Analysts Research

Stockbrokers' analysts research is often detailed, and may seem dull unless you have specialist knowledge of the industry. The stock recommendations are typically unreliable, and are aimed at institutions that know how to read between the lines. I still recommend that you get to see as much research as you can, for two reasons.

First, research reports educate you about a company, sector, or macro-economic overview. Second, the latest company report from a respected analyst will move the share price.

Occasionally, you will come across research output from an analyst who also happens to be a talented writer, and this makes it much easier to read. Russian banks are good about distributing research free on the Internet, although this can be late. Western and US bank sometimes follow suit, but possibly for a limited period.

Otherwise, you can obtain analysts' research reports on a pay-as-you-go basis through specialist web-based services but I tend to avoid these since such research can often be out of date, which is annoying if you are paying highly for it.

There is a better way to obtain analysts' research, and it will cost you nothing more than a little legwork. Ring up analysts at broking houses and ask for a copy of their latest research. Analysts are at their most alert in the early morning. Contact them with brief but pertinent questions and a request for their research. You are most likely to receive cooperation if you can represent yourself as a journalist, researcher or similar. It helps too if you can pick up the research in person, which - as a bonus - may enable you to meet the analyst.

Consider any report that you hold as only one of the information sources that you will use to help you make your trading decisions. Consider the following limitations:

Analysts can be biased

In the past 25 years, the role of the analyst has grown from that of a backroom researcher to a backup salesperson. As the expert that salespeople produce at client meetings, a good analyst can make the difference in obtaining a large order, which is why the top analysts earn millions of pounds a year.

Unfortunately, analysts are not always objective. If they are bullish about a company, this may be because the bank has a corporate releationship with it, which it declares, or it hopes to have this.

In the case of such a corporate relationship, the analyst will almost certainly have better access to the company, which should make its research more authoritative, despite the inevitable bias. Also, following recent accounting scandals, and the decline of most Internet stocks, the issue of analysts independence and integrity has come under the spotlight...

Analysts often follow the herd

The company is seen to issue all analysts with the same information at the same time. Based on this, analysts will often produce similar earnings forecasts.

Overzealous research analysts may swiftly find themselves persona non grata with the company. This could be suicide to their professional career.

Based on this situation, stock market nalysts are normally reluctant to offer a Sell recommendation on the company as it might then refuse to talk with them.

Your Guide to Analysts-Speak

Analysts write - and often speak - in a coded language that is aimed at institutional investors who understand how to read between the lines. The aim is to avoid being openly critical of the company. Here follows a guide to some of the most common terms used by analysts, followed by the hidden meaning. This is not a complete list, but will give you a feel for how the game works.

  1. Reduce - Sell shares urgently as something terrible may be about to happen.
  2. A hold - The share price is unlikely to rise and it may go down.
  3. A strong hold - The company is unlikely to achieve much for a while, but the share price will probably not decline much either.
  4. A long-term hold - This company is going nowhere and you should sell it.
  5. The share have attracted strong institutional interest - Hedge funds and other short-term institutional shareholders have decided to buy and sell the shares to make a quick buck on them. This will probably be extremely short-term, so trade quickly to make hay while the sun shines.
  6. This company is run by colourful entrepreneur Jo Bloggs - The top man is a crook, but we cannot say so for libel reasons. He has not yet been caught with his hand in the till, and so, at least in the short term, you may be able to make money trading his company's shares.
  7. You can't argue with the sales figures The company understands the concept of caveat emptor - The company is a rogue operation selling a probably dubious product by hard-sell methods or chicanery but has, in the short term at least, got good sales results. For how long this will continue is anybody's guess.

If a favoured company issues an unexpected profit warning, the share price will plummet as institutional investors sell out.

Analysts who can flag problems in advance to institutional investors when their competitors fail to do so will develop a valued reputation for independent thinking. Their hardest task is to reconcile this with a tactful relationship with the underlying company.

Analysts with good information do not initially put it in their written research reports. They will instead pass it through off-the-record telephone conversations with favoured clients.

All are scared to be seen offering insider information, which is against the law. One reputable analyst has confided in me: 'I break the law every day of my working life.'

Analysts are often outsiders

Analysts can write crisp, authoritative copy quickly about a company. In this respect, they are like journalists, although their information sources are better and their interpretive skills more honed.

Nonetheless, analysts may not know much about the companies that they cover. The forecast numbers that they use in their financial model may be little more than guesswork.

If an analyst is highly rated by independent surveys, this is for the quality of research but it does not mean that his or her recommendations are good. I know of one charming insurance companies analyst who had no credibility among his sales team because his tips were so terrible. This did not stop him from earning a six-figure income and winning an award for the quality of his research.

Analysts may not understand financial statements

As a bunch, analysts are of course numerate. However, only about 25 per cent of them are qualified accountants.

When they get drunk on Friday evenings in City bards, some analysts admit to me that they have limited understanding of creating accounting. They argue that to detect and expose this is not really what their job is about. This is a severe limitation.

Analysts change their minds quickly

Analysts are fickle. This can be appropriate in rapidly changing market conditions, or when the company's circumstances change. But it can also demonstrate how they do not know what they are saying and simply follow the fashion.

I have known analysts spout the bullish case for a stock when it is sharply rising, and become bearish on a sudden market reversal, although the company's fundamentals are unchanged. In the long run, such swaying with the wind can ruin their reputation.

Stock Market Speculators' Hall of Fame - Adventures of Sid

A great scientist once said that, in order to become a scientist, you do not need to have done well at science when at school. All that is required is a very strong interest in the subject. The same is arguably true of becoming a City analyst.

I know of one analyst who is still only in his mid-20's, but has climbed to great heights on false pretensions. We shall call him Sid.

When Sid was at university, he achieved only a third-class degree (in a non-mathematical subject) and his only dream has been to work in the City.

After graduation, he claimed his degree was a 2.1, and, partly on this basis, he landed a job with a leading investment bank. He became apprenticed to an experienced analyst in one of the key sectors.

By moving from job to job, he came to earn a fantastic salary, and was producing astonishingly impressive sounding research reports that belied his fundamental ignorance.

Conclusions about analysts' research and research reports

Institutional investors receive reports immediately on publication. You may not see them until several days. By then, they may be out of date. In any case, the share price will have already reacted, so greatly reducing or eliminating any trading opportunity that arose.

The quality of analyst research varies enormously, but in the final analysis, you must learn to treat it like the professionals do. Pay attention to the research itself which, in some cases will be very high quality. Be wary, however, of the analyst's forecasts.

When an analyst mentions a certain number as, for instance, target earnings, his or her followers have a human tendency to become anchored to that number and so too easily attached to it. They then give credibility to what confirms the number and ignore what does not.

Avoid this and take into account in your assessment that investors become biased due to the anchoring effect. This is why, if a company produces results that are slightly below expectations, the market can react savagely.

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