Found this while trolling around. ANALYSTS HAVE NO CHANCE - Big broker analysts are on a hiding to nothing sometimes and the rest of us are even worse off listening to them. You could pick any major stock recently (Lend Lease, Brambles or Telstra) and pluck out a buy recommendation at prices well in excess of the current price. So lets be cruel and do it. In order to be fair the broker remains nameless, most brokers were on the same tack. On June 6th a major broker published a research note upgrading their recommendation on Telstra [X.TLS] from Neutral to Accumulate. Telstra was priced at 660c at the time. The summary included the comments that "Earnings upgrade potential exists" and "there is a reduction in perceived risk". On the 11th June Telstra published a profits warning. On the 12th June this major broker reduced their recommendation to Neutral again with summary comments such as "the potential for earnings upgrades are limited in the short term" and "the stock to remain weak". The price was 608c down 9% from their recommendation a week earlier. Now 570c. Everyone who bought through them in the week prior got killed. BROKER RESEARCH - THE TRUTH (some of it) The most obvious point is that research is not written for mums and dads, it is written for institutional investors. The difference being the institutional fund manager will buy stocks that go down as long as they go down less than the rest. They are judged relative to an index. If the market falls 10% and the fund manager's funds fall 9% he has done well. This is a different benchmark to the retail client who wants an absolute return. For instance a Gold analyst will tell you to Buy NDY and NCM as the best gold stocks. The research will say "Buy" because the research is written for the Resources sector fund managers who have to hold some Gold stocks to balance things out. If you read that as a retail investor you might buy NDY. But the truth is NDY is going down because the sector is. The analyst is merely pointing out it will go down less than the others. Corporate Responsibility. All listed companies have their favourite brokers. These brokers pander to the companies in hope of a corporate deal and fee. These fees can completely dwarf any other revenue for that broker including commission on trading. As such all institutional research is written with corporate responsibilities in mind. If you want to know who is attached to who you look to see which broker handled the last corporate deal or share buy back. ABN AMRO handling the SNX buyback for instance has an SNX valuation of 554c. Price now 145c. Everyone had a BUY on Telstra ahead of the T2 float in the hope of snagging a role in the listing. Corporate fees come first. Small company analysts are the most pressured to write research which can mislead. They have to, because the commission earnt from trading in a small illiquid stock is just not worth the effort. You have to have a corporate play in mind to bother writing at all. There are some small company teams who cover a lot of stocks a lot of which is independent, but often the team is still there to attract corporate deals (lots of buy recommendations) and the stocks they are not attached to are followed for the benefit of the one that they are attached to. So the pet company knows what the competition is doing. So beware the big broker research on Squitty Stock.com. You can bet your bottom dollar there is a deal in the wings and the Buy recommendation is not for you. The bit to watch out for is the BUY HOLD SELL recommendation, that's when the analyst has to look up after hours of work and take a whole load of non fundamental factors into account. What will the company say, what will the corporate team say, can we write brokerage with a Hold, will the boss kill me if I say sell. At big brokers no research can be published without first being vetted by someone who isn't an analyst. What you can believe perhaps are the Sell recommendations. Brokers will say Hold (so as not to upset the company) and ring their clients and say Sell. If they say Sell, they mean it. For someone like JB Were to say 'Reduce' means sell. All research recommendations default to BUY. Its safe from a company relationship point of view. Most of the information an analyst reacts to is from the company. By definition the majority of it will therefore be good news. The audience for a BUY recommendation is the whole world. The audience for a SELL is limited to just shareholders. "Private Client" research is Institutional research re-edited. But the recommendations are the same. IT IS NOT ALL CLOAK AND DAGGER - Despite some ulterior motives the majority of research represents solid work with numbers and comment to be relied on. Ignore the recommendation and its all worthwhile. You need the analysts, they set the consensus expectations. It is only through knowing the consensus expectations for a company (right or wrong) that you can judge any development to be price sensitive or not. From that point of view it is invaluable to read what the experts think. NO HOPE - At other times of course, like with Telstra this week, you have to recognize that research is 'rubbish in, rubbish out'. Consider the Telstra analyst. Do you think he goes to Telstra and gets given carte blanche to wander about the Telstra offices and operations looking at confidential documents and talking to employees. No. The information an analyst works off is carefully filtered, often by an 'investor relations' department. These departments are there to control the information released to the market, not to tell all. Often the investor relations people are in the dark themselves anyway. What they don't know they can't blab after all. So when you see mistakes made, it is often not the judgement of the analysts at fault, it is the information they work on. OneTel for instance. Broke since December. Do you think analysts have been told anything true in the last 6 months?
