<= back to Analyzing Analyst Recommendations

We advise all investors to do their homework before investing. If you purchase a security solely because an analyst said the company was one of his or her “top picks,” you may be doing yourself a disservice. Especially if the company is one you’ve never heard of, take time to investigate:

1. When assessing a firm’s research report of a company, be sure to read all of the disclosures about the firm and analysts’ conflicts of interest and the types of research recommendations that the firm has made.
2. Research the company’s financial reports using the SEC’s EDGAR database at or call the company for copies. If you can’t analyze them on your own, ask a trusted professional for help.
3. Find out if a lock-up period is about to expire or whether the underwriter waived it. While that may not necessarily affect your decision to buy, it may put an analyst recommendation in perspective.
4. Confirm whether the analyst’s firm underwrote one of the company’s recent stock offerings—especially its IPO. Learn as much as you can about the company by reading independent news reports, commercial databases, and reference books. Your local library may have these and other resources.
5. Talk to your broker or financial adviser and ask questions about the company and its prospects. But bear in mind that if your broker’s firm issued a positive report on a company, your broker will be hard-pressed to contradict it. Be sure to ask your broker whether a particular investment is suitable for you in light of your financial circumstances.
6. Above all, always remember that even the soundest recommendation from the most trust-worthy analyst may not be a good choice for you. That’s one reason we caution investors never to rely solely on an analyst’s recommendation when buying or selling a stock. Before you act, ask yourself whether the decision fits with your goals, your time horizon, and your tolerance for risk. Know what you’re buying—or selling—and why.