What does it mean when a brokerage announces that it is "initiating coverage" of a particular stock? Should you pay attention to this? Well, yes and no.
Full-service brokerages and investment banks typically employ analysts to follow and study various companies. The analysts issue recommendations that are passed on to broker clients and others. When a brokerage initiates coverage of a company, it just means that the company is now being followed by the firm and that the brokerage has an opinion on it.
Examples of recommendations are "hold," "near-term attractive," "long-term buy," and "market outperform." You'll rarely see a "sell" recommendation, though. Because these recommendations usually come from organizations with investment banking operations, the analysts probably don't want to burn any bridges with current or potential investment banking clients by being too negative. So, rather than cry "Sell!" most firms issue nothing worse than a "hold" rating -- and sometimes a "market underperform" rating.
A Fortune magazine article from July 2000 pointed out, "Of the 33,169 buy, sell and hold recommendations made by stock analysts last year, only 125 were pure sells. That's 0.3%." Also amazing is that 23,551 of the recommendations were "buy" or "strong buy" -- fully 71%. Clearly, analysts tend to wax positive in their ratings.
The times might be changing a mite, though. A bit of reform is in the air, after countless recent scandals regarding analysts' recommendations. (To refresh your memory, read about Jack Grubman, who recommended AT&T to get his kids into a chic preschool.)
Generally, it's smart to not put much stock in analyst ratings. Still, though, many analysts do offer excellent research (that means reports, not ratings). In preparing their reports, analysts typically speak with corporate executives, model expected performance, and make estimates of future earnings per share (EPS). Although analyst reports are often reserved for company clients, you can sometimes get copies from your brokerage, from the company that was analyzed, or elsewhere online.
Learn more about analysts in these classic Fool articles: