Will Rogers once famously said he never met a man he didn't like. Wall Street has taken that sentiment and applied it to the stock market in an extreme way.
Most analysts on the Street have rarely met an stock they didn't like, or at least weren't willing to hang out with for a while.
An analysis from Bespoke Investment Group on stock ratings paints the picture in stunning fashion: Of the 12,122 ratings there are of companies in the broad market index, just 6.67 percent carry a "sell" label. The balance consisted of 48.43 percent "buy" ratings and 44.9 percent "hold." (The full report, which is premium content, can be accessed here.)
What's more, there's nothing particularly striking about the numbers from a historic perspective. Bespoke's Paul Hickey said in the report that the "percentages are roughly inline with where they have always been." In fact, the level of "sell" positions increased slightly from the last time Bespoke looked at the trend in August.
However, the buy-side bias might be something not familiar to many outside the Street's inner circle. Indeed, the numbers help personify both the chummy relationship between Wall Street analysts and the companies they cover, and the conflicts between trying to provide objective analysis for companies with whom investment banks have business relationships.
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"Even though Wall Street professes there is a Chinese wall that separates research from investment banking, we all know that the corporate finance activities of raising capital and mergers and acquisitions is dependent on the entire firms' relationship with the client," Carol Roth, head of Intercap Merchant Partners and a former investment banker herself, said in a phone interview.
"From my own experience, research analysts have to have a really good and compelling reason to put a sell rating on," she added. "A lot of them tend to stick to 'market perform' unless there's some really, really major reason why they think the company is incredibly overvalued or about to face some sort of a blowup."
Sometimes analysts will pile into a stock even when it seems mediocre at best.
Most buy ratings
| Sector | Buy ratings | Sell | Holds |
|---|---|---|---|
| Quanta Services | 100% | 0% | 0% |
| Delta Air Lines | 90.00% | 5.00% | 5.00% |
| Lam Research | 87.00% | 4.30% | 8.70% |
| McKesson Corp | 86.40% | 0.00% | 13.60% |
| Thermo Fisher Scientific | 86.40% | 4.50% | 9.10% |
Source: Bespoke Investment Group
Quanta Services, for instance, has had a good February—up 9.3 percent—but has been a dog for the past year, dropping 16.7 percent. Yet every analyst covering the company has it rated as a "buy," according to Bespoke, which assigns Quanta a score of just 45.72 on a scale of 100.
To be sure, a good many of the companies with the highest concentration of "buy" ratings are performing quite well, even some—such as Cognizant Technology and Salesforce.com—that Bespoke assigns low ratings. (Bespoke required that a company have at least 10 ratings to be included in its study.)
Those few companies that had "sell" ratings also justified them in a number of cases, though even the poor performers generally retained at least a high level of "hold" assessments.
Most sell ratings
| Stock | Buy rating | Sell | Holds |
|---|---|---|---|
| Diamond Offshore Drilling | 3.00% | 54.50% | 42.40% |
| Transocean | 15.40% | 53.80% | 30.80% |
| Southern Co | 4.50% | 45.50% | 50.00% |
| Con-Ed | 5.60% | 44.40% | 50.00% |
| Kellogg | 9.50% | 33.30% | 57.10% |
Source: Bespoke Investment Group
Diamond Offshore Drilling is tops on the list with 54.5 percent "sells" and just 3 percent "buys." Its shares are off 37.5 percent over the past 12 months and 19.2 percent in 2015, yet 42.4 percent of analyses carried a "hold" position. Transocean is second on the list with 53.8 percent "sell" ratings and 15.4 percent "buys" and has plunged 62.7 percent over the past year and 12.5 percent in 2015, yet 30.8 percent of analysts recommend a "hold."
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Campbell Soup has the sixth-highest concentration of "sells" (31.6 percent) and is up 8.2 percent over the 12-month period and 6.4 percent year to date.
For investors, the takeaway is to look more at what's inside the analyst reports rather than the overall rating, said Roth, who believes there is "no conspiracy or intentional dishonesty" afoot with analyst ratings broadly speaking.
"A lot of the advice, including mine, is often to have a very diversified portfolio with a long-term approach so you don't get caught up in a one-off scenario where the analyst is the second-to-last person to know and you're the last person to know," she said. "Information is power, but you've got to get a lot of information and you have to synthesize it and make your own conclusions."
