A quartet of leading Wall Street banks have unleashed more than 800 new Sell ratings on US-listed companies as they usher in new equity ratings. The surge of downgrades represents a 25-fold increase in Sell recommendations from the four firms in just over one month.
Credit Suisse First Boston, Salomon Smith Barney, Lehman Brothers and Bear Stearns had Sell or underperform ratings on 34 stocks in August. That has sky-rocketed to 833 as new ratings systems have come in, according to data from Thomson Financial’s First Call.
More downgrades are expected as Goldman Sachs and JP Morgan reform their ratings systems. Morgan Stanley, which changed its ratings system in March, rates 181 companies Underperform, compared to just three in February.
Traditionally, banks have issued Sell recommendations on just 1% to 2% of the companies they covered – leading to criticism that they were too frightened of losing business from corporate clients to sanction negative reports.
But in the new climate of industry reform and pursued by government investigations, many of the biggest Wall Street names are sending negative reports on 20% to 28% of the companies they rate.
The glut of Sell recommendations has been timed to coincide with the introduction of rules on analysts’ disclosure.
From last week, banks have to state in their research reports how many companies they rate Buy, Sell and Hold or Overweight, Market Weight and Underweight, to comply with reforms brought about by the National Association of Securities Dealers, the New York Stock Exchange and the Securities and Exchange Commission. The rules also demand that banks simplify their rating systems to three rating tiers, rather than four or five.
Two weeks ago, CSFB rated only 10 companies a Sell – out of the 1,059 it rates, according to Thomson First Call. As of last Monday, the bank rated 205 or 19% of its covered companies a Sell. SSB had 30 Sell recommendations two weeks ago. Last week, that number changed to 281 or 26% of the companies it covers. The number of Bear’s Sell recommendations rose from nine to 113.
One reason for the radical changes is many banks have changed the way they assign ratings by moving to the three-tier system, rather than call whether the share price is likely to move up or down over the next 12 months. Analysts have to rank companies in their sector against each other and split them into three tiers.
The top tier in a sector will be rated Overweight. These stocks will be expected to outperform the sector average. The middle tier is rated equal or market weight and the bottom tier is rated underweight – under performing the sector average.
Some banks say there will be a minimum of 15%-20% of companies in this bottom tier. CSFB, SSB, Bear Stearns and Morgan Stanley are among the banks using this system.
Charles Schwab, the US broker, and Bear Stearns were among companies that SSB downgraded to underperform last week.
Not all banks have seen their rating distributions change so radically. Deutsche Bank changed to a three-tier Buy, Hold, Sell system last week.
But it has not changed to the relative rating system others are using. Only 18 of the 643 companies it rates are in the Sell category.
Banks also have to declare what percentage of companies in each category they have investment banking relationships with.
Penny King Holdings Corporation, a Delaware Investment Holding Company.
Market Data 
Markets 
AI
