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Wall Street analysts have a lot of different ratings for stocks. In this week’s podcast Tom and Brendan take a look at why Wall Street rarely says sell. The conversation mainly revolves around a recent article found on MarketWatch, which you can find here. The article contains buy-sell-hold ratings from Sam Stovall, who is the Chief Equity Strategist at S&P Capital IQ. The data compiled contains over 11,000 individual ratings for the companies in the S&P 500 from Wall Street firms.
The alarming thing about the statistics contained in the article is that 93.5% of the ratings were “hold” or higher. The scale used contains five categories strong buy, buy, hold, weak hold, and sell. So that means only 2.2% of the ratings are a “sell”, and 4.3% of the ratings are a “weak hold”. You can clearly see from that data that Wall Street rarely says sell. In this case, they say sell just 2.2% of the time.
So why does that alarm us here at Mullooly Asset Management? Tom and Brendan explain. When we look at a stock we like to make sure it is what we consider technically sound. To do this we use the Dorsey Wright and Associates rankings. Using these rankings, we found that 45% of the stocks analyzed have poor technical scores. Technical scores measure relative strength, a topic we have discussed here on the website quite a bit.
Tom and Brendan go over a recent example of a stock that Wall Street would simply not give up on. Despite having a poor technical score, analysts couldn’t seem to say sell on Blackberry. Back in March 2011, Blackberry violated its bullish support line at $57 a share. In October 2013, it is trading around $8 a share. Other similar examples include the likes of Enron, AIG, and AOL. Wall Street rarely says sell, and they continued giving buy recommendations on these stocks after they broke their support lines.
So Wall Street rarely says sell, but why? Wall Street firms used to make money from clients buying and selling stocks, however that isn’t really the case anymore. Now they make more money from investment banking activities. It would be pretty tough for investment banking firms to gain clients if their analysts bashed too many stocks with “sell” ratings.