What is an Equity Research Report?
Sell-side equity research analysts primarily communicate their ideas through published equity research reports.
In this article, we describe the typical components of a research report and show how they are used by both the buy side and sell side.
Equity research reports are usually available for a fee through financial data providers.
Near the bottom of the article, we include a downloadable sample equity research report by JP Morgan.
Equity Research Report Timing
Quarterly Earnings Release vs. Initiating Coverage Report
Barring a new company initiation or an unexpected event, equity research reports tend to immediately precede and follow a company’s quarterly earnings announcements.
That’s because quarterly earnings releases tend to be catalysts for stock price movements, as earnings announcements likely represent the first time in 3 months that a company provides a comprehensive financial update.
Of course, research reports are also released immediately upon a major announcement like an acquisition or a restructuring. Additionally, if an equity research analyst initiates coverage on a new stock, he/she will likely publish a comprehensive initiation piece.
How to Interpret Equity Research Reports
“Buy”, “Sell” and “Hold” Ratings
Equity research reports are one of several types of key documents analysts have to gather before diving into a full-scale financial modeling project. That’s because research reports contain estimates used widely by investment bankers to help drive the assumptions underpinning 3-statement models and other models commonly built on the sell side.
On the buy side, equity research is also widely used. Like investment bankers, buy-side analysts find the insights in sell-side equity research reports helpful. However, equity research is used to help the buy side professional understand the “street consensus,” which is important for determining the extent to which companies have an unrealized value that may justify an investment.
The three main types of ratings ascribed by equity research analysts are the following:
- “Buy” Rating → If an equity research analyst marks a stock as a “Buy”, the rating is a formal recommendation that upon analyzing the stock and the factors that drive price movements, the analyst has determined the stock is a worthwhile investment. The markets tend to interpret the rating as a “Strong Buy”, especially if the report’s findings resonate with investors.
- “Sell” Rating → In order to preserve their existing relationships with the management teams of publicly traded companies, equity analysts must strike the right balance between releasing objective analysis reports (and recommendations) and maintaining an open dialogue with the company’s management team. That said, a “Sell” rating is rather uncommon in occurrence because the market is aware of the relationship dynamics (and will interpret it as a “Strong Sell”). Otherwise, the analyst’s rating can be framed to not cause a steep decline in the market share price of the underlying company, while still releasing their findings to the public.
- “Hold” Rating → The third rating, a “Hold”, is fairly straightforward as it indicates that the analyst concluded that the projected performance of the company is in line with either its historical trajectory, industry comparable companies, or the market as a whole. In other words, there is a lack of a catalyst event that could cause a substantial swing — either up or down — in the share price. As a result, the recommendation is to continue to hold and see if any notable developments emerge, but regardless, continuing to hold the stock not too risky and minimal volatility in pricing should be anticipated in theory.
In addition, two other common ratings are “Underperform” and “Outperform”.
- “Underperform” Rating → The former, an “Underperform”, indicates the stock may lag behind the market, but the near-term slowdown does not necessarily mean that an investor should liquidate their positions, i.e. a moderate sell.
- “Outperform” Rating → The latter, an “Outperform”, is a recommendation to buy a stock because it appears likely to “beat the market.” However, the anticipated excess return above the market return is proportionally minor; hence, the “Buy” rating was not offered, i.e. a moderate buy.
Sell-Side Equity Research Report Anatomy
A full equity research report, as opposed to a short one-page “note”, usually includes:
- Investment Recommendation: The equity research analyst’s investment rating
- Key Takeaways: A one-page summary of what the analyst thinks is about to happen (ahead of an earnings release) or his/her interpretation of the key takeaways from what has just happened (immediately after the earnings release)
- Quarterly Update: Comprehensive detail about the preceding quarter (when a company has just reported earnings)
- Catalysts: Details about the company’s near-term (or long-term) catalysts that are developing are discussed here.
- Financial Exhibits: Snapshots of the analyst’s earnings model and detailed forecasts
Equity Research Report Example: JP Morgan Hulu (PDF)
Use the form below to download a research report from JP Morgan by the analyst covering Hulu.
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was looking for an equity research report template