ST: Analysts miss the mark over longer term

Analysts are paid to do their jobs. They do not invest their own money in the stocks and hence there is a lack of conviction that is lacking in walking the talk. Nevertheless, they remain the ones that conduct detailed analysis and provides a platform for others to form their own judgement in investments.

Analysts miss the mark over longer term

Predictive powers go awry in forecasting underperformers

Published on Feb 13, 2013


Visitors at JCube in Jurong East, a CapitaMalls Asia mall. Analysts got it right on the stock in January last year, with 16 "buys" out of 19 calls, but their average 12-month target price of $1.62 turned out to be too low, given that the counter has almost doubled in price to $2.10 since then. -- PHOTO: CAPITAMALLS ASIA LIMITED

By Goh Eng Yeow Senior Correspondent

analYSTS are regularly scoring bull's-eyes these days with buy calls amid a rising market - but their record is not so great when looked at over the longer term.

Go back to the start of last year, when the benchmark Straits Times Index was at 2,646.35.

What followed was three months of volatility that allowed the STI to hit 3,000 points.

Shares then succumbed to the jitters amid fresh flare-ups in the euro zone crisis, and tumbled back to 2,698.9 in July.

The index then resumed its climb, reaching a two-year high level of 3,270.3 last Friday.

Analysts were spot-on in picking outperformers such as CapitaMalls Asia and CapitaLand.

The shares of both firms staged spectacular recoveries as their extensive China exposure lured investors once the mainland's huge manufacturing sector revived.

But the analysts' predictive powers went awry when it came to forecasting underperformers.

Take plantations giant Wilmar International. At the start of January last year, there were 14 "buy" calls from the 25 analysts covering the counter, projecting an average target price of $5.72.

That turned out to be way too bullish. The stock suffered a beating in February after it released its full-year results, and another in May when its profitability was dampened by losses in its volatile oil-seeds and grain division.

By mid-year, the number of "buy" calls among the 28 analysts covering Wilmar had dropped to only six but the average price target - $4.48 - was still too optimistic.

The counter came in for a drubbing and plummeted to as low as $3 in the next three months.

After that, analysts were not fast enough at playing catch-up in reversing their gloomy assessment of Wilmar. The investment mood in China - the company's major market for cooking oil - turned sweet, but "buys" accounted for only a third or so of the 27 calls on the counter.

Wilmar has risen by around 16per cent since January, leaving the average target price of $3.59 set by analysts behind. The counter ended four cents up at $3.68 last Friday.

It was very much the same story for fellow commodities play Olam International.

In January last year, it attracted 20 "buys" out of 26 calls, with an average target price of $2.92.

Six months later, analysts were still bullish, with 18 "buys" out of 25 calls, although they slashed the target price to $2.33, after Olam reported a 21.1 per cent drop in its first-quarter earnings to $98.7 million.

The analysts' buoyant calls went out of the window when a scathing attack made on the company by US short-selling research outfit Muddy Waters sent the counter to as low as $1.395 in December.

The number of "buys" dropped to just nine, as analysts scaled back their expectations, even as the company successfully raised US$750million (S$930million) from a bond-cum-warrants offering that boosted its shares.

Even among outperformers, analysts sometimes turn out to be a tad too conservative in their projections, causing their target price to miss by a wide margin.

Take CapitaMalls Asia, the best performer among the 30 STI component stocks. No doubt analysts got it right on the stock in January last year, with 16 "buys" out of 19 calls.

But their average 12-month target price of $1.62 turned out to be too low, given that the counter has almost doubled in price to $2.10 since.

So, while dealers look to analysts' reports for ideas, they sometimes rely on other means as well.

Said UOB Kay Hian remisier Charlie Lim: "I depend more on charts for any stock movements. But if there is interest in a particular stock, I will send the report to the clients."

engyeow@sph.com.sg

Positive bias and anchoring are the 2 biggest killer for analysts, whether or not they have money in it, because there are attached career risk.

(14-02-2013, 07:46 AM)greengiraffe Wrote: Analysts are paid to do their jobs. They do not invest their own money in the stocks and hence there is a lack of conviction that is lacking in walking the talk.

Yes they are paid to do the job. But if they don't own the share, we say they lack conviction. If they do, we say they have vested interest. How fair.

Based on my experience conversing with analysts who used to work with financial institutions, I doubt their poor predictive performance has much to do with a lack of conviction. It's simply a matter of inexperience and incompetence at the executive level.

My gut sense is that these are primarily pretty junior staff whom people are listening to because they happen to publish their research with a recognizable letterhead.

If you think about it, in order for an analyst to have a compelling view of a company's long term performance, he needs to think on the CEO and BOD level as we are really talking about business strategies, talent strategies, capital allocation and a discerned understanding of enterprise risk.

Contrast this to a typical analyst who is usually a junior freshie with a couple of years experience. Even a head of research in a typical bank is usually only a SVP, the equivalent to a mid-level manager in a normal MNC. The public and media places undue attention on their reports which they normally wouldn't if they had published the same reports on an individiaul basis.

Why any bank needs to pay for such nonsense is of course a subject for further discussion, but once we view this whole sell side analyst business in this perspective, it becomes readily apparent that our expectations for them to be accurate are misplaced.

The article is mainly referring to sell side analysts. There is a reason why they keep churning out one report after another. Considering the amount of time they put in to research/investigate each company before doing the write-up, is it any surprise that their reports lacks depth and have the tendency to miss the mark?

