NASD Offers Guide to Stock Ratings
Acknowledging how confusing stock analyst recommendations can be, the National Assn. of Securities Dealers Inc. has issued a guide to help investors decipher equity research reports.
The “Guide to Understanding Securities Analyst Recommendations” was posted Tuesday at the brokerage industry group’s Web site (www.nasd.com), along with a glossary of terms commonly used in the reports.
Last week, Securities and Exchange Commission Chairman Harvey L. Pitt urged brokerages to immediately comply with an NASD proposal that would require them to provide additional information in research reports and stiffen barriers between a firm’s analysts and investment bankers.
That plan is aimed at minimizing conflicts of interest in the brokerage industry, which has come under fire for its supposed lack of objectivity. Critics say analysts face pressure to issue glowing reports that may help their brokerages win or keep investment banking deals with the companies they cover.
Although not new, the criticism has gained momentum in the wake of Enron Corp.’s collapse. Many analysts maintained positive recommendations on Enron’s stock right up until the company filed for bankruptcy protection in December.
SEC approval of the NASD’s plan is expected to take two months.
Meanwhile, the investor guide explains that Wall Street analysts rarely use a simple buy-sell-hold scale to rate stocks; instead, each firm issues its own set of labels or delicate euphemisms.
At Firm A, for example, “buy” may be the top rating, followed by “outperform,” “neutral,” “underperform” and “avoid.” At Firm B, ratings may run from “strong buy” to “buy” to “hold” to “sell.” At Firm C, “recommended list” might be the top mark, followed by “trading buy,” “market outperformer,” “market perform” and “market underperformer.”
The guide also acknowledges one of Wall Street’s worst-kept secrets--that the word “sell” is scarcely used. Frequently, a “hold” rating in effect means “sell,” the NASD notes.
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