Who are the Analysts?

Stock analysts come in two varieties: buy-side and sell-side. Investment bankers, including most full-service brokerages, hire sell-side analysts to research stocks of interest. Originally, brokerages derived most of their income from commissions on stock sales, hence the term, sell-side analysts. These days, investment banking accounts for the lion’s share of full-service brokerage income, but the sell-side label is still applied.

Brokerages employ scores of analysts. Each typically covers a specific industry such as semiconductor equipment or restaurants. Analysts write research reports on their industry as a whole, and on specific companies within the industry. The analysts devise sales and earnings forecasts, buy, hold, or sell recommendations, and target prices for companies they follow. They update their forecasts and recommendations after each company’s quarterly report is released and at other times as events warrant. Sell-side analysts’ ratings and reports are widely distributed, and third parties such as Thomson Financial, Zacks Research, and Reuters tabulate their ratings and estimates and publish them in the form of analysts’ consensus ratings and forecasts.

Mutual funds, pension plans and other institutional players read the sell-side analysts’ reports, but many also employ their own analysts. These buy-side analysts do their own research and arrive at their own opinions about a company’s future prospects. The buy-side analysts’ reports are rarely publicized.

All of the ratings and forecasts that we hear about or see complied come from sell-side analysts. Analysts publish an in-depth report describing the business model, industry, and competitive situation when they begin coverage of a new company. After that, most analysts’ reports are short updates, typically responding to an earnings report or other news affecting the company’s outlook. Each report or update includes the analysts’ current buy/sell recommendation, as well as earnings forecasts for upcoming quarters and for the current and next fiscal years. The report also provides background information justifying changes in the ratings or forecasts.

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