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Hold the Recommendation

Some equity research houses are ditching the standard buy, hold, and sell recommendations for stocks in favor of more-nuanced assessments.

5Apr

On March 1, SG Cowen Securities Corp. announced that it will no longer issue ratings for stocks. "Investment conclusions have been 'dumbed-down' by the attempt to categorize each opinion into one of a small handful of buckets," wrote Barry Tarasoff, director of research at SG Cowen, in a letter to clients. He says the firm will issue investment opinions that use "the full richness of the English language."

So far, companies are applauding the decision. "I give them credit. It's a bold move," says Mark Aaron, director of investor relations at Tiffany & Co., which counts SG Cowen among its analysts. "If it shifts investors from a narrow focus on ratings to discussion of more-thought-provoking research, we are all better off."

The move comes just days after HSBC, the world's second-largest bank, announced that it would forgo recommendations in its equity research. So did America's Growth Capital, a small investment bank when it launched in Boston just eight months ago. Maria Lewis Kussmaul, director of investment research, says the problem with ratings is that one size doesn't fit all. "What might be a 'sell' for a short-term investor could be a 'buy' for an investor with a longer time horizon," she says. And institutional investors don't use ratings anyway, she adds. "They're beyond useless."

Marv Burkett, CFO of Nvidia Corp., a Santa Clara, California-based graphics chipmaker, expects other sell-side analysts to follow suit. He says that the trend could shift the focus to the longer term. "Doing away with ratings and price targets could help move people from a trader mentality to more of an investor mentality. That's a good thing," he says.

Of course, another good thing is that by forgoing ratings, research firms can avoid the sticky problem of issuing—or failing to issue—sell recommendations on their investment-banking clients. "It will alleviate pressure on analysts to avoid angering clients," says Jeffrey Haas, professor of securities law at New York Law School.

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