Why Consultants and Researchers Should Replace Sell-Side Analysts

STL recently put forward a popular view of telecoms as a defensive sector in today's financial and economic turmoil. Still, they feel things could change:

The audience at our November event seemed comforted by the appeal which the capital markets currently find in telecom as a defensive sector. However, we also stressed that this is likely to be a fleeting phase, as underlying concerns about the industry’s ability to generate sustainable value will return.

I do not wish to contest STL's views on telco transformation, but I feel something is missing in this (vastly simplified) summary: probably every industry sector faces challenges, some even bigger than those plaguing telecoms. Obviously, financials come to mind, but healthcare, IT, oil & gas and automobiles have a few issues to sort out as well. Personally, I wouldn't be comfortable predicting which sector is set to outperform the others next year.

Somehow, this ties nicely into Kai's (not entirely serious) call for government support of the telco sector, a while ago. Apparently, he was disgruntled over the amount of funds available to bail out financials and the automobile sector that haven't been able to regulate themselves. Why shouldn't FTTH operators get government support as well?

What follows from combining these two posts is that consultants and researchers (instead of Kai's FTTH operators) should step in and replace the sell-side analysts that have lost their jobs over the past few months (by adding investment recommendations to their industry knowledge). Of course, there is some work to be done, but the very fundamental changes of the financial industry could provide industry experts and consultants with a unique opportunity to venture into a new area and serve a new set of customers. They could be much better equipped to serve the buy-side than the average financial analyst. To loosely quote a buddy of mine (who still has his Wall Street sales job):

To say that stocks are cheap, based on current P/E ratios, shows an appalling lack of historic perspective that plagues the sell-side. Low P/E ratios probably imply that earnings projections are still way too high. It should be commonly known: C-level execs are the very last people to update their views to altered market conditions; only to be followed by sell-side analysts.

Comments

[Jack Johnson]

Did anybody think about the huge amounts of regulatory work necessary to get consultants to provide financial advice and stock recommendations to buy-siders? Series 7, 63, 86, 87, NASD registration, etc, etc. To make this suggestion without thinking about the real world obstacles is beyond ridiculous!

2008 Dec 31 10:14 AM

[selene]

Given six months, the recommendations of these "consultants" wouldn't be any better than those of the sell-side analysts. The issues that make sell-side research not more useful than it is are structural and would still afflict whoever was doing the research. It's not as though these "consultants" are drawn from a completely different pool of smart/educated types, either.

2008 Dec 31 10:53 AM

[notsosmart]

homework,research,hist... charts are meaningless in a liars society.lack of ethics,truth,transpare... & accountability makes anal sts useless.your own thinking & some good luck is al lyou can hope for,sheeples

2008 Dec 31 11:03 AM

[seastead]

Let's get rid of recommendations. They were useless in the past, are useless in the present and will continue to be useless in the future (note: their use as a contrary indicator is debatable). If someone is making investment decisions based on sell-side recommendations, they shouldn't be in the market. All they do is perpetuate the stream of glib. brain-dead advice coming from advisers and buy-side analysts.

2009 Jan 16 05:14 PM