If you have been investing for a while, chances are you’ve seen plenty of equity research reports sent directly to you from your stock broker. Or perhaps, you read summaries of them in the business section of the newspapers. Now the next question comes. Should you rely purely on the information in the report to invest in the companies?
We believe the answer to the above question is “sort of”. Let us explain further.
Conflict Of Interest
The fact remains that many analysts suffer from a conflict of interest between the requirement of the brokerage houses that employ them, the companies that they cover, and the needs of retail investors.
For example, analysts may have good relationship with the companies they cover. That is natural and there is nothing wrong with that. If you have been following a stock for years and know the company’s management well, you would tend to cover it more because you understand it better. And since (most) companies would make strategic decisions to grow the business, it is more probable that the analysts who cover the companies would be excited as well by any business announcements made. Thus, they may be lured into issuing rosier outlook for the stocks.
It is also common for a company to have a horde of analysts issuing a mixture of outcomes such as 4 Buy, 3 Hold and 3 Sell recommendations. As such, it is hard for a retail investor to know who to believe amongst these contradictory reports.
Deciphering The Facts From Opinions
Think a little more about this, all analysts have the same set of data. To come out with a different set of end results would require different assumptions and interpretations. Likewise, it is important for you to read in between the lines, and understand the data an analyst may have gathered and the critical thinking that went into making a particular recommendation or earnings forecast. Always remember, analysts’ recommedations are based on the intepretation which they derived from the same facts that everyone has.
With that, we attempt to streamline and focus on the main gist from an analyst report written on Breadtalk Limited as per what a retail investor may have done. The report was written way back in year 2012 and can be found in this link.
- Judging from the table above, Breadtalk has delivered a good report card with revenue and profits growing steadily over the past 4 years.
- Breadtalk is facing headwinds due to increase in wages and refurbishments. Raw material costs are likely to increase as well.
- On the other hand, encouraging growth can be seen from its Din Tai Fung restaurants in Singapore and Thailand.
- China and Singapore are key markets where retail sales account for approximately 30% and 50% of its top-line currently.
A Clearer Picture On Hindsight
Consequently, the analyst’s conclusion on Breadtalk was to advise investors to “Hold” the stock owing to the challenging environment going forward.
However, the recommendation above would be a bum on hindsight. Breadtalk last traded at S$1.135 on 22nd September 2015, double of the S$0.56 purchase price based on the report released 13th August 2012. The jump in share price is probably due to the improving results which stretch on till today and the many different brands under its arsenal. An investor who had stayed the course would be glad he didn’t get swayed when the report was released at the point in time.
To sum it up, you will often see analysts discuss various aspects of the businesses that really do matter in the long run. But even as these analysts discuss these things, they tend to focus on how it would affect earnings in the next 12 months, rather than to think about the longer term effects these decisions would have on the business. One possible factor for that could be the fact that brokerage firms make profit only when people trade, so an investor who holds his stocks long term would not generate as much revenue as an investors who trades frequently based on 1-year projections.
Thus, it is your duty to toss out any discussion that doesn’t pertain to the long-term performance of the business, and spend your time looking at the more interesting discussions that actually matters in the long-run.