Buy, sell or hold? That is the question

CARMEL FISHER
Last updated 05:00 03/02/2013

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OPINION: At this time of year, and indeed at any reporting season, we are bombarded with analysts' views of whether certain stocks are rated a Buy, Sell or Hold.

These ratings are often accompanied by a target price, which is the price the analyst expects the shares to be trading at in 12 months.

Sometimes, instead of a Buy or Sell rating, an analyst will suggest a stock should be underweight or overweight, which is that analyst's view of how investors should position the stock in their portfolios compared with the stock's index weighting.

When you think about it, it is a big ask for an analyst not only to decide whether investors (who are all unique, with different risk profiles and investment objectives) should own a stock, and how much of the stock they should own relative to other stocks, but also to estimate how much the stock is going to be worth in a year.

History has shown that while analysts do exhibit skill in forecasting earnings, they have not shown an ability to consistently forecast target prices.

This is quite understandable. While future earnings can reasonably be forecast, when it comes to share prices, all sorts of exogenous factors, such as the economy, interest rates and the prevailing mood of the market, can play havoc with stock prices.

Knowing how difficult it is for any analyst to get the inside running on any stock, it is amazing that the market pays so much attention to analysts' views, but it does, and especially so at reporting time.

We saw the Apple share price weaken before its recent profit result because one analyst downgraded the stock from "outperform" to "neutral" - that is, even though, according to Thompson Reuters, 18 Wall Street analysts rated Apple a "strong buy" and 26 of 57 analysts covering the stock thought it was a "buy". Only two analysts rated the stock as "underperform", one as a "sell" and 10 had "hold or neutral" (see page 16).

One of the problems with analysts' recommendations is that the reason for downgrades often has nothing to do with the underlying company, its structure or its management.

It can be just that the analyst thinks the share price has run ahead of itself and may be ahead of his target price which, as we have already discussed, is not a particularly useful yardstick.

The other complication is that often analyst recommendations are written more for institutional investors, who shift their portfolios around regularly, rather than for retail investors, who may not want to or be able to juggle their portfolios daily.

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So how should we sift through the myriad analyst recommendations? Unfortunately there is no straightforward answer, and there is no such thing as consensus.

For all the market's nous and sophisticated technology, subjectivity reigns supreme, and for every positive view, there is often a contradicting negative one.

While ignorance is never a recommended investment strategy, when it comes to acting on changing analysts' views, there is something to be said for counting to 10, making a coffee and following one's own counsel.

Carmel Fisher is managing director of Fisher Funds, an investment manager and KiwiSaver provider.

- Sunday Star Times

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