Starting this summer, Merrill Lynch will be encouraging analysts to call more stocks dogs.
The firm announced new guidelines yesterday for its research analysts that will require them to increase the number of firms in their coverage area that they expect will fall or underperform in the coming 12 months. Currently, an estimated 12 percent of the stocks Merrill analysts cover are expected to underperform in the next 12 months; that number will be increased to 20 percent beginning June 2, according to Merrill. The company is also capping the number of stocks an analyst may put buys on (to 70 percent of the analyst’s investing universe).
The new system “is designed to provide clients with enhanced transparency into analysts' views, greater differentiation among the equity ratings within a sector, and closer alignment between rating distributions and historical stock performance,” according to the press release. (To view the press release, click here).
In so doing, Merrill may be trying to insulate itself from lawsuits, or criticisms that sell-side analysts merely hype and cheerlead stocks. The move may also be an attempt to attract clients who wish to short stocks, like hedge funds.
“The investment performance of our institutional and individual investors is always paramount,” said Candace Browning, president of Merrill Lynch Global Research. “The basis of the new equity rating system is to reinforce our ongoing drive to encourage Merrill Lynch analysts to adopt the perspective and mindset of top-performing investors.”
According to the release, anyone viewing the analyst ratings should expect the following: a “Buy” rating on a stock should expect that stock to have a total return of at least 10 percent; a “Neutral” rating means the analyst expects the stock to remain flat or increase, but be less attractive than buy-rated stocks; and “Underperform” stocks are (a) expected to have either a negative total return; or (b) have a positive total return, but be the least attractive stocks in a coverage cluster.”