When it comes to researching whether or not you should invest in a publicly traded company, you have an array of resources at your disposal.
You can review any U.S.-listed public company's regulatory filings, which are available through the Securities and Exchange Commission's EDGAR database, follow media coverage of any company of interest, seek the advice of a broker or investment advisor, and review the reports of research analysts who specialize in the company and its sector.
While each resource has its merits -- and it's often better to consult multiple sources when researching an investment opportunity -- here are five things you should know if you plan to take the analyst research route.
1. Be prepared to pay
Research analysts are employed by financial firms and market intelligence firms that typically charge a fee for their investment reports. If you're a customer with a brokerage firm, you may be able to access the reports from the firm's analysts for free, though you may still have to pay for reports produced by other brokerage firms or independent research firms. Sometimes business journalists will publish quotes from analyst reports in news articles, but sifting through news media accounts isn't always a reliable way to gain access to analyst intelligence. Those quotes might miss something big elsewhere in the report that would be important for a prospective shareholder to note. Check with your broker to learn more.
2. Read the whole report
Analyst reports can be many pages long and include a number of charts and graphs. You may be tempted to skim the report, or simply rely on the one- or two-word analyst recommendations -- such as "buy," "sell," "market outperform," and "market underperform" -- that generally accompany their reports, or stick with just the summary section. But the reports themselves often include important information that help put otherwise general recommendations into context and help you understand how the analyst reached his or her conclusion. It's also important to ensure that you're reviewing the latest research available. Analysts usually issue new reports ahead of and after company earnings announcements, but may also issue reports at other times, such as following an important news event or an industry conference spotlighting the company or its management.
3. Rating systems vary across firms
While many firms may use similar terms, the terms often mean something slightly different depending on the company issuing the report. For instance, at one firm, the highest rating a stock may receive is "buy," while at another firm, "buy" is second behind "strong buy." And sometimes, recommendations indicate a timeline or specific performance goals. At some firms, for example, "outperform" may indicate that the analyst expects the stock to deliver returns that beat the industry average or the broader market within about a year. Recommendations issued by FINRA member firms require clear, comprehensive and prominent disclosures of the definition of each rating, including any time horizons or benchmarks upon which the rating is based. To make sure you truly understand an analyst's recommendation, double-check the term definitions of his or her firm's rating system.
4. Consult more than one source of information and analysis
Just as it's smart to diversify your portfolio, it's also wise to seek more than one opinion when it comes to making investment decisions. Though a research analyst may be an expert in a specific sector, he or she isn't infallible. In fact, analysts covering the same company often disagree with one another. Determining whose conclusions make more sense to you may mean reading analysts' full reports (see No. 2), including charts that map an analyst's ratings changes against a stock's price -- such charts provide a quick and powerful snapshot of the analyst's track record of accurately predicting stock moves. Investors should also consider gathering more information from companies' regulatory filings, media reports and their brokers. FINRA advises investors to seek research reports produced by FINRA member firms, whose reports must meet strict FINRA guidelines regarding objectivity and other key issues.
5. Beware of conflicts of interest
How can you judge if an analyst is truly unbiased in his or her recommendations? If you're consulting research provided by a FINRA-member firm, you can take comfort in knowing that FINRA rules significantly reduce or eliminate conflicts facing analysts. Research reports from FINRA member firms must include extensive disclosures of potential conflicts of interest, such as if a firm employing the analyst also provides investment banking services to the company being rated or if the analyst owns stock in the company he or she is recommending. Investors should carefully examine those conflicts when deciding how much weight to accord the analysis presented in a report. Investors should also note that research provided by non-FINRA firms may not meet the same standards with regard to conflict disclosure.
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