What is Analyst Sponsorship
Analyst sponsorship is the positive endorsement of a company’s stock made by one or more investment analysts from major firms. Analysts who make these endorsements are known as sell-side analysts.
Breaking Down Analyst Sponsorship
Analyst sponsorship is determined by sell-side analysts, often referred to simply as “analysts” on financial news programs, who use proprietary research to recommend to investors which stocks to buy and whether to sell or hold the stocks currently in their portfolio. Analyst sponsorship implies that the analyst believes a stock will increase in price over a given period. It is not, strictly speaking, an unqualified pronouncement on the company’s value, in either the short or long term.
For example, an analyst examines a Company A’s cash flow, capital management and potential for growth, among other fundamentals. Checking that against the price per share, the analyst determines that Company A’s stock is undervalued, meaning the stock is trading for less than the company’s intrinsic value. That earns the stock analyst sponsorship.
Let’s say that same analyst researches Company B’s fundamentals and finds they are decidedly stronger than Company A’s. If Company B’s stock is overvalued, i.e., trading for more than the company’s intrinsic value, it will not earn analyst sponsorship, even if it has a bright earnings outlook.
Analyst Sponsorship and Conflicts of Interest
There is a clear incentive for sell-side analysts to give accurate, unbiased recommendations. Their clients are investors, and the more objective their analyses, the greater chance their investors have of being successful over the long term. On the other hand, the potential conflicts of interest are many. The analyst’s firm may have investment banking clients, whose offering the analyst will naturally have an interest in recommending. An artificially positive analyst report may also lead indirectly to more brokerage commissions for the firm, which may even tie in with the analyst’s earnings and bonuses. Furthermore, the individual analyst, or the analyst’s associates, may personally own stock in the company the analyst is researching. Given that recommendations can have a measurable influence, at least temporarily, on the market value of a stock, these conflicts deserve scrutiny.
The U.S. Securities and Exchange Commission has implemented several rules meant to avoid or in some cases merely disclose potential conflicts of interest. Even so, investors should treat analyst recommendations, and sponsorships especially, with a degree of skepticism. Investors should be prepared do some of the spade work themselves, looking over the company’s financial reports to get their own sense of its intrinsic value, before deciding to buy.