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.