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Matt Levine

Brokerage Firm Prefers to Keep Its Research Friendly

Buying a stock is a binary decision. Shouldn't research also be binary?

This Wall Street Journal story about Sidoti & Co., a small brokerage that "doesn’t allow analysts to issue any negative ratings on the hundreds of stocks they follow," is such a perfect little parable of the financial industry. Sidoti has two ratings categories: "buy" and "neutral." Most sell-side research has three ratings categories: "buy," "neutral" and "sell," or words to that effect. Some use five ratings, along the lines of very buy, buy, neutral, sell and very sell.  Spinal Tap's amps go to eleven. You can just have your ratings scale go to neutral, and make neutral louder. Sidoti has conveyed all the information it needs to convey with "buy" and "neutral": It thinks you should buy the "buy" stocks, and it doesn't think you should buy the other ones. You shouldn't own stocks that you wouldn't buy, so -- especially in Sidoti's coverage universe of "small-cap and micro-cap companies" -- there is no reason to distinguish between stocks not to buy and stocks not to hold. After Sidoti's refreshing simplicity, it seems like false precision to offer three or five ratings. Just tell me whether to buy the stock or not. That's all I care about.

Except that that's not what Sidoti's customers care about. Here's what they care about: