This article is from the How to Start an Investment Program tutorial, author unknown.
Another source of valuable information to help you in your stock selection is to acquire and read the company report by a professional analyst. These researchers provide the clues to assist investors in determining if a stock is undervalued, overvalued, or priced about right and, consequently, if it is a good time to buy the stock or unload it.
Analysts are often compared to fortune tellers or prophets because of what they are asked to do: predict the future. The reality is they do not rely on a crystal ball, but rather they dissect a company's past and current financial statements to come up with comparable measures such as projected earnings growth and sales growth, cost and profit percentages, and estimated earnings per share figures.
Unlike the information that is provided by the company (Annual Report, Press Releases), analyst can generally be expected to provide an unbiased opinion about a stock. It must be remembered, however, that most analyst work for a brokerage house and brokerage houses are, at times, are the primary source of financing for a company they are "covering." This situation sets up a direct conflict of interest for the analyst and calls into question whether the report is truly objective in nature. In this event, the brokerage house has an obligation to inform the reader beforehand of the relationship.
Analyst's "signals" are usually given in the form of words such as "buy," "strong buy," "accumulate," "hold," or "sell." And, while it doesn't happen often, it is not unheard of for one brokerage house to issue a buy, when another brokerage house issues a conflicting hold or sell.
The point should be clear to anyone investigating a particular company to look for more than one analyst opinion before purchasing a stock, and to remember that financial analysis, like the practice of dentistry, is as much an art as a science. The same data can often be interpreted in more than one way.
In conclusion, you have been exposed to several sources for obtaining information about a company. Collectively, they can useful in giving an investor confidence that he or she is making a buy/sell decision based on something other than emotion or the feeling of "throwing darts at a board."
Keep in mind, however, that even professional analysts are surprised at times and that there is never a "sure thing" in stock investing. In the next chapter, I will go into some basic measures to look for in valuing a stock.