INVESTMENT PRIMER. Sherlock Holmses of the investment industry. How stock analysts sniff out the makings of those buy-and-sell lists

Ever been curious as to just who that royal ``we'' is when a broker tells you, ``We're recommending . . .''? That second someone is the stock analyst.

Also called a financial analyst, he or she (and a $30,000-to-$250,000 salary plus research expenses) is the difference between a full-service brokerage and a discount brokerage.

The job of an analyst is a blend of the high-rolling and the routine. On any given day, between bites of filet mignon, an analyst may be swapping fare-war stories with the CEO of a major airline. Or if he's Michael Culp, restaurant industry analyst at Prudential-Bache Securities, he may be gulping burritos in the booth next to you as he ``researches'' the prospects for the latest Mexican fast-food outlet.

At the most, an analyst may spend three full months a year jetting about the country. He pays courtesy calls on institutional clients (pension fund and bank trust department managers), taking the time to answer questions and purveying pearls from his research and travels. Analysts attend trade shows and conventions looking for scraps of information or the latest Cabbage Patch phenomenon. And, of course, they visit the companies they track, looking for tidbits or confirmation of hunches, and just plain developing the lines of communication.

It's true, some analysts have been lambasted for getting too chummy with corporate officials. The concern is that if they get too close, their judgment may be clouded: They may end up touting a poor stock.

For instance, Baldwin-United, with its likable chief honcho, was once a favorite of Wall Street analysts. But Baldwin wasn't all it appeared to be. It took an off-the-beaten-path analyst working in a small Chicago firm to blow the whistle.

James Chanos, working at Gilford Securities at the time, eschewed personal contact with Baldwin officials and kept his nose in the financial data on the company. He found higher earnings based on nothing more than fancy bookkeeping. Baldwin-United went bankrupt in 1983; thousands of investors were caught in the fallout.

On the other hand, ties with the company can pay off handsomely. A number of brokerage houses figure that analysts earn their keep bringing in new investment banking business. By staying close to the executives, an analyst can catch wind of mergers or the need for new financing. So the brokerage house captures a solid consulting fee or underwrites a stock offering or bond issue.

Crunching numbers is the other, perhaps more prosaic, side of the business. By and large, analysts are inherently fundamentalists. They start their analysis by developing a macroeconomic model. They consider such things as whether the gross national product will grow by 3 or 5 percent, for example, the next year. Will interest rates rise or fall? Will oil prices continue to drop? Will imports ebb or flow?

The analysts then consider how these factors affect an individual industry. Not every brokerage covers every industry. Merrill Lynch, Pierce, Fenner & Smith Inc. in New York has one of the largest research staffs, some 200 analysts covering more than 40 industries (everything from beverages to trucking) and some 1,400 companies (domestic and international).

At any rate, using macroeconomic assumptions, applying them to certain industries, and then considering their effect on specific companies, an analyst can make earnings projections. Using those projections, the analyst tries to calculate roughly whether a stock is fairly valued.

If the analyst, for instance, determines that lower oil prices will mean lower fuel costs for the trucking industry, the next step in his analysis is to ask which companies will benefit most from that reduction. At this point, the analyst may put specific companies under almost microscopic scrutiny to see where an investment advantage can be gained. And many analysts use computer models to play their what-if games.

At some point, the analysts pull together their conclusions and write up recommendations that go out to their clients and the brokers.

Today, analysts are often recruited fresh out of master's programs at leading business schools. From there some brokerage firms send the green analysts through their own apprenticeship programs. Others go straight from grad school to start work toward certification.

The chartered financial analyst designation, or CFA, is a professional certification akin to the CPA ticket awarded to accountants, says Alfred C. Morley, president of the Institute of Chartered Financial Analysts in Charlottesville, Va. At present there are about 8,000 CFAs among the estimated 25,000 analysts.

To carry the three-letter tag after their names, analysts must pass three CFA institute exams and meet certain eligibility requirements: a bachelor's degree or equivalent work experience and three years of on-the-job investment analysis. There is also a requirement that 50 percent of any work experience must be spent on the ``investment-making process,'' which doesn't include the duties performed by a broker.

A CFA designation not only means the opportunity of promotions and more pay for an analyst, it means he or she must follow certain ethical guidelines. Since the CFA institute was founded in 1963, 20 sanctions have been leveled -- ranging from a private hand slap to revocation of CFA certification, Mr. Morley reports.

Remember that royal ``we''?

Well, Morley says analysts prepare their research for institutional clients. A less-detailed written account gets passed along to the broker. But he says, ``It's rare that a broker, let alone an individual customer, would ever confer with an analyst. The only exception might occur in regional brokerage firms, where the relationship between broker and analyst might be closer.''

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