What it means
A research analyst spends most of the day reading, modelling and asking questions. They study annual reports, speak to company management, build forecasts for revenue and profit, and then compare what they find with the current share price.
There are two broad types. Sell-side analysts work for brokers and banks and publish research for clients, while buy-side analysts work for funds and investors and write mainly for their own portfolio managers.
The first group tends to be public, and the second tends to be private. Most analysts cover a sector, such as banks, retail or software, and become experts in what drives profit in it.
The usual output is a forecast of earnings, a valuation using methods such as discounted cash flow or price-to-earnings multiples, and a rating such as buy, hold or sell. For a non-finance professional, analysts matter because they shape how the market sees a company.
A change in rating or a cut to an earnings forecast can move a share price, and a management team that regularly misses analysts' expectations may find its share price under pressure. There are risks to be aware of.
Sell-side analysts can face conflicts of interest because their firm may also earn fees from the companies they cover, so regulators require separation between research and investment banking, and readers should look at the disclosures at the end of a report. Qualifications vary, but many analysts hold a degree in finance or accounting and pursue professional credentials such as the Chartered Financial Analyst designation.
Strong analysts combine numeracy with the ability to explain a business in clear language.
In practice
Real-world examples.
Example
A sell-side analyst covering airlines publishes a report after quarterly results. She raises her earnings forecast because fuel costs are falling, lifts her target price from $40 to $46 and keeps a buy rating.
Example
A buy-side analyst at a pension fund studies a packaging company the fund might buy. He builds a model, visits a factory and recommends a purchase of $20,000,000 of shares to the portfolio manager. Over several years he is judged on the quality of his reasoning and the accuracy of his forecasts, not on a single lucky call.
Example
A chief financial officer at a listed software company meets analysts after a results announcement. She explains the drivers of margin and customer churn, knowing that clear guidance reduces the risk of a surprise miss. Her team logs every question asked, because recurring questions reveal which numbers the market does not yet understand.
Formula
Calculation
Target price = forecast earnings per share x target price-to-earnings multiple; Implied upside = (target price - current price) / current price.
Suppose an analyst forecasts earnings per share of $4.00 for a retailer and judges that a multiple of 15 times is fair. Target price = 4.00 x 15 = $60. If the shares trade at $48, implied upside = (60 - 48) / 48 = 12 / 48 = 25%.Case study
Seen in the real world.
Stonebridge Capital is an illustrative, fictional investment fund. One of its analysts was assigned to a small medical equipment maker whose shares had fallen sharply after a missed quarter.
The analyst rebuilt the company's forecasts line by line, discovering that the fall in sales came from one delayed hospital contract worth $6,000,000, not from lost customers. She calculated that earnings per share would recover to $2.50 within two years and applied a multiple of 14 times, giving a value of $35 against a share price of $24.
Stonebridge bought a position based on her report. The report also listed the three events that would prove her wrong, such as a second delayed contract, so the portfolio manager knew exactly what to monitor. The illustrative lesson is that an analyst's value lies in the reasoning behind the numbers, not in the rating alone.
Watch out
Common mistakes.
- Treating an analyst's rating as a guarantee, when it is an opinion based on forecasts that can be wrong.
- Ignoring the conflicts of interest disclosed in a sell-side report, which can influence how optimistic a view is.
- Reading only the headline target price and skipping the assumptions, which are where the real information is.
Questions
People also ask.
What is the difference between a sell-side and a buy-side analyst?
A sell-side analyst publishes research for clients of a broker or bank, while a buy-side analyst advises the fund that employs them and keeps the findings private.
Do analysts need professional qualifications?
There is no single required qualification, but credentials such as the Chartered Financial Analyst designation and strong accounting skills are common, and a career usually starts in a junior role supporting a senior analyst.
How do companies work with analysts?
Companies hold results briefings and investor meetings and share public information equally, since giving selected analysts private information would breach securities rules.
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