Stock Analysts Do Better Vertical Than Horizontal
HT: FierceFinanceWith their buy/sell/hold recommendations, stock analysts are key cogs in the machine that decides what publicly traded corporations are worth. Brokerages and independent research shops employ these men and women to be experts usually not just on a single company but on a whole industry. Analysts can become mini-celebrities on Wall Street for being accurate, articulate, or maybe just provocative.One major assumption in this arrangement is that the analyst with the best take on, say, McDonald’s (MCD) also has a keen understanding of Wendy’s (WEN), Burger King (BKW), Chipotle (CMG), and other similar chains. Horizontal specialization is how the entire industry is organized—take a look at the Wall Street Journal’s 2013 ranking of “The Master Stock Pickers,” which crowns Jim Parker of Raymond James Financial (RJF) as the king of airlines, or Business Insider’s 2012 list of “The 36 Best Analysts on Wall Street,” which anoints Mike Mayo of Crédit Agricole (ACA:FP) as the guy to trust on big banking.
A new academic paper suggests this may be all wrong. Three professors—Mihir Mehta and David Reeb of Temple University and Wanli Zhao of Southern Illinois University—argue that it’s better to analyze companies vertically, by studying the specific suppliers and customers in their supply chain. For example, Walt Disney (DIS) has a pretty straightforward setup: Its suppliers include Publicis Groupe (PUB:FP), the advertising giant, and its customers include Netflix (NFLX) and Wal-Mart Stores (WMT), which sell Disney movies....MORE
