3/9/2011
By Brian Sozzi, Research Analyst

Quick, what is the first thought that comes to mind when hearing "Wall Street Analyst?"  Perhaps a pencil pusher locked in a room for an endless amount of hours?  How about a tech geek that is constructing a model so sophisticated that it only makes sense to those on the inside?  Or, maybe, it's a male or female adhering to the principles of value investor Ben Graham, seeking out stocks selling at a discount to book value?  Take it from me, the role of Wall Street analyst encompasses all those tasks, but so much more.

There are the bright and early team meetings to brainstorm for the biggest and best ideas and maybe map out a change in a particular rating of a company under coverage, then it's off to client calls or on the road to drum up new business.  Of course there is the time spent updating the sacred DCF model and writing a First Call note or two, but those duties are increasingly being heaped upon junior level associates so the senior point person could be utilized in a more efficient manner.  Equity research departments at the bulge brackets, historically, were a loss leader to the firms, providing human capital to the greater pool of traders raking in the dough.  At a non-bulge bracket firm, the services of the analyst are now being lumped in with the pitch for client business, the other selling feature being best in class execution capabilities (this new model on display with execution houses purchasing research only firms, which makes for a competitive edge in landing new business).

However, the traditional analyst role is changing quickly, and if one aspires to be at the larger firms he or she better have major Street cred, a solid book of business, or both.  Not to mention the intestinal fortitude to lay all those merits on the line by making big, contrarian stock calls.  After all, an analyst is a star so long as the next recommendation works out.

There is an entirely other aspect to playing the role of Wall Street analyst and I want to share this because many probably won't hear it elsewhere.  Call them factoids, granular tidbits of information, or what have you but amassing obscure information and then combining that with strong insight on a company is the real deal to "winning", as Charlie Sheen so eloquently puts it.  In light of the Galleon scandal, and recently former director of Goldman Sachs Rajat Gupta being thrown into the fray, the analyst position is once again in the spotlight for the first true time since the Enron scandal broke (which led to the Global Research Advisory Settlement, the spirit of which never truly was embraced by the major banks). 

No longer are analysts in the second fiddle position to the mortgage bond trading desk or derivatives desk (ok, maybe the latter).  They are being viewed as the keepers of ambiguous data that could move a market in a stock if unleashed.  Expert networks, traditional sell-side analysts, and buy-side analysts all are attempting to trump the other and find information that has their firm positioned correctly in the market.  Within that, I think the fine line of what is material non-public information and what is insight driven through rigorous channel checks, discussions with management, and 20 some odd years of covering a company are being blurred.  Management is not going to mention a potential acquisition, a result of Regulation FD, but they may very well utter an off the cuff comment on inventory composition at quarter end after an analyst day webcast is over that hints at downside risk or upside potential to consensus earnings.  The casual observer, aka individual investor, has little knowledge of this comment which happened after the webcast taping concluded, but to an analyst that bit of information is golden.

Technically, there are no laws being broken so long as the analyst does not trade on non-public information.  But, is putting the pieces to the puzzle together and conveying that to clients considered law-breaking?  Moreover, following that aforementioned inventory comment chances are that in the next day or two that analyst will be out lowering or raising their earnings estimates, potentially moving the stock lower or higher.  How should this be rationalized in this new age of fast information?   Analyst roles indeed are being redefined as we know it.

Brian Sozzi
Wall Street Strategies

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