Yesterday brought the Securities and Exchange Commission's deadline for Wall Street analysts to rate companies with a uniform code of buy, hold, or sell. In honor of this August event, Bloomberg analyzed the current ratings from the nine largest securities firms. The service found Lehman Brothers, Salomon Smith Barney, and Morgan Stanley the most bearish with the most sells, with Deutsche Bank and UBS Warburg the least. Here's the breakdown:
Firm Buy % Hold % Sell % Lehman Bros. 32 40 28 Salomon Smith Barney 36 38 26 Morgan Stanley 34 46 20 Bear Stearns 37 42 19 CSFB 42 37 19 Merrill Lynch 49 45 6.3 Goldman Sachs 57 38 6 UBS Warburg 51 44 5 Deutsche Bank 54 43 3
We'll take the bet that the difference in sell percentages between the top five and bottom four is statistically significant. However, because there is sometimes more than meets even the Foolish eye, we called three of the four banks with the lowest sell percentages (finding a phone number for the fourth, UBS Warburg, taxed our writer) for comments, and by press time, we heard from Deutsche Bank and Goldman Sachs.
Deutsche Bank spokesperson Chris Cortezi distinguished her firm from others this way: "Our ratings are based on absolute returns -- the target prices analysts have set. A 'sell' is defined as a stock that will fall by 10% or more over 12 months. A lot of the other firms have systems where the rating is based on that analyst's universe of coverage, a stock relative to its sector. If you say your sector is going 20%, but X stock will be less, then it's outperforming your sector."
The Goldman Sachs' spokesperson -- who asked us not to use his name so his friends wouldn't kid him for appearing on The Motley Fool (we're offended!) -- said, "A number of firms have changed rating systems. Five or six announced yesterday. We've announced a new system to implement in fourth quarter. When we implement our new rating system in fourth quarter, there will be a broader distribution of ratings."
Our take? The distribution of ratings is a red herring. Even if the SEC were able to enforce total objectivity on the part of analysts, it's analysis, not ratings, that matter. Investors in individual stocks must understand a business and its financials well enough to make an informed decision. If analysts offer helpful information -- and a few have been known to -- great, though we revealed in The Motley Fool Manifesto that much stands in the way. But don't let the rating, an analyst's view of the stock's prospects in the next 12 months, sway you by itself.