In a letter to clients Tuesday, Citigroup’s Global Head of Research Andrew Pitt announced a new ratings system to be used by all of the firm’s analysts globally. Stocks rated “hold” will now be called “neutral.”
“The new ratings system has been devised after a significant due diligence process and, for your benefit, will be clearer and more streamlined,” wrote Pitt, in the letter obtained by CNBC. “The investment ratings will change from Buy, Hold and Sell, to Buy, Neutral, and Sell — i.e. Neutral will replace Hold in our recommendation matrix.”
The change may not exactly be enough to increase confidence in sell-side research, which still receives criticism for not rating enough companies “sell” in the wake of the tech-bubble research scandal at the turn of the decade. Major firms paid fines and promised to put protections in place to not let potential investment banking business influence their research units.
“They have to be kidding,” said one Citi client, who asked to remain anonymous.
Even amid the ongoing slide in stocks, a miniscule number of analysts advise selling stocks. Just 167 “sell” recommendations were contained in nearly 20,000 Wall Street research reports recently reviewed by Standard & Poor’s Sam Stovall, according to a Marketwatch column published last week.
To be fair to Citigroup, the letter signaled that there could be more “sell” ratings in the future.
“Any expectation of a negative 12-month ETR (equity total return) will trigger a Sell rating,” wrote Pitt. This would eliminate the widely-used practice of analysts assigning a price target below current market price, but still keeping the rating at “hold,” so as to not upset the company.
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