(14-02-2013, 09:47 AM)mobo Wrote: Based on my experience conversing with analysts who used to work with financial institutions, I doubt their poor predictive performance has much to do with a lack of conviction. It's simply a matter of inexperience and incompetence at the executive level.

My gut sense is that these are primarily pretty junior staff whom people are listening to because they happen to publish their research with a recognizable letterhead.

If you think about it, in order for an analyst to have a compelling view of a company's long term performance, he needs to think on the CEO and BOD level as we are really talking about business strategies, talent strategies, capital allocation and a discerned understanding of enterprise risk.

Contrast this to a typical analyst who is usually a junior freshie with a couple of years experience. Even a head of research in a typical bank is usually only a SVP, the equivalent to a mid-level manager in a normal MNC. The public and media places undue attention on their reports which they normally wouldn't if they had published the same reports on an individiaul basis.

Why any bank needs to pay for such nonsense is of course a subject for further discussion, but once we view this whole sell side analyst business in this perspective, it becomes readily apparent that our expectations for them to be accurate are misplaced.

Mostly agree with your view, except one

Freely available analysts' report should not be considered as "compelling view" from the analysts, but a collection of facts with the company investment seminar presentation, which may not easily available.

Of course, paid analyst's report is different story.

Forecast from most or in fact all analyst reports are short-term in nature and tends to be lagging. Target prices chase the news as they increase on good earnings release and vice versa. Very seldom do we see an analyst report reduces its target price in anticipation of a downturn.

Herding mentality is another reason. The biggest risk for an analyst is career risk. He or she will rather be wrong together than be proven correct alone. Because if the latter proves to be otherwise, he or she risks being the biggest sucker in the industry.

Personally, I view analyst report as a secondary access to information not disclosed from my usual research sources while their forecast data is used as a counter-check (though not an exclusive one) to my level of optimism/pessimism.

(14-02-2013, 10:05 AM)CityFarmer Wrote:

(14-02-2013, 09:47 AM)mobo Wrote: Based on my experience conversing with analysts who used to work with financial institutions, I doubt their poor predictive performance has much to do with a lack of conviction. It's simply a matter of inexperience and incompetence at the executive level.

My gut sense is that these are primarily pretty junior staff whom people are listening to because they happen to publish their research with a recognizable letterhead.

If you think about it, in order for an analyst to have a compelling view of a company's long term performance, he needs to think on the CEO and BOD level as we are really talking about business strategies, talent strategies, capital allocation and a discerned understanding of enterprise risk.

Contrast this to a typical analyst who is usually a junior freshie with a couple of years experience. Even a head of research in a typical bank is usually only a SVP, the equivalent to a mid-level manager in a normal MNC. The public and media places undue attention on their reports which they normally wouldn't if they had published the same reports on an individiaul basis.

Why any bank needs to pay for such nonsense is of course a subject for further discussion, but once we view this whole sell side analyst business in this perspective, it becomes readily apparent that our expectations for them to be accurate are misplaced.

Mostly agree with your view, except one

Freely available analysts' report should not be considered as "compelling view" from the analysts, but a collection of facts with the company investment seminar presentation, which may not easily available.

Of course, paid analyst's report is different story.

Thank you for your views. To add on your comment, I agree with you that they "should" by right be viewed as collection of facts, but in reality this is not the way these guys potray themselves to the outside world.

When you issue advice like "buy" / "sell" on the basis of your valuation and assessment of a company vis-a-vis its current price, it has transcended beyond mere collection of data. It is an explicit expression of professional investment opinion; whether such reports are given freely or sold for a price is a matter of its operating model.

(14-02-2013, 11:32 AM)mobo Wrote:

(14-02-2013, 10:05 AM)CityFarmer Wrote:

(14-02-2013, 09:47 AM)mobo Wrote: Based on my experience conversing with analysts who used to work with financial institutions, I doubt their poor predictive performance has much to do with a lack of conviction. It's simply a matter of inexperience and incompetence at the executive level.

My gut sense is that these are primarily pretty junior staff whom people are listening to because they happen to publish their research with a recognizable letterhead.

If you think about it, in order for an analyst to have a compelling view of a company's long term performance, he needs to think on the CEO and BOD level as we are really talking about business strategies, talent strategies, capital allocation and a discerned understanding of enterprise risk.

Contrast this to a typical analyst who is usually a junior freshie with a couple of years experience. Even a head of research in a typical bank is usually only a SVP, the equivalent to a mid-level manager in a normal MNC. The public and media places undue attention on their reports which they normally wouldn't if they had published the same reports on an individiaul basis.

Why any bank needs to pay for such nonsense is of course a subject for further discussion, but once we view this whole sell side analyst business in this perspective, it becomes readily apparent that our expectations for them to be accurate are misplaced.

Mostly agree with your view, except one

Freely available analysts' report should not be considered as "compelling view" from the analysts, but a collection of facts with the company investment seminar presentation, which may not easily available.

Of course, paid analyst's report is different story.

Thank you for your views. To add on your comment, I agree with you that they "should" by right be viewed as collection of facts, but in reality this is not the way these guys potray themselves to the outside world.

When you issue advice like "buy" / "sell" on the basis of your valuation and assessment of a company vis-a-vis its current price, it has transcended beyond mere collection of data. It is an explicit expression of professional investment opinion; whether such reports are given freely or sold for a price is a matter of its operating model.

Doesn't it similar as day-to-day sales talk we are encountering in work life. Most are presented professionally. We still need to do our due diligence, instead of blame them when wrong decision made.

I don't blame them as long as there is no false info meant to mislead, they are just doing their job.