When major stock market indices, such as the S&P 500 (SPX), trend down, investors applying a broad market approach to investing may want to shift to tailoring more selective portfolios. The goal would be to discover higher probability outperformers and avoid expected underperformers. How does the average investor do this? This is where finding equity research you’re confident in and knowing the overall in-and-outs stock research can make a difference in the long term.
The Value of Equity Research to Investors
Equity research can be invaluable during broad market weakness. Although stocks, in general, may be poised for a sell-off, specific sectors might still benefit from their own individual circumstances. These could be sectors like utilities, retail segments, life sciences, or interest rate-sensitive stocks that could perform differently than the broader market. Moreover, some companies may show resilience despite broader economic challenges.
Equity analysts help investors find these opportunities by providing detailed insights into sectors and companies. However, different research producers produce different kinds of research, and understanding the differences between sell-side research, buy-side research, and company-sponsored equity research can be key to understanding how much “skin” the analyst has in their research reports.
Sell-Side Stock Analysts
Sell-side equity research is produced by brokerage firms and investment banks. These analysts provide institutional and retail investors with research reports, stock recommendations, and price targets. Their primary goal is to generate trading commissions and investment banking business. Sell-side analysts often have access to the researched company’s management and industry experts. This offers insights not found in financial reports.
However, it’s important to remember that their recommendations might be influenced by the need to maintain good working relationships with the companies they cover.
Buy-Side Stock Analysts
Buy-side equity research is conducted by asset management firms, hedge funds, and other institutional investors. These analysts focus on generating investment ideas and strategies to benefit their firm’s portfolio. Buyside research is typically more proprietary and less widely distributed than sell-side research. The primary goal is to achieve superior investment returns for the firm’s clients. Buyside analysts have more freedom to express contrarian views and are less likely to be influenced by external relationships.
Company-Sponsored Equity Research
Company-sponsored equity research is paid for by the companies being analyzed. Independent research firms often produce this type of research to increase visibility and attract investors. While it can provide valuable information, there is a potential conflict of interest since the research is funded by the subject company. Investors should consider this potential bias when using company-sponsored research.
Macro and Micro Insights
Equity research also provides insights into macroeconomic factors influencing stock performance. For example, BlackRock’s (BLK) commentary emphasizes leaning into risk and identifying opportunities in sectors like artificial intelligence, which are expected to drive growth despite market volatility. Similarly, Morningstar’s (MORN) analysis suggests that value and small-cap stocks may offer attractive investment opportunities even in an overvalued market.
Key Takeaway
As major indexes face potential declines, equity research can help investors navigate these challenges by identifying specific opportunities. By leveraging detailed analysis and insights from sell-side, buy-side, and company-sponsored analysts, investors can make informed decisions and potentially outperform the broader market.
Additionally, various tools are in place to sort through the analysts, such as what type they are, who they work for, and which have a better track record than the others. These important details can be found here on TipRanks to help investors who prefer stock picking as their chosen investment style.
No one has expertise in all possible industries and companies. This is where following Wall Street analysts who make their living following specific stocks in the industry can pay off.
