Even though analysts are looked upon as professionals, there are still many flaws in blindly agreeing with their “buy” or “sell” ratings.
First of all, there is a huge incentive for analysts to issue “buy” recommendations instead of “sell”. The universe of stocks not owned by a customer is always much larger than the list of those currently owned. Consequently, it’s much easier to generate commissions from the “buy” recommendation.
Analysts usually work for a firm, and they have a vested interest in keeping that firm profitable. It doesn’t pay for analysts to cover stocks unless they can generate enough revenue to allow the analysts to keep their jobs. This also means that smaller cap stocks, which don’t have huge volume, are usually ignored because they can’t bring in enough trading commissions. It’s ironic because these smaller stocks are specifically the ones that hold the most profit potential for the investor.
Analysts are usually cut off from important sources of information, including company officers and investor-relations personnel. These people can hold important pieces of the puzzle when putting together a “buy” or “sell” rating. This is a major flaw, but it is a necessary evil, because it would open the door to potential insider trading.
Inside a major firm, independent thinking isn’t the norm, because it’s very difficult to go against fellow analysts. It’s much safer to be wrong in a crowd than being the only one to misinterpret a situation.
Finally, analysts typically cover only one industry group. There are chemical analysts who don’t know much about investing in other industries. If a chemical analyst says to buy a stock in the chemical industry, it’s not being compared to investment prospects of other industries.
You should do your own research and use analysts to CONFIRM your findings.