Merrill Analysts to Rate 20% of Stocks `Underperform'

Merrill Analysts to Rate 20% of Stocks `Underperform'

May 14 (Bloomberg) -- Merrill Lynch & Co. will require its stock analysts to have ``underperform'' ratings on at least 20 percent of the companies they cover, about four times the Wall Street average.

The new guidelines will also limit ``buy'' ratings to 70 percent of shares, while ``neutral''-rated stocks won't exceed 30 percent. Analysts at Merrill, the third-largest U.S. securities firm, now recommend selling about 12 percent of their companies.

Merrill Chief Executive Officer John Thain is trying to lure clients with advice on overvalued stocks, a strategy his former employer, Goldman Sachs Group Inc., has adopted. Goldman, the world's most-profitable securities firm, had sells on 15 percent of the companies on April 1. About 37 percent of stocks fall every year, Candace Browning, president of Merrill Lynch Global Research, said in a Bloomberg Television interview today.

Merrill is ``trying to go after the customer base that has generated the most commissions, and that's the hedge funds,'' said Jack Ablin, who oversees $62 billion as chief investment officer at Harris Private Bank in Chicago. ``They probably do want to offer them short ideas.''

Short selling is the sale of stock borrowed from shareholders in the hope of profiting by repurchasing the securities later at a lower price and returning them to the holder. Short sellers have the widest choice of stocks since at least 1990 as corporate finances deteriorate and profit growth slows, London-based Societe Generale SA strategist James Montier wrote in a report yesterday.

$1.4 Billion Settlement

Merrill's shift comes as analysts rate about half as many stocks ``sell'' as they did in 2003, according to data compiled by Bloomberg. That year, 10 securities firms including Merrill paid $1.4 billion to settle allegations by then-New York Attorney General Eliot Spitzer they used research to promote investment banking clients. About 5.5 percent of all stocks covered by Wall Street analysts are currently rated ``sell'' or its equivalent, Bloomberg data show.

``Do they need to have a better sell discipline? Absolutely,'' said Peter Sorrentino, a portfolio manager at Huntington Asset Advisors in Cincinnati, which oversees $16.7 billion. Sorrentino owns Merrill Lynch shares and uses its research to help make investment decisions.

``Anybody can find good stuff to buy,'' he added. ``It's the sell research people pay for.''

Negative Total Return

Merrill also changed the definition of its ratings categories. The lowest, ``underperform,'' applies to stocks expected to have a negative total return over 12 months or gain the least among stocks in their industry or region. Stocks rated ``neutral'' are projected to return up to 10 percent, and ``buy'' ratings will apply to companies expected to return more than 10 percent.

The new system will begin June 2, Merrill said in a statement distributed by Business Wire. The company is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.

The proportion of U.S. shares available for trading that were sold short at the end of April was 10.3 percent, Bespoke Investment Group LLC said in a May 12 report. The Harrison, New York-based investment-research firm based its analysis on the 1,500 companies in the Standard & Poor's 1500 Index.

BLOOMBERG