RIYADH, 27 June 2005 — Like any major purchase in life, the investor-purchaser needs to investigate the “real” value of a particular stock that he is interested in and consequently decides whether it is worth buying and at what price.

Failure to do so usually leads the purchaser to buy a poor asset — stock, or a good one but at a price which is much higher than its intrinsic value. Doing the research and the analysis on a potential stock purchase is not a simple task, particularly if the investor wants to invest a small amount or if he plans to distribute his investment funds in several companies. Stock analysis requires technical know-how, experience, regular follow-up, and in addition it is time consuming. Based on the above and related factors a standalone business of “stock analysis” has flourished around most major stock markets. Analysis of stocks or other investment instruments is performed by stock analysts who work for full service brokerage firms, or for financial services companies.

Analysts are well paid professionals whose mission is to research and scrutinize information about companies and their respective industries, then provide a conclusion and a rating about the future prospects of each company. There are two types of analysts, Buy-Side Analysts and Sell-Side Analysts.

A sell-side analyst is a financial analyst who works for a brokerage firm and whose recommendations are passed on to the brokerage firm’s customers through the stock brokers. A buy-side analyst is a financial analyst employed by a non-brokerage firm, typically one of the larger money management firms that purchase securities on their account. He researches and selects good prospect companies for his employer to invest in.

Analysts focus on a limited number of leading — dynamic companies, and analyze them technically on a regular basis. At the end of their investigation, each analyst concludes with a specific rating of the analyzed company. The rating of a single analyst is not adequate for an investment decision. Instead investors look at all the ratings — average rating of all the analysts that follow a particular company. Each analyst rating is represented numerically which in turn makes it possible to calculate an average rating for all analysts for a specific company. In the US, the rating scale that is used by analysts range from 1 to 5 and are represented by, Strong Buy (1), Buy (2), Hold (3), Sell (4) and Strong Sell (5).

Analysts in other countries use the same concept but based on different implementation. Most investors take the above average analyst rating seriously when making an investment decision.

Some companies are not followed at all by analysts, others by few, and the most valuable and active companies are followed by more than 30 analysts.

Although the financial analysts look at the same or similar data for each company, however their conclusions are not necessary the similar. This makes the requirement to look at the input of all analysts more important.

Accordingly the final rating of any company that is quoted by the media is the average rating of all the analysts that follow it. An actual rating might be 1.35, which is between strong buy (1) and buy (2), or a rating of 2.1 which is between buy (2) and hold (3). For an investment selection, it is apparent from the above that the lower the average rating the more attractive the company is for investment. The fundamentals of some companies change based on recent business decisions, and hence their respective ratings should be reflected accordingly. Analysts normally update their ratings on a regular basis, which in turn is reflected in the overall average for each company.

Whenever more than one analyst downgrades the rating of a particular company at the same time, the share price of such company goes down immediately. The same is true when the rating is upgraded. Although analysts rating are important, however they should be taken in the right perspective. Of particular importance is the fact that they have various degrees of knowledge, experience, and interest in specific companies. Accordingly their judgment is impacted by the above factors.

The most disturbing influence is the one that some analysts receive from their management regarding the ratings of companies that they do business with. This influence is manifested by the small number of “sell” ratings by analysts, although in reality a much larger number of companies get in trouble.

(Salim J. Ghalayini, [email protected], is the author of “Stocks for the Practical Investor”. He manages several investment accounts.)