Analyst Speak
07/06/2005
Analysts are simple creatures to understand on televisionĀ
until they open their mouths. From my years on Bloomberg TV or on the BBC or interviews on Sky TV, I cannot recall a single analyst from a bank or stockbroker who did not like the stock he was speaking about. Worse still, when I interviewed them about this, the common theme, no matter how you couch it, always seemed to be that in the long-term they were positive and in the short-term 'they saw market volatility.'
What they meant was 'in the short-term it will go up and down and not the direction I am saying, so I don't want to be embarrassed if you call me back in 6 months because I may still be in this job at this stockbroker. In the long-term, heck all stocks go up don't they? And anyway, who's going to remember in the long-term anything I say?'
I am not simply saying this without ample evidence. Post the prosecutions by the New York Attorney General even more evidence is available. In 'Conflict of Interest and the Credibility of Underwriter Analyst Recommendations' by Roni Michaely of Cornell University and Kent Womack of Dartmouth College reveals 'Brokerage analysts frequently comment on and sometimes recommend companies that their firms have recently floated on the stockmarket. We show that stocks that underwriter analysts recommend perform more poorly than "buy" recommendations by unaffiliated brokers prior to, at the time of, and subsequent to the recommendation date. We conclude that the recommendations by underwriter analysts show significant evidence of bias. We show also that the market does not recognize the full extent of this bias. The results suggest a potential conflict of interest inherent in the different functions that investment bankers perform.'
Journalists of course are hate figures. They read English not Maths at University. Anyway, earnings figures always come after 4pm and by then the bar is too crowded for a drink. And all company report around the same time all together, so it is very easy to get bored for financial journalists - isn't it?
"The Pied Pipers of Wall Street" - that's what one commentator calls investment bank stock analysts. The accusation: these stock researchers mislead investors by issuing flattering research reports to drum up other business for their bank.
The New York State Attorney General apparently agrees. He launched an investigation (followed this week by a probe by 12 US state regulators) into leading US banks' stock research departments.
So we're on our own when it comes to stock analysis then? That's no problem for online traders - they can improve on analysts reports anyway. The trick is to be your own analyst - and it's a lot easier than ever, making analysts not just unreliable but increasingly outmoded.
Foremost, an analyst report can't tell you if a particular stock fits well within your existing portfolio. The author doesn't know your financial goals, risk appetite or other portfolio holdings. We could hardly do worse than bank analysts. Research found that after transaction costs there was no point buying strongest recommended stocks relative to the least favourably recommended ones.
Being your own analyst is straightforward. Most investors fail however because they don't first ask what type of investments they are searching for.
Do you want (in rough order of increasing riskiness) undervalued stocks, or growth companies (those that may be well valued but are growing in turnover and profits at a pace suggesting the share price will continue accelerating), or speculative recovery stories (relatively unhealthy companies that may be about to turn a corner and their share price follow)?
Value-Growth
On my value growth criteria which are based on stocks meeting revenue and profit growth and good value based on criteria such as price earnings growth, the following names come up. Remember they are for a 6 month outlook: Arla Foods, BAe Systems, Michael Page, Rolls-Royce, SIG, Spectris, Vedanta.
Remember I am targeting about 20-20% with the value growth criteria. Last year it produced 33% return. On my momentum value indicator I have Babcock, Burren, Charter, Homeserve, International Power, Investec, SABMiller.
Crazy Small Stock
These are high risk volatile stocks which could move sharply higher or move sharply lower in my view, but will almost certainly not stand still. Names on the radar include: Braime, NXT, Vislink, Volex, Trust of Property.
Also, if you would like a free multi-media CDROM on 'Investing Better', which covers spreadbetting, CFD trading and momentum indicators like the MACD, posted to you then drop me an email with your postal address to alpesh@tradermind.com.
Spreadbetters
Spreadbetters and futures traders often look at hard and soft commodities. Here's my quick take on the action for the week ahead:
- Oil: Mixed
- Copper: Down
- Gold: Down
- Ā£/$: Down
- Dow: Mixed to possibly higher
- FTSE 100: Higher (Olympics!)
- Soyabean Oil: Mixed
|