One aspect of the investing community that needs a debate is the precise role of research analysts. The Oxford dictionary defines an analyst as �a person whose job involves examining facts or materials in order to give an opinion on them�. Contrary to this a majority of research analysts function as search analysts. Company managements are expected to provide all clues and leads. These projected management aspirations commonly termed as �guidance� is the basic crux for research. Companies that do not provide guidance are not put under the crystal ball for forecasting numbers. In the backdrop of the projected numbers analysts keep working with various permutations on borrowed excel sheets thus arriving at a recommendations rarely 20% beyond (each side) of the current price.
Almost all conference calls are focused with questions on numbers, numbers and more numbers. The reference to business dynamics, competitive landscape, market set up, customer perception, long range goals and other subjective attributes of business analysis is completely missing. The focus is to get the q on q numbers. No wonder research has become a QSQT - Quarter se Quarter tak.
In a management cocall the typical questions that come out are:
a) What would be your sales growth for the coming quarter and the year?
b) Will we maintain the same EBIDTA Margins if so how so if not why not?
c) What is the proposed debt level (for calculation of interest costs)?
d) What are the plans for Capital spending (for computation of depreciation and cash flow analysis).
e) Dividend payout ratio (for calculation of Book value/Retained earnings).
The benefit that management projections provide to analysts is that it makes it easier for them to shift the burden of negligence and provides an escape route. In companies whose management does not provide guidance the burden of incompetence cannot be shifted hence these companies are excluded from coverage by most analysts.
On the other hand when a company starts providing guidance to the nearest percentage analysts get down to the excel sheet to the nearest paisa. It gets a lot easier. More multibaggers originate from companies that do not provide guidance then from companies that do. For companies that provide guidance the efficient market hypothesis is in complete vogue. Bhaav Bhagwaan hai (In the ticker lies the god) all prices discount what the management had set out to do. The only thing that can surprise the investing community is the only thing that can surprise the management as well. So companies that do elaborate conference calls, investor presentations and showcase their investment worthiness have more room for disappointment then companies that do neither of these.
Michael Steinhardt allocates all his success to one principle �Variant Perception�. That is how much the actual would differ from the expected. The chances of variant perception is more with a tight lipped company that talks once a year then with a management that opens its mouth four times in twelve months.
I agree with you observation. However,there is another angle
to it.Business aspects & competitive landscape etc do not change
frequently - infact, there are usually only minor changes for many
years. An analyst attending concalls every quarter can not be expected
to ask these questions if he has already asked these when he initiated
coverage. After that queries on numbers tell the incremental story. e.g
if margin has fallen, query would be why it has fallen? Answer may
indicate that a new competitor has come.
Very informative and helpful post. You have good command on the topic and have explained in a very nice way.
Thanks for sharing.
Basantji,
i agree with u all of points but its all about share market business ...
so fortune can also be a factor...
true what you said....
Respected Basant sir,
It is a great privilege to interact with you. I would like to know how much CFA helps in doing equity research? I want to take a career in equity research. Is it good to spend time on CFA or instead do analysis of stocks during that time? which helps me to learn more? Please let me know how much does it (doing cfa) help than doing my own analysis? Since you are the best person to answer this question, i m asking this to you. I kindly request u to reply me sir. Is cfa mandatory for equity research and does it help me a lot in research??
If you are looking for a job you need a formak degree to back yourself up but if you want to do your own research than level 1 of Cfa with plenty of reading is good enough.
Good post however, I was wanting to know if you could write a little more on this subject? I'd be very grateful if you could elaborate a little bit more. Appreciate it!
Basantji - Can you refer some books / reference material for people coming from non-commerce background, so that they can analyse balance sheets .
CFA is a exhaustive program with many other subjects. If a non-commerce person like me wants to enhance his skills in the analyzing the balance sheet, what should he do?
Posted on:12/9/2011 10:34:02 PMSeemaKharpuriya
Very nice post sir.