The Analyst Handbook

By Bernie Kohn
July 22, 2009 04:06 PM

Securities analysts have long been part of the business journalist’s matrix.

At their best, analysts are accessible, strategically insightful, expert number crunchers and secure in speaking their minds.  At their worst, they know only what management tells them or color the truth to protect their firms or relationships with the companies they cover. That is, if they talk to you at all.

Some journalists still see analysts as a security blanket, especially for younger reporters or those new to a beat. Others prefer that reporters become their own analysts.

Either way, journalists need to understand how analysts think and operate in order to judge their value and credibility as sources.

Rex Henderson has been on both sides of the relationship. He spent nearly 20 years as a reporter, most of them covering business for The Tampa Tribune, before joining investment firm Raymond James & Associates as an analyst nine years ago.

“An analyst’s principal audience is institutional investors,’ Henderson says. “So an analyst is most likely to talk to national publications or wire services where his name could appear before an institutional client base.”

Henderson speaks regularly with about a half-dozen reporters who cover his industries - auto retailers and other “hard” consumer goods - but he is careful about what he says.  “The upside for analysts in talking to reporters is minimal. The downside, if you’re misquoted, is immense,” he said.

Earlier this decade, investigations of Wall Street business practices revealed that some analysts recommended certain stocks publicly while privately calling them “crap” or worse. Why? To help their firms get those companies’ lucrative investment banking business.

The scandal led to new rules designed to weed out conflicts of interests, make analysis more independent, and assure that all investors received the same information about companies at the same time.

These rules have made communications more fair and honest, but at a cost to the reporter-analyst relationship. Analysts are generally required to get permission from their “compliance” departments before consenting to an interview. Many won’t go to that trouble. Similarly, brokerage firms that used to distribute analysts’ reports to journalists free for the asking will no longer release them at all.

With companies’ conference calls with analysts now open to the public, a result of the Wall Street reforms, many reporters don’t need analysts the way they once did, says Ted Reed, who covers airlines for TheStreet.com. But he adds that the best analysts provide valuable help in dissecting financial statements and providing strategic insight.

Even Fortune magazine’s Allan Sloan, who acerbically refers to them as “anal-ysts,” says he uses them occasionally.

“The important thing is to treat them the way you would treat any other source. You can’t build a story around them,” Sloan says.

“People used to treat analysts as some kind of living gods, and they’re not. You have to develop a relationship with them and figure out if they’re trustworthy.”

How do you do that? Here are some things to consider:

• How often does the analyst publish reports on the company you’re writing about? That information is easily accessible on Bloomberg, among other sources. If an analyst hasn’t done a report in the past six months, how can their information be up to date and reliable?

• How much time does the analyst spend looking at any given company? Several years ago, a reporter discovered that one widely quoted analyst claimed to follow more than 1,000 companies. Nobody can do that, of course. On the other hand, they need to cover enough companies to know their industry.

• How much real analysis is the analyst doing? Is he or she just relaying what management says, or do they talk to other sources and independently dissect the numbers and strategy? Do they ask tough questions on conference calls even if management doesn’t like it? Or do they congratulate managers on last quarter’s performance and seem to just be trying to fill in financial details for predetermined conclusions?

• Are you calling an analyst to quote him or her on something you already know? If so, why not just say it yourself?

• Look for analysts at smaller regional firms rather than on Wall Street. These analysts are more likely to return phone calls, particularly from reporters from small or lesser-known publications. And they often they are some of the best in their business.

• Consider using credit rating firms, industry consultants, or “buy-side” analysts – those who work for a mutual fund company or other institutional investors – instead of brokerage (i.e. “sell-side”) analysts. “The credit analysts have really stepped into the gap, particularly S&P and Moody’s,” Reed says. “While you’d like to have them you don’t need the major market houses’ analysts more. The credit analysts will talk to the smaller papers and put you on their lists.”

We asked a number of business reporters to talk about analysts they respect. None mentioned one currently working on Wall Street. A few examples:

Rick Rothacker, banking reporter, The Charlotte Observer: Nancy Bush, NAB Research. “She is a longtime independent analyst so she has institutional knowledge, an informed opinion and there's not a lot of hoops to jump through to get her on the phone. “

Reed:  Robert McAdoo, Avondale Partners in Nashville. “Reporters are pretty smart, but they may not know how to look at the numbers to see something like whether a particular flight is profitable. He knows how to do that. He has great sources, and he’s the type of analyst who goes the extra step.”

Sloan:  Cecile Gondor, Herzfeld Advisors in Miami.  Outstanding written analysis and depth of understanding in her niche, closed-end funds.

Hanah Cho, mutual funds reporter, The Baltimore Sun:  Greggory (CQ) Warren, Morningstar Inc.  “He returns your phone calls and he’s knows what I’m calling about before I even tell him.”

Do you have a go-to analyst? To add to the list, e-mail your suggestion to kelly.carr@businessjournalism.org. With your help, we can create a comprehensive source list for business journalists.

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Copyright © 2009 Donald W. Reynolds National Center for Business Journalism