Merrill Lynch Makes It Harder to Say 'Buy'

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

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 strategist James Montier wrote in a report this week.

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 L. Spitzer that they used research to promote the interests of 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 shares and uses that firm's research to help make investment decisions.

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

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 is to begin June 2, Merrill said in a statement distributed by Business Wire. Merrill is a passive, minority investor in Bloomberg, 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 said in a May 12 report. The Harrison, N.Y., research firm based its analysis on the Standard & Poor's 1500-stock index.