Analysts Doing Stock Market Science — Sort of

Abstract

Basically, stock analysts try to calculate the value of shares and relate that value to the current price at which the share is traded in order to identify interesting investment opportunities. As noted by Beunza and Garud (2007), this means that analysts regularly deal with situations characterized by Knightian uncertainty. For many analysts, this is also what motivates them:

Brokers and traders want to sell and make money; analysts want to be right.

(Head of Analyst Group)

Analysts are active in all business lines within investment banking, but their major role is within securities. This is where they spend most of their time, residing next to the brokers and the traders. Since the analysts regularly interact with people outside their own occupation, as well as outside the bank, they are an informative group on which to focus if one wishes to understand what goes on between the different experts in investment banking, as well as between different actors in the financial sector. Describing the work of stock analysts will shed light not only on what they do themselves but also on what they do together with others.

The analyst team has invited investors — clients and potential clients — to a one-day ‘industrial sector seminar’ at the bank. From breakfast to lunch the invited professional investors are listening to 15-minute corporate presentations by CEOs, CFOs, and IR directors. The analyst team is responsible for the programme and has invited corporations it regards as especially interesting. Each presentation is followed by questions from the investors and ends with brief comments by the analyst team to explicate their view of the situation. There are some recurring themes: The US market is not very hot, but given the correct strategic focus, there are still profit opportunities. Environmental issues seem to be the thing for the future, but it will soon be too late to join the bandwagon, the analysts caution. China, on the other hand, still has great potential according to all the invited managers. And so the discussion continues. After (an excellent) lunch at the bank, ‘one-on-one’ meetings follow. The corporate managers sit down individually with potential investors, often with one of the bank’s analysts as a third speaking partner. If all goes well during this ‘speed-dating’ (in many cases it does), the investors commit to making new or additional investments in the industry and/or in specific firms, the managers attract new capital to support their business ventures, and the bank’s analysts add to their own, as well as their bank’s, brand value. Bottom line result for the bank: the investors will trade more of their securities via the bank’s trading desk in the near future.