Hold Us to Death

Stock analysts came under heavy scrutiny in the early 2000s for rating companies that their firms did business with favorably.  At the turn of the century, more than 70% of all analyst ratings were "buys," and investors were increasingly wondering what the ulterior motives were of the firm that was issuing the recommendations.  When financial regulation occurred post Enron, investors hoped that analyst ratings would become more credible.  Maybe issuing a "sell" rating on a stock wouldn't be so bad anymore.

The first chart below shows the percentage of all analyst ratings that are "buys" as well as the S&P 500 going back to 1997 based on calculations from Bloomberg.  As shown, the percentage of "buy" ratings has indeed seen a steady, steep decline over the last 10 years.  In 2002 when the corporate cleanup was occurring, "buy" ratings took a big hit.  Part of the big drop in "buy" ratings could have been due to the fact that the market was heading lower, but when the market bottom was finally reached and the major indices went on a bull run from 2003-2007, "buy" ratings continued lower as well.  As it stands now, just 28.7% of stock recommendations are "buys."

If only looking at the first chart, it definitely appears that analysts have become more willing to slap an unfavorable rating on a company, even if it means ruffling feathers.  However, a look at the chart below suggests that analysts are now simply punting instead of making a gutsy call.  As "buy" ratings have gone down, "sell" ratings have ticked just slightly higher, but "hold" ratings have skyrocketed.  At the moment, 66.2% of all ratings are "holds."  What good do all of these "holds" do for investors looking for ideas?  If someone doesn't own a stock already, how are they supposed to "hold" it without "buying" it first?  

With scrutiny of analysts elevated significantly this decade, it's easy to understand why "holds" would increase so much, and it's not due to ambivalence.  Nevertheless, it's not helping investors.