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.
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.
Basantji, 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. So that adds incremental info to your repertoire of business knowledge of the company. What is margin liekly next quarter/year? If management says that it expects to recover margin back. why? it has put in place a strategy to counter competition. That tells analsyst change in company's competitive strategy.
Excellent article and very true too .
nice point sir
Most times reading research report is waste of time. We (me and my 4 brilliant friends) have not read any broker report for any stock after 2008 crash - we read only quarterly results for the stock we track, its peers and technicals :-).
Nice writeup! With more and more technology and maths, analysts are coming out with more complex formulae and more focussed to use those in research. While there's no harm in using those but we have to also focus on very simple things which sometimes are ignored. Common sense is very uncommon?
I think it has to do our mindset. Usually people who ask question and people who answer them are world apart. The analysts are alreday in awe with CXOs who answer the questions. Just look at the servility with which they ask question. I am not blaming the analysts but this is how India operates. People who are CXOs are more powerful than the analysts and they can really do the damage to these analysts if they act too smart.
Very good article. But in my view when the facts and figures comes out it is only a data given a company. No company has accurate true data in the world. So when the basic data itself weak then the analysation will also be on the side only. We all dealing with speculative market aiming to earn some extra money. So according the movement of the stock numbers and not their result or data numbers. Only possible way is to just ignore those reports and trade on your own without seeing the reports but by seeing the cahrts.
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Posted on:5/13/2011 12:44:51 AMKhan
I think that one reason for analysts not actually doing or reporting any investigation into the future performance of the companies is due to the motive with which the reports are released, i.e to generate brokerage rather than educate the investor.
More the reports with smaller targets which get met easily, the more brokerage is generated as the investor moves from one stock to another. Or the buy side may be themselves justifying the transactions with the help of such research reports.
I would like to know more about these concalls? Is it by invitation or anyone can attend the concalls?