The Goals of the Sell-Side Analyst in Investment Banking - dummies

The Goals of the Sell-Side Analyst in Investment Banking

By Matt Krantz, Robert R. Johnson

The sell-side analyst at a firm that does investment banking has a somewhat complicated job. Their primary job is to use fundamental analysis (the ability to determine the value of a company examining the details of the business) to help investors decide whether to invest.

But here’s where things get complicated. Sell-side analysts are writing about companies that just so happen to be some of the investment bank’s best clients and generate large fee income from IPOs, mergers, or follow-on offerings.

Given the conflicts that sell-side analysts face, it’s important to understand the roles that these professionals serve, including the following:

  • Protecting new stocks from being lost and forgotten: When a company goes public, it’s suddenly in competition with thousands of other publicly traded companies. There are massive companies with huge market values, like Microsoft and Exxon Mobil, in addition to small and midsize companies. Investors have no shortage of choices when it comes to finding stocks to buy.

    Reminding investors to take a look at a newly public company is one role of the sell-side analyst. By providing research coverage on a newly public company, the sell-side analyst is drawing attention to that stock. And having analyst coverage from a major Wall Street firm is a way for a company to avoid being an orphan (forgotten stock) with investors.

  • Performing surveillance for investors: Pity the poor mutual fund manager. These buy-side investors need to scour Wall Street for the very best investments that will help them beat the market and justify the fees they charge their investors. But even for large mutual funds, doing in-depth research on every stock out there is virtually impossible. That’s why buy-side investors often look to the sell-side analysts for help.

    The sell-side analysts are laser focused on a somewhat limited universe of stocks. This specialization helps them establish an expertise in certain industries. Their research summarizes the risks and opportunities of a certain company, saving the buy-side investors lots of time and potential mistakes. Reports from sell-side analysts may highlight stocks that buy-side investors weren’t even following or aware of.

  • Highlighting anomalies: Because sell-side analysts are so focused on certain companies, they’re able to pinpoint stocks that may be attractive, but overlooked, because other investors aren’t paying attention to the full story. Sell-side analysts can afford the time to really dig into a company and see, for instance, that revenue may have fallen not due to a problem with the business, but because it sold off a business unit.