How to Identify Trading Trends in the Stock-Analyst Community - dummies

How to Identify Trading Trends in the Stock-Analyst Community

By Michael Griffis, Lita Epstein

Good traders are always looking for trends. The regulatory climate in Washington now drives changes in the stock-analyst community following disclosures of the abuses exposed after the stock bubble that ended in 2000. The Financial Disclosure Regulation of 2001 (Regulation FD) controls the flow of information between companies and analysts and ultimately what information makes its way to you as an outside investor or trader.

Some traders believe that the restrictions that ban selective disclosure to friendly analysts or key investors actually hurt the flow of information to the general public. Regulation FD requires that any information disclosed to analysts or key investors that can affect the value of the company must be disclosed to the general public within 24 hours, even if the information wasn’t part of a planned report.

The preference is for making announcements about material information at the same time for everyone, but sometimes during meetings with an analyst or institutional investor, information is shared inadvertently.

For example, if analysts find out information during a company tour, the company then is required to put out a press release disclosing the same information to the general public. Some analysts believe this is making the preparation of their reports much more difficult than it needs to be.

Regulation FD, however, halted some commonplace industry practices, including closed meetings with analysts and institutional investors. Lawyers for many companies warn senior managers to be careful about responding to calls from individual analysts. Some companies require that any contact with analysts first be evaluated and approved through their legal advisors.

Regulations also impact roadshows, which are marketing tours that introduce a company’s new securities offerings. The SEC permits these events but gives clear guidance that they now need to be more like oral offers that are designed to avoid the prohibition against written or broadcast offers made outside the official prospectus of the offering.

The SEC believes these roadshows are best conducted in the open to all investors and has voiced objections to having two separate roadshows, one for institutional investors and another, more sanitized version, for retail investors.

Some legal experts also advise companies to be careful about whether they include outside analysts, those not employed by the underwriter of the offering, as part of the roadshow. Including outside analysts, some believe, can be viewed as selective disclosure, which violates Regulation FD.

The biggest regulatory changes you’ll see as an individual investor or trader relate to disclosures that must be made in research reports, including a requirement that securities firms must disclose any compensation they receive for investment banking services they provide during the three months following the public offering for a covered company.

Also, firms that are members of the New York Stock Exchange or the National Association of Securities Dealers must disclose when they stop coverage of a public company. Many times this type of news generates unfavorable publicity for the company and can result in a drop in stock prices. In addition to these disclosures, analysts’ research reports must include information about the relationships between the analysts, underwriters, and stock issuer.

Operating in this type of fish bowl may make companies and analysts nervous, but it nevertheless should level the playing field for individual investors. Look carefully for these disclosures as you read analysts’ reports and take advantage of your newfound access to information by attending analysts’ earnings conferences and being part of the insider pool rather than a passive outsider.