Fundamental Analysis (Guest Post)

Fundamental Analysis (Guest Post)

Analyst report – what really matters?


This post was originally posted here. The writer, BrennenPak is a veteran community member and blogger on InvestingNote, with username known as BrennenPak and 3000+ followers.

As stock investors, it is almost an everyday affair to come across stock analysis reports. It is not uncommon to across analyst reports comprising 5-6 pages of graphs and write-ups. Perhaps, it is meant to instill in readers that painstaking analysis is real hard work, and that not many people are capable or willing to do them. Actually, the way I see it (and perhaps many readers out there would agree) is the final conclusion of whether it is the ‘Buy’ or ‘Sell’ call that matters to everybody. The target price is probably all that matters. To make it especially appealing to readers, most brokerage houses design this most important conclusion to be at the most significant part of an A4 page, usually the upper right-hand side of an A4 page. So, within 3 seconds or so, a reader knows the conclusion of the whole report. The rest of the contents in the report is quite secondary. Most of it is to spice up or to reinforce how the conclusion was arrived at. In all likelihood, most people give the details a miss, and will not question the analyses or the assumptions behind those analyses. After all, people gave the benefit of doubt that nobody is really able to predict the future.

Relying too much on analyst reports

From an investor’s perspective, following a report and acting on it, is a wisest way of doing things. After all, many of us do not have much time to even read a report, let alone researching and feeding data into our analysis to arrive at some decent conclusions. In very plain words, it is a lazy but a clever way of doing things by leveraging on someone else’s hard-work. After all, it is really herd mentally. If everyone believes in it, the truth actually presents itself. In fact, this is how technical analysis came about.

Why are some stocks heavily covered while others do not?

Brokerage houses issue reports to get people interested, in particular, the big, blue heavy weights. The reason is that they are liquid and are of very high value. These stocks generate highest income for brokerage houses. The higher the frequencies of trade in these stocks, the more income they would generate for the middleman. Almost always, illiquid stocks do not get to be covered by analysts. What is the purpose of covering a stock when the daily trade is only a few hundred shares a day, right?

Differences in analyst opinion

Analyst reports may give conflicting conclusions. Remember, stock investors do not expect analysts to be just stock reporters.
The general expectation is that analysts must be able to read or extrapolate into the future. In so doing, analysts have to make assumptions when making analyses. This can result in huge differences in their opinions. For example, a recent case of Capital Commercial Trusts, (CCT). Following the purchase of an office building at Main Airport Center. from its sponsor, Capitaland, in Frankfurt, Germany. I came across three analyst reports offering three different conclusions. One said ‘buy’, one said ‘sell’ and the last said ‘Hold’, perhaps taking a neutral position as a safer option. The fact is that nobody can tell the future. Therefore, it is common to make assumptions in order to make projections. These assumptions can be grossly wrong. Even if the assumptions may appear to be reasonable at the time of analysis, disruptions may happen in reality causing the actual trading price to differ significantly from the projected stock price.

(Since, I am on the subject of Capitaland. I remember for many years, Capitaland’s stock price has always be valued about $4 per share. That went on for many years as far as I can remember. To date, I noticed that it never even stayed above $3.70 per share convincingly.)

Analysts are humans too

I am not sure of the internal checks of brokerage houses. Analysts are human beings too. They can have personal bias. Perhaps, itmay be difficult for an analyst to issue a ‘sell’ call when he fell in love with a stock. Or, he may be under pressure to issue, at worst, a ‘Hold’ because the everyone is optimistic about a stock. Over the years, my observation is analysts tend to issue ‘buy’ calls more than ‘sell’ calls. Perhaps most of the stock coverage is in blue chips. Certainly, a ‘buy’ call is the natural choice because the actual stock price seldom reaches the target price as no one wants to hold the last baton. Even if a stock price is about to reach its target price, new reports are issued to reflect a higher target price. (I remember years ago even before the oil price crashed in 2016, Keppel Corp share price was projected to hit $13-$14 per share when it was trading around $10 to $11 per share at that time. In the best of my memory, it did not even hit $12 per share from then until now. To date, it is trading below $7 per share.)

Why analysts then?

Some people say just treat analyst reports as a pinch of salt. They are never accurate. If that were the case, then why do we need analysts? In my many years of observation, I notice that analyst reports may have some influence on share prices. There are a few things that analysts can help as far as the stock market is concerned.

1.Being a full time professional, they are more focus in their job. Investors believe that they are able to provide more in-depth studies of the company and its operating environment. Furthermore, they have the benefit of conducting interviews with the company executives and visiting the company premises. Many investors do not have such opportunities, especially those on 9-5 jobs. To certain extent, company executives welcome them. Such communications serve as a conduit for company executives to provide the right message to investors.

2.They can help provide additional thought process. As individuals, we do have blind spots. We may have overlooked or even missed out things completely. We may have personal bias or fall in love with certain stocks, even though we may not openly admit it. We may not agree
with the analyst reports totally, but they do provide different views surrounding a stock.

3.In certain situations, such as a falling market, they can help stem a straight fall to lessen the pain of stockholders. They can help turn-around situation to provide a floor for the stock price. Perhaps, it may be a situation of self-fulfilling prophesy. But still, it works. Of course, in a similar way, they can also stifle the upside by issuing a sell call.

Getting recommendations from analyst report won’t produce the biggest upside

It is hard to say whether analyses report help or does not help in one’s buy/sell decision. But at end of the day, it is end user’s decision to make the judgement to buy or sell a stock. Stocks analysis can only do so much, at most be used as reference. To me, the best way to profiteer from stocks is really to do your homework. Remember, by the time when analyst reports land in the hands of investors, the stock price could have already gone up by 20%-30% because you are not the only one who knows about it. By then, tens of thousands out there would have already get their hands in it. So, when you spot a good stock and is out of the radar screen of the analysts, keep that to yourself. Load up the stocks and wait for the stock to come to live. It could be a few days, a few weeks, a few months or even a few years down the road. Just be patient.

Doing it alone

But there are always the negatives if you are doing it alone. Remember, no one is beside you for you to seek solace when things go wrong. The journey can be quite lonely since no analysts are alongside with you. Apart from that, you must be daring to go for broke. Say, you have spotted an undiscovered stock with a huge upside potential. Are you prepared to put aside$10,000 and prepared to lose it all if things do not go your way? Let take OSIM for example. The lowest price during the global financial crisis in 2009 was $0.05, and the 1-to-1 right issued at that time at $0.05 was heavily undersubscribed. The amount of $10,000 would have bought 200,000 shares. Following that bad quarter, OSIM went into 23 quarters of growth and the trading price at the highest point was $2.94. That was equivalent to a whopping $558k on $10k investment. In other words, it was a 5880% upside! In hindsight, many would not mind putting $10,000 for a dream of 58.8 times upside. But really, during that time, many were more concerned about losing their $10,000 than trying to chase their dream of getting multi-bagger returns. And that was the exact reason why the share price sank to such a miserable state.

Taking stocks

At the point of writing, it has been more than 10 years since I left my full-time job. Thanks to the stock market, so far so good!

Once again, this article is a guest post and was originally posted on Brennens profile on InvestingNote. 

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