Analyst research plays an important role in helping investors decide which stocks to own – but it has flaws. One problem is that popular companies often get a lot more research coverage than lesser-known firms. This distortion can put too much focus on well-known names – but it may also create opportunities to profit from stocks that analysts have missed.
In his book One Up on Wall Street, the well known American investor Peter Lynch, wrote: “If you find a stock with little or no institutional ownership, you’ve found a potential winner. Find a company that no analyst has ever visited, or that no analyst would admit to knowing about, and you’ve got a double winner. When I talk to a company that tells me the last analyst showed up three years ago, I can hardly contain my enthusiasm.”
Lynch’s point was that out-of-favour stocks that are overlooked by the City can be a source of great returns for investors prepared to do their homework.
Small-caps struggle for research
In the UK, company size is very influential in determining how much research a firm gets. For analysts (and their employers) large-cap company research offers a much greater prospect of lucrative brokerage and corporate deal-making…
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