Homepage
PR Newswire
28-02-2011, 11:52 PM
Feb 28, 2011
The power of equities analysts
Reports they issue on firms can have big effect on their share prices
By Yasmine Yahya
JUST what kind of storm can be unleashed when a single analyst riles a company was on full display last week.
Olam International was forced into launching a publicity blitz on Wednesday after CLSA analyst Swati Chopra questioned the firm's reporting standards and internal controls.
It was quite a sight to see the firm and its bosses come out with all guns blazing, but it also underscored the power that an equities analyst can wield over a firm and its share price.
Ms Chopra released her report last Monday, and by the end of trade on Wednesday Olam's shares had fallen by 13 per cent.
A similar incident occurred in 2007, when OCBC Investment Research issued a report about Cougar Logistics that caused Cougar's shares to drop almost 17 per cent over three days. That report contained several factual errors, but even the release of an amended report failed to stem the bloodletting.
Analysts are so influential that companies sometimes use drastic measures in an attempt to prevent them from issuing negative reports.
An executive at a blue chip firm told The Straits Times that her company had once contemplated taking legal action against an analyst it felt was being unfair.
This analyst simply 'didn't want to listen', the executive said, and continued issuing comments based on inaccurate information even after the company had tried clarifying certain facts with him.
'But in the end, we decided we didn't want to waste the resources to sue him. We just stopped inviting him to our briefings,' she said.
Analysts and investor relations experts told The Straits Times that such incidents are rare.
For the most part, analysts carry out their work with little drama or scandal.
Their job mainly involves, well, analysing - studying a firm's business plan and financials to assess its current health and forecast its future earnings.
Broadly speaking, there are two kinds of analysts - buy-side and sell-side.
Buy-siders identify investment opportunities that would grow the net worth of their own employers, which are typically hedge funds or mutual funds.
Sell-side analysts advise investors outside their own firm. They are there to help a brokerage's clients make better investment decisions.
If you are a retail investor, these are the analysts whose reports you receive every morning. These reports are also read by remisiers and mutual funds using the brokerage's services.
How often they write reports on a certain company depends on the firm's announcements and share price volatility. At the very least, an analyst will write one report every quarter for a company under his purview.
An analyst who covers Fraser & Neave said he writes one report a month on the conglomerate, to follow up on the announcements made by its various units.
Besides sizing up a company's financial health and future prospects, these analysts usually recommend what investors should do with the shares - buy, hold or sell.
These three short words can make or break an analyst's career. The calls made by each analyst are recorded and tracked by financial information firms such as Bloomberg and Thomson Reuters, which then rank analysts based on how accurate their forecasts have been.
Thomson Reuters also presents annual awards - the StarMine Analyst Awards and StarMine Broker Rankings - to the world's top individual analysts and brokerage firms based on their estimate accuracy and recommendation performance.
Partly because of the visibility of their recommendations, analysts tend to move in packs.
Take any listed company. If it is a big enough firm, it would have about 20 analysts studying its business at any given time. And, chances are, more than half of them would have the same call.
When asked why this is often the case, one analyst joked: 'There's safety in numbers.'
Another added: 'When I was first starting out in the business, I was quite afraid of issuing contrarian calls in case I was wrong. So I tended to follow the herd; I felt safer that way.'
As she gained experience and confidence, however, she got bolder.
'There was a period in time when most analysts in Singapore had a 'sell' call on Parkway Holdings. Not only was I one of the few who had a 'buy' call, I also issued the highest target price,' she said.
Her boldness paid off - the company was bought by Malaysian sovereign wealth fund Khazanah at a price that was very close to her target price.
But it is not just a case of the herd mentality at work. One analyst pointed out that they often end up with similar recommendations simply because they have access to the same set of financial information about the firm, and interpret the data in similar ways.
So what usually happens when one lone analyst makes a contrarian call is that people start to scrutinise the analyst's report to figure out just how he or she came to such a contrasting view.
Some people even start to question whether a conflict of interest is at work - is the analyst issuing a positive call on an unpopular firm because his investment banking colleagues want him to help retain a client?
To be sure, such cases are not unheard of. Analysts who spoke to The Straits Times said they have either been approached by their colleagues from another unit seeking to sway their recommendations, or have heard of other analysts who have been in such situations.
But they note that there are strict rules in place to prevent them from being influenced by corporate finance deals, leading to a 'Chinese wall' between securities analysts and investment bankers.
'The rules put in place in the early 2000s basically prohibited securities analysts from receiving commissions from investment banking deals,' noted an analyst.
'So I have no incentive whatsoever to let a corporate deal influence me.'
