Research & Analysts

Joshua said...

Mind sharing your personal list with the readers? (re Asian and Malaysian market)
My coverage is mainly European stocks, and hence the list below:

1) Goldman Sachs
2) Merrill Lynch
3) Bernstein
4) Dresdner
5) BarCap
6) HSBC
7) Citigroup
8) JP Morgan
9) Investec
10)Soc Gen

Comments: The problem is these people move too often too quickly. There isn't sufficient time to be partial to any one team or analyst. You may follow an analyst but sometimes when they move to another house, the way they regard research and the supervisory structure, plus interventionist / consensus decision making can neutralise the strategy and independent thoughts of a good analyst.

Everything else being equal, I would pay the most attention to Goldman Sachs, anywhere and everywhere, in particular their macro views and asset allocation revisions. Partly because they trade so much and their words carry that much weight, especially on a 1-6 month view. It does not mean that their research are particularly insightful, but you will find they come out with many "big statements" reports, e.g. the recent oil will hit US$200. They are also biased to some extent in coming out with these big statement reports because they want volatility for their trading prop desk to make money. I am not suggesting that their traders front run their research, but its hard to believe that none of the trading side have zero inkling on what the research will be putting out.

Good research most of the times do not get to the right crowd. If you work for the top 5 research firms, your clients will be the BSDs and will move markets. It does not mean the research is "correct analytically" but as long as it is persuasive, it moves markets. How to be persuasive, well, by getting ranked higher and higher. How to recognise good research:

a) it has to be able to grasp the critical factors affecting the stock or the sectors

b) it has to be able to pick out the few more meaningful catalysts over the next 6-12 months and how they will affect the share price

c) it has to stand out, the analyst has to stick his/her neck out on a particular view passionately and convincingly

d) finally, and most importantly, good research are always highly persuasive, laced with solid arguments

When you are faced with 5 same stock reports, all buys from differing research firms, look at the quality of arguments and the assumptions (sometimes voiced, most times hidden). Especially look at target prices - overly reliant on a typical PE/earnings growth formula or worse, Sum of the parts diatribe, you know its a futile exercise. Exacting target prices are basically an indication of textbook valuation, when has textbook ever equated to reality? Hence I still prefer the Strong Buy, Buy, Neutral approach.

One has to take the recommendations alongside with the evolving sentiment of the market. Hence a stock research report will never be a solid guide, it just look at the stock and the business sector it is in. Many other factors affect stock prices as you all will know: big companies going bankrupt; currencies realigning dramatically; political and social upheavals; interest rate differentials; etc... It would be much easier if stocks were just stocks and businesses on its own, but its not.