Even though you can learn a lot about a company by studying its balance sheet and income statement, you may also be interested in an analyst's breakdown of the stock's story. What else is happening that could affect the stock's price?
Most reports include a summary of the analyst's opinion, and some reports include detailed analysis of each factor in the analyst's reasoning, with sections devoted to an analysis of the industry, the company's strategy, or other factors.
Fundamental analysis beyond the financials includes:
Strategy: What's the company's business plan? Are its products and services competitive?
Consumer market: Who are the clients? What is the company doing to improve its marketing?
Development and planning: What new products or services are in the pipeline? Will the company be making any major organizational changes or shifts in focus?
Legislation: What's the likely effect of recent or pending legislation?
Management: Is the company well run? Has management made smart decisions in the past?
Industry: Who are the competitors? What factors affect the industry as a whole?
Economy: How will the company be affected by trends in the overall economy?
Although some investors and analysts rely more heavily on the financial numbers and other quantitative measures, you may find that the qualitative analysis — such as the talent of the company's management, its marketing plans, or its product development — is also important to your stock selection process.
Most analyst reports first examine whether a company is fundamentally sound before deciding whether the price is right. However, an analysis of a stock's trading history and expectations is an extremely important part of most analyst reports. Where you see trading data, including price charts and statistics on trading volume, you're looking at the technical side of a report.
Technical analysis looks at how a stock trades on the market to find meaningful patterns. The technical data that an analyst examines include the price history, trading volume, insider trading, and volatility. Standard & Poor's reports, for example, offer technical data like this:
The analyst calls the stock bullish because the price has been going up. The Relative Strength Rank measures the stock's past year's price performance compared to the overall market. And insider activity shows that insiders — executives who work for the company itself — have been trading the stock unfavorably. In other words, they're selling more than they're buying.
The way that company insiders trade their employer's stock may reveal their positive or negative appraisal of the company's performance. Insiders are required to report their plans to trade company stock to the SEC in advance, which allows analysts to gauge how the insiders are trading.
An analyst report may also include a measurement of insider trading volume — the quantity of trades being made. If there's a flurry of activity, it may be a harbinger of changes to come. Of course, dramatic changes in general trading volume, which may also appear in a report, may also point to important news and developments.
You may also find information on a stock's volatility in an analyst report, sometimes expressed as a number called the beta — a measure of a stock's relative volatility. To measure beta, the volatility of the stock's benchmark index is set equal to one. Therefore, a stock with a beta lower than one can be expected to fluctuate less than its benchmark index, and a stock with a beta higher than one will fluctuate more.
Volatility risk may play a big part in your investment decisions. For example, you may not want to invest in a highly volatile stock even if the analyst recommends it strongly — or on the other hand, you may be actively seeking out highly volatile stocks in a rising market.
As part of the effort required by recent changes in the law to make in-house analysis more transparent, or open, these stock research reports include disclosures about conflicts of interest and other information:
Analyst certification: The analyst certifies that he or she has given an objective, accurate opinion, and that his or her compensation isn't tied to the recommendation. In other words, the firm doesn't tie the analyst's paycheck to the ratings.
Conflict of interest disclosures: The firm that provides analysis of a company's stock must disclose whether they've provided investment banking services to that company, or whether they're seeking to do business with them. They must also disclose whether they hold any shares in the company's stock and how their analysts are compensated.
Ratings distribution: If a firm has rated everything a buy, you'll see it here. That's because firms must include in their reports a breakdown of the number of stocks they've rated in each category, so you can see whether analysis at the firm seems reasonable, or whether it leans toward the overly bullish.
Ratings explanation: Since not every firm uses familiar terms for their ratings, they must explain their system in easy-to-understand terms.
Analyst track record: To give investors an easier way to gauge an analyst's accuracy, reports include charts that illustrate an analyst's price targets and ratings compared to the stock's actual performance.