What do you guys think causes some Equity Analysts to continually excel at estimating earnings while others are good stock pickers? This is not to say that they are mutually exclusive, only that some Analysts tend to do better in one area over time. Looking forward to hearing thoughts and comments, especially from people in Equity Research.
I don’t know why someone is better at one than another; however, I would say that it is better to be a good stock picker than earnings estimator. I am reminded of the quote from Buffett… “I would rather be approximately right that precisely wrong”
I would just think that being a good earnings estimator would usually translate into being a good stock picker but that isn’t the case…
i work with both kinds of analysts and i know exactly what you mean when you make that distinction. the estimators hardly ever upgrade or downgrade stocks. the reports they write are basically worthless since they go something like this "we read the press release and the numbers the co. reported were slightly above/below our estimates so we are raising/lowering our estimates by some meaningless amount, which adds/subtracts 1-3 pennies from our earnings estimate. please pay us for this wonderful research."i read the press release, too. tell me something i dont know. the second type hate writing quarterly earnings updates and bullsh!t sales previews and prefer to ACTUALLY UPGRADE STOCKS. i know, it’s kind of a mircale in this industry (sell side research), but some people actually do go against the norm and successfully pick stocks that are down and out. it seems as though one can do a better job of stock picking on the buyside than on the sell side, since on the sell side you are basically getting paid for your models and information flow rather than actually picking stocks. i am definitely moving to the buyside ASAP after grad school.
Could it be that stock pickers include more information into their judgment than how much the company is going to earn? Things like market psychology, momentum, industry risk, and whether those earnings are going to translate to dividends or corporate growth. I could admire skill in estimating earnings, but it would be silly to assume that this will translate one-for-one to good stock picking skill, since there are many other factors affecting asset prices. It also depends on how you are measuring skill at estimating earnings. If you are estimating earnings one period ahead, then that may be remarkable, but not so helpful for getting prices right. If you are able to estimate earnings a year or two ahead, then it might be a real advantage.
Well then, two questions off of that response. What then is the job of a sell side analyst? Is it to be an accurate earnings estimator or to be a good stock picker? Or both?
Simply put, most sell-side analysts are too short-sighted in their analysis. That is why long-term investors make money.
My understanding is that a good sell side analyst presents useful, relevant, and accurate information (as accurate as possible, given constraints) for making an investment decision. Earnings is relevant to that decision, so being good at earnings estimates is good. Industry and company analysis and the competitive position of the company is also relevant, since investors will want insights into what is driving the securities prices for a company. Ultimately this boils down to a buy/sell/hold or similar decision, but buyside researchers, PMs, and prop traders who make an investment decision might actually pay more attention to the supporting material than the final buy/sell decision that the SS analyst produces. Stock picking skill on the sell side probably (here I am stepping into territory I don’t really know much about) is measured by how accurate those buy and sell decisions are, and whether price targets (if available) would generate profitable trading results if followed. Ultimately, whether a sell side analyst is good depends on how useful the research turns out to be, and that depends on who is using the information and what parts of the research report feed into their investment style. Some might just run with the buy/sell decisions, while others might take earnings estimates and throw them into their own model. So good research report writing has to be about getting the investment thesis clearly written, easily understood, and supported by relevant, accurate data.
Have you ever seen one of those charts at the end of a sellside report that shows the history of buy/hold/sell recs, and every single rec is dead wrong?
“Have you ever seen one of those charts at the end of a sellside report that shows the history of buy/hold/sell recs, and every single rec is dead wrong?” Yes, these often show proof positive that some analysts play the “chase the price with my price target game.” The worst are the charts that show a clear trend of the analyst raising or lowering his target after the stock has repeatedly climbed / declined. Thanks for nothing, guy. “Well then, two questions off of that response. What then is the job of a sell side analyst? Is it to be an accurate earnings estimator or to be a good stock picker?” It depends on the analyst and the firm. Buyside is more about stock picking in a portfolio context (I’m generalizing here). Sellside analysts generate revenue in a lot of ways: 1) Information flow 2) Information management (models, notes, etc.) 3) Access to management – taking a company on the road, taking a buyside shop to a company the sellside has a relationship with, etc. 4) Established insight into an industry. There are some analysts that have been around for 20 years. Hedge funds and the like will often pay just to talk to these guys and run ideas past them (this has nothing to do with picking stocks, btw). 5) The “I told you so call” where an institutional salesperson who has a relationship with a buyside firm pushes research at that client over a number of months. If the estimates / sales comps #s have been accurate and the stock has worked, then the salesperson can say, “Look we know this stock, here is the latest piece of info. and you should pay us for it.” This is one example of the product produced by an earnings estimator. The client may not really care what the rating on the stock is, but he wants to know the analyst (who has a recent track record of calling estimates on the stock) thinks. 6) Picking stocks in some cases. 7) Other stuff I’m sure. I hope that helps. Personally, I don’t think the sellside is where it’s at. It seems like more of an “earnings game” to me than any real value added. Much rather manage money on the buyside… in due time.