Morgan Stanley to Simplify Stock Rating System

Brokerage Morgan Stanley said Monday that it will simplify its stock rating system and put more emphasis on harder-hitting research, as part of a Wall Street trend to address the issue of analyst independence.

The securities industry has come under heavy fire from regulators, politicians and investors over the last year to end conflicts of interest that cast doubt on the honesty of analysts’ research. Critics also have called for analysts to be clearer in their reports instead of using murky language to obscure negative feelings about some stocks.

Morgan Stanley, the second-largest U.S. brokerage, said it will begin using three stock ratings--overweight, equal-weight and underweight--as of March 18.

The brokerage’s current ratings are strong buy, outperform, neutral and underperform.

Under Morgan’s new system, an overweight rating means the analyst believes the stock will produce a greater total return (appreciation plus any dividend income) than the average return expected of others covered in its industry over the next 12 to 18 months.

An equal-weight rating indicates the stock’s performance is expected to be in line with the average return of others in the analysts’ coverage, while underweight means the stock is expected to perform worse than the other companies covered in its industry.

A stock’s rating will factor in the perceived risk in the shares relative to others in its sector, Morgan said.

Dennis Shea, head of Morgan Stanley’s global research in New York, said the firm opted against simple buy, sell or hold ratings because “we think the jargon of ‘buy’ and ‘sell’ is misleading. What is a buy for a 25-year-old clearly might not be a buy for a 65-year-old.

“We are also committing to using the full ratings spectrum,” Shea said, meaning investors can expect to see more negative stock opinions from Morgan analysts.

The brokerage currently gives its lowest rating, underperform, to 0.8% of the 877 stocks it covers, according to Thomson Financial/First Call.

Wall Street has been lambasted for maintaining overly cheery views of stocks even as the market plunged over the last two years. Critics say analysts have been pressured into writing favorably about companies simply to guarantee that their firms receive lucrative investment-banking business from the subject companies.

Prudential Securities made a similar move to simplify stock ratings last year, changing its system to three opinions--buy, sell or hold.

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Bloomberg News was used in compiling this report.