If I had never worked on SELL side research & had not interacted with BUY side Fund Manager, I would have never understood how simply complicated the world actually is.
So movie Tanu Weds Manu Returns gets released and as the tradition prevails, movie critics are shown the movie prior to general public, movie critics go on to write review about the movie & gave 2.5 star rating, its equivalent of poor movie or you can pass this movie. However, post rating firm realized their mistake and thought to correct it. I am not sure what additional research they did, but change in recommendation is surely very interesting change.
Something similar happens on Dalal Street, below is chart that show analyst recommendation along with stock price movement over a period of time (for tata steel). Notice how recommendation remains same over period of time. (this is just one random example, there tonnes like these)
Stock prices collapsed from 700 (2008) to 200 (2008) from there back to 700 (2010) and analyst thinks you should still HOLD on the stock. If that was not enough, he has remained bullish from 600 (2011) till date, when stock has halved. However it’s not this sole analyst or sole brokerage firm, most of them are that way. Everybody does research and most of them think they have insight which most of the others have missed it.
One attributable reason is”nature of brokerage business”. Analyst covers a stock he meets management gets info, analyses it, forecast number and gives out recommendation. One of the crucial things is meeting with management, every fund manager ask sell side analyst if he has meet the management? And hence it becomes of paramount importance. Now once he has meet management, he has to maintain that to make sure regular meeting & interaction (flow of information). This meeting can stop if analyst gives out negative rating (sell), he would probably not get invite to meet management or refusal to meet him in one-on-one meeting, or would get snub during Q&A session. Due to this analyst is afraid to give sell rating on the stock and resulting suffering for Investor and poor name of Street.
Hence look at analyst recommendation history and full brokerage house recommendation (list of all stocks under coverage along with recommendation). So if analyst doesn’t have SELL rating on any stock, one red bell goes off. If full brokerage house recommendation doesn’t have any SELL rating, red bell just broke due to heavy ringing.
Make sure you listen to couple of analyst than just one. Second compare their numbers and ask for key assumption.