Research Reports & Communications

Types of Research Reports

Research analysts produce a variety of written communications, each serving a different purpose and audience. Understanding the types, structures, and regulatory requirements governing research reports is a core topic on the Series 87 examination. The quality and integrity of research reports directly influence investor decision-making and market efficiency.

Initiating Coverage Reports

An initiating coverage report (also called an "initiation") is the first research report an analyst publishes on a company. It is typically the most comprehensive report type, often 30-80 pages in length, and establishes the analyst's investment thesis, financial model, and valuation framework. The initiation serves as the foundational document for all subsequent reports on the company and includes a detailed business description, industry analysis, competitive positioning assessment, financial model with projections, valuation analysis (DCF and comps), an investment rating, and a price target.

Earnings Notes and Flash Reports

Earnings notes are published immediately following a company's quarterly earnings release and conference call. They typically include a summary of key results versus expectations, any changes to the analyst's financial estimates or valuation, an updated rating or price target if warranted, and key takeaways from the earnings call. Flash notes are shorter, time-sensitive communications that alert clients to significant developments before a more detailed analysis is available.

Industry and Thematic Reports

Industry reports provide broader sector-level analysis that contextualizes individual company coverage. They examine industry trends, competitive dynamics, regulatory changes, and thematic shifts that affect multiple companies within the analyst's coverage universe. These reports demonstrate the analyst's expertise and help clients understand the macro context for individual stock recommendations.

Rating Change Reports

When an analyst changes their investment rating (e.g., from Hold to Buy, or from Buy to Sell), they publish a detailed rating change report explaining the rationale for the change. These reports receive significant attention from investors because rating changes often trigger trading activity. The report must clearly articulate what has changed in the investment thesis and why the prior rating is no longer appropriate.

Research Report Structure

While formats vary across firms, a well-structured research report typically follows a standard framework designed to communicate the investment thesis clearly and support it with evidence. The standard components include:

Front Page Summary

The first page serves as an executive summary and includes the company name, ticker symbol, and exchange; the analyst's rating (Buy, Hold, Sell or equivalent) and price target; key financial metrics and estimates (revenue, EPS, EBITDA); the stock's current price and market capitalization; and a brief summary of the investment thesis (2-3 key points). Many institutional investors make initial decisions based primarily on the front page, so it must be compelling and clear.

Investment Thesis

The investment thesis section presents the analyst's core argument for why the stock is rated as it is. A strong investment thesis is specific, differentiated, and testable. It should clearly state: (1) what the analyst believes that is different from the consensus view, (2) what catalysts could drive the stock price toward the price target, and (3) what risks could invalidate the thesis. The thesis should be supported by evidence from financial analysis, industry research, and competitive assessment.

Financial Analysis and Model

This section presents the analyst's detailed financial model, including historical financials, projected income statement, balance sheet, and cash flow statement, key assumptions driving the model, and segment-level analysis where appropriate. Tables and charts should clearly present the data, and the analyst should explain the rationale for key assumptions, particularly where they differ from management guidance or consensus expectations.

Valuation

The valuation section presents the analyst's valuation analysis, typically including DCF analysis with sensitivity tables, comparable company analysis with peer multiples, and a summary valuation range leading to the price target. The price target represents the analyst's estimate of the stock's value over a specified time horizon, typically 12 months.

Risk Factors

A responsible research report must identify the key risks that could cause the stock to underperform. Both upside risks (for Sell-rated stocks) and downside risks (for Buy-rated stocks) should be disclosed. Risk factors should be specific to the company rather than generic boilerplate language.

Ratings Systems and Price Targets

Research firms use rating systems to communicate their investment recommendations. While terminology varies across firms, most use a three-tier or five-tier system that maps to the fundamental concepts of Buy, Hold, and Sell.

FINRA requires firms to disclose the distribution of ratings across their coverage universe. Historically, the sell-side has exhibited a significant positive bias, with Buy ratings far outnumbering Sell ratings. Firms must disclose the percentage of companies in each rating category and what percentage of those companies have received investment banking services from the firm. This disclosure helps investors identify potential conflicts where firms may maintain favorable ratings to retain investment banking relationships.

Price Targets

A price target represents the analyst's estimate of what the stock should be worth at a specified future date, typically 12 months out. Price targets are derived from the analyst's valuation analysis (DCF, comps, or a combination) and should be consistent with the rating. A Buy rating should have a price target above the current stock price, while a Sell rating should have a price target below the current price.

Price targets must have a reasonable basis supported by the analyst's financial model and valuation methodology. Analysts should clearly explain the assumptions underlying their price targets and update them when material changes in fundamentals or market conditions warrant revision. Recklessly setting price targets without analytical support can result in disciplinary action.

Required Disclosures and Disclaimers

FINRA Rule 2241 and SEC regulations require extensive disclosures in research reports to ensure transparency about potential conflicts of interest. Required disclosures include:

• Investment banking relationship: Whether the firm has provided investment banking services to the covered company within the past 12 months, or expects to receive or intends to seek investment banking compensation in the next 3 months
• Ownership disclosure: Whether the firm or the analyst has a financial interest in the covered company's securities
• Compensation disclosure: A statement that the analyst's compensation is based in part on the overall profitability of the firm, which includes investment banking revenue. Analyst compensation must NOT be directly tied to specific investment banking transactions
• Rating distribution: The percentage of all securities rated Buy, Hold, and Sell, and the percentage of companies in each category from which the firm has received investment banking compensation
• Price chart: A chart showing the stock's price history with the analyst's ratings and price targets overlaid over the past three years
• Definitions of ratings: A clear explanation of what each rating category means
• Valuation methodology: The method(s) used to determine the price target

Public Appearances and Media Communications

Research analysts frequently communicate through channels beyond written reports, including television appearances (CNBC, Bloomberg), conference presentations, webinars, and social media. FINRA Rule 2241 extends certain requirements to these public appearances:

• Analysts must disclose conflicts of interest during public appearances, including investment banking relationships and personal financial interests in covered securities
• Statements made in public must be consistent with the analyst's current research views and ratings. An analyst cannot say "Buy" on television for a stock they have rated "Sell" in their most recent report
• Analysts must not make promises of specific returns or guarantees about future performance
• Social media posts about covered companies are subject to the same requirements as other public communications

Third-party research — research produced by an independent provider and distributed by a broker-dealer — is subject to separate rules under FINRA Rule 2241(b). The distributing firm must disclose that the research was prepared by a third party, and the firm is responsible for reviewing the research to ensure it meets applicable standards.