Buy, Sell and Hold On! Stock Ratings Still Confuse

"It made for great P.R. to go to a three-point system, but everyone's interpreted it in a different way," said Kei Kianpoor, CEO of Investars.com, a Web site that tracks analyst research. "Investors shouldn't need a degree in deconstruction to understand what a buy means."

Both Sides of Mouth

Last year, New York State Attorney General Eliot Spitzer uncovered emails showing that analysts at Merrill Lynch and Citigroup (C) unit Salomon Smith Barney had privately disparaged stocks that they were publicly recommending. That prompted a larger investigation into conflicts of interest on Wall Street and led to significant fines as well as changes to the way analysts are compensated.

Although not required by any settlement or new securities laws to alter the way they rate stocks, all the major brokerages have revised their systems over the past year, by reducing the number of ratings issued on stocks from four or five to just three. But because the system has not been regulated, some say it remains confusing and can still mislead investors.

To be sure, the major brokers all explain their ratings methodologies at the top of their research reports, and the system is better than it once was. Investors can at least take some comfort in knowing that a buy rating is no longer analyst-speak for hold, and a hold doesn't really mean sell.

Looking for Balance

Patricia Walters, senior vice president of professional standards at the Association for Investment Management Research, said that while the current system has some flaws, homogenization isn't the way to go. "I think we need to find a balance between information that's comparable and information that gives companies the ability to communicate their different perspectives," she said.

In the meantime, however, White said investors should go to a third party like Investars to analyze the analysts, just as investors now go to an independent research firm like Morningstar to analyze the performance of portfolio managers.

Whether or not brokers are trying to circumvent being measured won't matter in the end, he said, because third parties will continue to monitor the analysts, "and in time these companies will come to realize that providing comparable information is a valuable tool."

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