Thanks Barcoo...what is the source of this? I'll give you some classic examples of a broker I used "feeding the chooks" just like the chickens in the movie chicken run:Buy HTA (Float @$2.00, then again at 90c) ..broker was resposible for listing - stock now at 30cBuy TVSN (Float @$1.00)...broker responsible for listing - stock now 7cBuy SPL(Float @0.85)...broker resposible for listing - stock now around 50cBuy PAS @ 1.50 then again at 75c..right the way down to 30c....now I get a letter to SELL!Boy do I feel a sucker! I've taken their "advice" on all this except TVSN. Crikey's I'm not going to sell Pasminco at .22c, that is at a market cap of around 250 Million..that is only half what they payed for Savage resources assets in the US (when the dollar was @0.75) and Ernst Henry copper gold mine here in Aus COMBINED (AND consequently values the Centry Zinc mine at ZERO!)PAS is got to be a take over play at .22c..yet the Broker says sell! Stuff giving them the commission, partic when the "advice" has been absolutely incorrect. I've been fed like I chook, "but I don't want to be a pie!" (quote Chicken Run)AB
Pasminco: Unless it's Dead, it's Worth Double By James Dunn & Geoffrey Transom, 20 Jun 2001 Pasminco Limited (PAS) has responded to the Australian Stock Exchange's query dated 20 June, in which it was asked whether it had any information to release that might explain the fall in its share price from 37 cents on 14 June to 22.5 cents at yesterday's close. PAS has advised that it has no new information that might affect the value of, or could explain the recent trading in, its shares. PAS has reiterated that, as announced on 26 April, it expects to record a loss for the year ending June 30. This follows its first-half result of an after-tax loss of $37.3 million, which has "made it evident that the full-year result will represent a variance of greater than 15% year-on-year". It repeats that, as has already been announced, its revenue stream has been hit by the decline in zinc and lead prices. But PAS states that it is able to meet all of its commitments as and when they fall due. PAS states that it has made all of its principal loan repayments that are due this (calendar) year; it is not in breach of any banking covenants; and it currently has undrawn facilities of $125 million in total. PAS expects its "business improvement program" to deliver a sustainable improvement in the underlying operating performance of the business at the rate of $100 million a year by the end of (calendar) 2001. "It is unfortunate that the decline in metal prices is distracting from these gains," says the company. The zinc price has fallen below $US900 a tonne (US40 cents a pound), its lowest level for two-and-a-half years: PAS breaks even at about $US1000 a tonne. Compounding its problems is PAS's currency hedging position, which is well out-of-the-money. The option position cost PAS $42 million in the December half-year, at an average Australian dollar exchange rate of 55.4 US cents. That exchange rate has weakened further, to a spot rate of 51.83 cents at time of writing. PAS has already announced a review of all of the assets in its portfolio: it will sell any that are not capable of generating an adequate return on funds employed. It says that negotiations for the sale of the Broken Hill Mine have already commenced: gold producer and base metals explorer Perilya Limited (PEM) is reported to be an interested party. The Elura mine in New South Wales, the Rosebery mine in Tasmania and the Cockle Creek smelter, also in NSW, will also be sold. PAS's major asset, the Century mine in north-west Queensland, is operating at just over 90% of capacity and the company expects full capacity to be reached by December 2001. PAS expects a 20-year mine life for Century, which it projects to make a positive contribution to EBITDA (earnings before interest, tax, depreciation and amortisation) in the current financial year. It appears that the brokerage analysts have responded in the knee-jerk manner we usually expect, and simply extrapolated the downtrend in zinc prices well into FY02. The current share price is implicitly assuming a zinc price for FY02 and FY03 – and, effectively, into perpetuity – of about 47.8 US cents a pound. That is ridiculously low, even given that current LME inventories are high and the current spot zinc price is low – about 41–42 cents a pound. As history shows, the zinc price is prone to swings of 30–50% in each direction over a two-year period – the last upmove lasted from mid-1998 to September 2000 – from current levels to over 60 US cents. At that point it became evident that the US was in economic trouble – hence the recent weakness in all base metals. The reality is that weak commodity prices are the result of weakening demand from the US and Europe – signals that their respective economies have slowed markedly, particularly in the industrial heartlands. I like to refer to this slowing as the Greenspan Effect. And, although I fully expect the US to slide into recession (with the first quarter of negative growth to be experienced in the quarter which is just about to end), I don't expect it to be a long and deep recession. When the US begins growing again, zinc prices will rise substantially, however the Australian dollar will lag in its rebound; Pasminco would do well to take currency hedges at 52–53 cents (to the $A) – now – and let the zinc price move where it may. Pasminco also has too much debt (we estimate it will total about $1.2 billion at balance date) – that is abundantly clear, and a lot of that debt is denominated in US dollars. However, if this is such a dire problem, it's unclear why analysts were not braying about it when the $A was at 47.5 US cents a month or so ago. PAS is currently an ideal takeover candidate. Using the most conservative assumptions I have found – i.e., long-run values of $A = 67 US cents; and Zn = 50 US cents a pound, PAS has a valuation of about 97 cents a share before considering the potential for offloading its under-performing assets and thus reducing its debt. Even assuming that any suitor got its hands on PAS for half of its embedded long-run value, a stock price around 50 cents is not out of the question. The clear favourite as merger partner (or takeover suitor) – from the point of view of potential productive synergies and the low likelihood of political interference, is MIM. PAS shares will recommence trading at the opening of tomorrow's (21 June) session.
Thanks for the Pasminco post..this one I am definetly not selling at current levels. As Dunn points out, whilst their is significant debt(in U.S dollars), I would like to add, a lot of this is secured against a major asset(in U.S dollars)..ie the old Savage zinc operations. These do not have the enviromental and payout "problems" of some of Pasminco's Aussie assets pointed out by Gotliebsen on Business daily the other day. The whole lot must be worth more than 250 Million!
Hi FolksBrokers = SalespeopleMorning meetings tell them what to flog.Fact.JR
I agree with JR. I use fundamentals a lot, so I don't really listen to a lot of brokers but I do have a couple of comments:1. Brokers have no understanding of your own portfolio, risk tolerance etc. It's like some-one giving you advice on what colour to paint your car, when you don't own one.2. Brokers aren't accountable for their recommendations. I haven't once yet seen a broker who has sample portfolios which track how well their recommendations are going.
I agree with all the above.Brokers are primarily salespeople. your longterm portfolio won't pay for this year's car.Analysts are all too frequently influenced by corporate banking imperatives. At best, they rely on audited reports.For those who rely on fundamentals, what about the auditors? Who pays them? Who wants to retain the client in future? They have an even bigger vested interest in providing what the management want to publish.chrischalkley
Thats it Chris any small investor who thinks they will get honest representation is dreamingJR
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