Be wary of analyst reports

By Matt Krantz
USA Today

Investors should still be skeptical of analyst reports even though Merrill Lynch promises to erase some of Wall Street's conflicts of interest.

No matter what Merrill Lynch does to clean up the process after its settlement with the New York attorney general, analyst reports will continue to be incomplete, says Hugh Johnson, strategist at First Albany. Despite the proposed changes, investors must keep several things in mind as they read research reports:

• Treat analyst reports as an opinion, not a recommendation. Investors should come up with their own "buy" recommendations, not rely on brokers, says Jeff Fox, director of educational development at the National Association of Investors Corp., which helps individual investors. You should always keep your eye jaded when reading analysts reports, he says, because their expectations tend to be too rosy.
• Learn to read the new disclosures. Much of the new information to be included with Merrill Lynch reports will only help investors who learn to read them, says Chuck Hill, director of research at Thomson First Call. Focus on the part that will show whether the firm has an investment banking relationship with the covered company, he says.
• Remember which analysts have been critical in the past. Their research is probably more valuable, even if their firm has an investment banking relationship, says Jim Margard, strategist with Rainier Investment Management.

Above all, investors should remember that no matter what changes are made, analysts will still get paid indirectly from investment banking.