclude analysts’ investment banking teams from financing deals based on a sell recommendation. Company representatives said cutting off analysts is not the answer to a sell rating, however rare it may be.

“If there was a sell recommendation, we would not try to retaliate in any way. That’s really just foolish and gets you in trouble,” said Jerry Cooper, director of corporate communications for Asarco Inc., the U.S.-based unit of Grupo Mexico, the world’s No. 3 copper producer. Asarco has not had to deal with any sell recommendations, he added.

Still, Wall Street remains scared of the sell.

It’s not just the companies that scare analysts, but their own colleagues in investment banking as well. A stock analyst from a top-tier Wall Street firm often is following companies that bring his or her firm millions of dollars in investment banking fees.

If the analyst is down on the company, that cash cow may dry up or take its business elsewhere.

“I think what the analysts are reflecting is a lot more of the pressure coming from the investment banking side, not the company itself,” said Louis Thompson, chief executive of industry trade group National Investor Relations Institute.

About 68% of all stock recommendations today are “buys” or “strong buys,” despite the prolonged market slide, according to research firm First Call/Thomson Financial.

Analysts also worry that the dreaded sell recommendation will cut them off from key corporate executives, such as chief financial officers. But, again, the reality is different.

Fifty-four percent of analysts believe companies will temporarily exclude them from briefings, but only 25% of companies said they had or would cut off access after an analyst rated them a sell.