Analysts also have to abide by strict disclosure rules, and at many brokerages they are forbidden from buying or selling shares in the firms that they cover.
yasminey@sph.com.sg
The power of equities analysts
Reports they issue on firms can have big effect on their share prices
By Yasmine Yahya
JUST what kind of storm can be unleashed when a single analyst riles a company was on full display last week.
Olam International was forced into launching a publicity blitz on Wednesday after CLSA analyst Swati Chopra questioned the firm's reporting standards and internal controls.
It was quite a sight to see the firm and its bosses come out with all guns blazing, but it also underscored the power that an equities analyst can wield over a firm and its share price.
Ms Chopra released her report last Monday, and by the end of trade on Wednesday Olam's shares had fallen by 13 per cent.
A similar incident occurred in 2007, when OCBC Investment Research issued a report about Cougar Logistics that caused Cougar's shares to drop almost 17 per cent over three days. That report contained several factual errors, but even the release of an amended report failed to stem the bloodletting.
Analysts are so influential that companies sometimes use drastic measures in an attempt to prevent them from issuing negative reports.
An executive at a blue chip firm told The Straits Times that her company had once contemplated taking legal action against an analyst it felt was being unfair.
This analyst simply 'didn't want to listen', the executive said, and continued issuing comments based on inaccurate information even after the company had tried clarifying certain facts with him.
'But in the end, we decided we didn't want to waste the resources to sue him. We just stopped inviting him to our briefings,' she said.
Analysts and investor relations experts told The Straits Times that such incidents are rare.
For the most part, analysts carry out their work with little drama or scandal.
Their job mainly involves, well, analysing - studying a firm's business plan and financials to assess its current health and forecast its future earnings.
Broadly speaking, there are two kinds of analysts - buy-side and sell-side.
Buy-siders identify investment opportunities that would grow the net worth of their own employers, which are typically hedge funds or mutual funds.
Sell-side analysts advise investors outside their own firm. They are there to help a brokerage's clients make better investment decisions.
If you are a retail investor, these are the analysts whose reports you receive every morning. These reports are also read by remisiers and mutual funds using the brokerage's services.
How often they write reports on a certain company depends on the firm's announcements and share price volatility. At the very least, an analyst will write one report every quarter for a company under his purview.
An analyst who covers Fraser & Neave said he writes one report a month on the conglomerate, to follow up on the announcements made by its various units.
Besides sizing up a company's financial health and future prospects, these analysts usually recommend what investors should do with the shares - buy, hold or sell.
These three short words can make or break an analyst's career. The calls made by each analyst are recorded and tracked by financial information firms such as Bloomberg and Thomson Reuters, which then rank analysts based on how accurate their forecasts have been.
Thomson Reuters also presents annual awards - the StarMine Analyst Awards and StarMine Broker Rankings - to the world's top individual analysts and brokerage firms based on their estimate accuracy and recommendation performance.
Partly because of the visibility of their recommendations, analysts tend to move in packs.
Take any listed company. If it is a big enough firm, it would have about 20 analysts studying its business at any given time. And, chances are, more than half of them would have the same call.
When asked why this is often the case, one analyst joked: 'There's safety in numbers.'
Another added: 'When I was first starting out in the business, I was quite afraid of issuing contrarian calls in case I was wrong. So I tended to follow the herd; I felt safer that way.'
As she gained experience and confidence, however, she got bolder.
'There was a period in time when most analysts in Singapore had a 'sell' call on Parkway Holdings. Not only was I one of the few who had a 'buy' call, I also issued the highest target price,' she said.
Her boldness paid off - the company was bought by Malaysian sovereign wealth fund Khazanah at a price that was very close to her target price.
But it is not just a case of the herd mentality at work. One analyst pointed out that they often end up with similar recommendations simply because they have access to the same set of financial information about the firm, and interpret the data in similar ways.
So what usually happens when one lone analyst makes a contrarian call is that people start to scrutinise the analyst's report to figure out just how he or she came to such a contrasting view.
Some people even start to question whether a conflict of interest is at work - is the analyst issuing a positive call on an unpopular firm because his investment banking colleagues want him to help retain a client?
To be sure, such cases are not unheard of. Analysts who spoke to The Straits Times said they have either been approached by their colleagues from another unit seeking to sway their recommendations, or have heard of other analysts who have been in such situations.
But they note that there are strict rules in place to prevent them from being influenced by corporate finance deals, leading to a 'Chinese wall' between securities analysts and investment bankers.
'The rules put in place in the early 2000s basically prohibited securities analysts from receiving commissions from investment banking deals,' noted an analyst.
'So I have no incentive whatsoever to let a corporate deal influence me.'
Analysts also have to abide by strict disclosure rules, and at many brokerages they are forbidden from buying or selling shares in the firms that they cover.
yasminey@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/