Tuesday, June 27, 2006

Research Ratings
Goldman On The Right Track

Finally, the things which has caused my disillusionment with equity research are being rectified. Goldman Sachs has disallowed its equity analysts to be fence-sitters anymore by banning "outperform" and "underperform" recommendations. These two are basically to cover their asses for stocks that are likely to beat or unable to beat the index. These two categories of recommendations are generally ignored by users cause its inactionable. Goldman is now insisting on unambigious "buy" and "sell" tips for which the analysts will be held accountable. Goldman Sachs' analysts will be obliged to set price targets (that's a must) for all companis they cover. If the analyst were to change his/her recommendation, he/she will have to publish an evaluation of their tip (how well or poorly the tip has performed - fantastic move). I always believe more accountability will cause analysts to work harder and question their convictions deeper. Too many analysts are just playing the game by hiding behind safe words and recommendations, being good at being wishy-washy, talk turtle around financial terms with little real world experience, no value added pentrative comments but rather run of the mill captions, ... etc...

This move by Goldman brings it in line with the forward thinking Merrill Lynch research methodology, but the other are sticking to the old method. Stricter "buys" and "sells" may be partly to appease hedge funds (who tend to trade a lot more) but its definitely a step in the right direction.

Plus, the best move is that Goldman analysts are to cite the catalysts that would move the stock to the perceived level. Just like my affinity for "trigger factors", an undervalued stock will stay undervalued for the longets time if we cannot forsee the trigger factors.

A lot more analysts will have to leave Goldman as the moves basically raises the passing grade from 60/100 to 85/100... and some will not be able to cut it. Now, more investors will be paying much closer attention to the recommendations coming out of Goldman and Merrill as these analysts are basically staking their careers on these recommendations.

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