Investment Research: Ignore the Ratings, Read the Reports

On the flip side, if the stock is expected to underperform the expected return by more than 2%, it's a "sell" and if it is expected to dramatically underperform the expected return, it could be considered a short sale . A rating system like that would eliminate the subjectivity and guess work (see benchmark ).

Thus, I strongly suggest you ignore the research rating and, instead, actually read the report. Here are few important parts of the report to look for:

• Price targets: Just because an analyst changes a rating doesn't mean that the price target on the stock has changed. The price target is a fair value assigned by an analyst to a company's stock. The better analysts will provide various scenarios (base case, best case, worst case), all of which have varying price targets. Compare the stock's current price to that of the analyst's price target to determine if the stock is worthy of buying, selling or holding (see "Ask TheStreet: Target Practice" and "What Do EBITDA and Target Estimate Mean?")
• Metrics: Look for more quantitative data points such as EPS estimates, revenue growth, margins (gross and net ) and any relevant costs and sales figures.
• Qualitative commentary: Pay attention to how an analyst covers the actual business, such as the new product offerings, competitive landscape, industry trends and management changes.
• Balance sheet: Never forget the importance of the balance sheet (see "Balance Sheets: The Good, the Bad and the In-Between" ).

What About Independent Research?

The Wall Street analyst scandal and the growth of the Internet in terms of investing and investment research opened up opportunities for third-party independent research to emerge as a viable alternative to sell-side research.

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