How much attention do you pay to sell-side research reports & recommendations?

[Guest Grey512]

dear COBF users,

 

Some-time lurker here, recent joiner. My inaugural post is a question on a topic which long interested me: how much attention do value investors pay to Wall Street & the sell-side?

I have heard all sorts of responses to this topic. Some value investors completely ignore the Street (no broker research reading, no talking to analysts, etc). Some are in the middle and occassionally read such reports. And some can quickly make decisions about securities based on just reading sell-side research - e.g. Daniel Loeb has a video recording on YouTube where he said that he read a research report that "smelled right" and he consequently made a buy/sell decision on a security "in a few minutes".

 

Personally, I am somewhere "in the middle". I actively try to avoid sell-side research (even any news alerts or articles about some IBank downgrading some stock that I am interested in), but I find that this requires some effort on my part and to be perfectly honest with you, the Wall Street noise does sometimes get to me and make it harder to pull a trigger on a company purely because I am (unfortunately) aware that the Street recently downgraded it, for instance.

 

Very interested in hearing your views. ;)

[intothebreach]

None whatsoever for my part. Probably made easier due to the fact that I don't have an easy access to most of them.

[Mephistopheles]

As a former research analyst, I'd like to reinforce that research reports should be ignored except to learn cold facts such as numbers in a financial statement.

 

Analysts are very smart, hard working, decent people. But there is a major restraint to the quality of their work and that is the short term bias that is pervasive in the industry for a multitude of reasons.

 

I'm sure everyone is aware of this, but just wanted it to be heard from someone who's been in the industry.

[Travis Wiedower]

I never actively seek it out but if I come across sell-side coverage on a stock I care about I'll read it. I have gotten value from them before but some of it is really bad. Best case scenario sell-side is extremely biased (doesn't mean they're wrong though).

[Pelagic]

One of the things that turns me off to analyst reports is the fact that they're quick to upgrade or downgrade a stock after an earnings announcement or material event when the stock has already moved quite a bit. The short term nature of their forecasts forces them into needing to be right, right now whereas most value investors would shrug it off and say a single quarter's earnings really don't matter much if your time horizon is 5+ years.

[jay21]

0% for valuation (except NAV for complicated entities like LVNTA)

 

But I like reading the reports for industry/company background and primers on Fixed Income products. Usually very helpful.

[Andy Dufresne]

In my limited experience with / exposure to sell-side "research", the bulk of it is very very poor - not only is there an almost myopic focus on short term prospects, but the numbers are fiddled around to get to a "price target" (heaven forbid someone tries to actually calculate intrinsic value) and the sentiment on a company can change rapidly so that a stock once lauded can be swiftly downgraded even though nothing intrinsically valuable has occurred with the company or the competitive environment. I could go on, but I think you get the point.

 

As mentioned, they can serve as Cliff Notes / summaries of financials but I think it much better to go directly to the source material and see things there for myself.

[benhacker]

I can't find it right now, but there was a study done maybe 8 years back that captured what I believed about analyst reports quite simply:

 

1) The study found that the financial forecasts were pretty reasonable

2) The study found that the price targets in reports were manipulated to match pricing.

 

So basically, it appeared to the folks doing this study as if the analysts did real work on the industry, markets, competition, and then screwed with the final output to make the target price "work" for what the market or their bosses wanted.

 

I think this is another way to say that getting raw data on an industry, trends, etc is useful, and perhaps even some of the analysts cash flow, debt, etc forecasts... but definitely ignore the buy / sell / hold and price target info.

 

My 2 cents,

[Guest notorious546]

I can't find it right now, but there was a study done maybe 8 years back that captured what I believed about analyst reports quite simply:

 

1) The study found that the financial forecasts were pretty reasonable

2) The study found that the price targets in reports were manipulated to match pricing.

 

So basically, it appeared to the folks doing this study as if the analysts did real work on the industry, markets, competition, and then screwed with the final output to make the target price "work" for what the market or their bosses wanted.

 

I think this is another way to say that getting raw data on an industry, trends, etc is useful, and perhaps even some of the analysts cash flow, debt, etc forecasts... but definitely ignore the buy / sell / hold and price target info.

 

My 2 cents,

 

+1

[abitofvalue]

Important to keep in mind incentives - sell-side gets paid via trading activity. So the bias is towards trying to find something actionable which can lead to a lot of false positives and constant tinkering with target prices. Add in the fact that most institutions have forced curves (x% buy, y% sell), corporate relationships, and directors of research really don't like things being out of whack (target price on a buy being within a few cents or less than current price) and you have a recipie for tinkering with target prices.

 

The other alternative would be constantly moving from buy to sell to neutral which requires the to go through some internal committee, hurts corporate / investor relationships and can make an analyst look schizophrenic

 

value investors by definition trade a lot less and spend time thinking about the long term so sell-side isn't really focused on the value investors.

 

Read initiation coverage or non-earnings reports to learn about business models, learn about companies and management teams etc.. Even the drivers are usually spot on. Target prices are usually 12 month targets and almost always back-solved for.  To actually know what the analyst is thinking you need to speak with them.  at the end of the day the good analysts on the sell side can add value but it's still focused on generating trading activity. Doing good research helps build the analysts research analysts reputation, client base etc to the point when he says something is a buy or sell it can move stocks.  Which is why stocks move in response to upgrade / downgrades but not in response to target price changes typically.

[SharperDingaan]

One has to realize that these are marketing pitches, and you are not the target market.

 

To make a reputation, the analyst has to routinely round-trip favored customers through their covered stocks - & see to it that those customers don't end up with a loss. You play the piano keys, to bring in the masses; so that the favored can exit the box - & reward you a job at their organization next year.

 

A cynic might point out that there is nothing to prevent you from taking a leaf from the same book, and simply entering/exiting between the favored few. Much as a mosquito, or tick, gets a free meal - without killing its host.

 

SD

 

[Jurgis]

value investors by definition trade a lot less and spend time thinking about the long term so sell-side isn't really focused on the value investors.

 

CoBF investors might trade a lot less.

 

Value investors "by definition" do not trade "a lot less". Value investor can buy undervalued stock and sell it in 2 weeks if it appreciates above the intrinsic value. Same with netnet investors.

 

You might as well say that growth investors "by definition" trade a lot less: they should only sell when company stops growing, no? ;)

[abitofvalue]

value investors by definition trade a lot less and spend time thinking about the long term so sell-side isn't really focused on the value investors.

 

CoBF investors might trade a lot less.

 

Value investors "by definition" do not trade "a lot less". Value investor can buy undervalued stock and sell it in 2 weeks if it appreciates above the intrinsic value. Same with netnet investors.

 

You might as well say that growth investors "by definition" trade a lot less: they should only sell when company stops growing, no? ;)

 

fair point. 

 

I guess i should have said -- "the target audience is not long-term concentrated investors looking to buy companies with a large margin of safety or an economic moat, as these people are unlikely to respond to small daily movements in the stock price and therefore are more likely to trade less frequently than the typical stock jockey under normal stock market conditions."  8) 

[Guest Grey512]

Thank you all for your responses.

 

After giving this topic quite a bit of thought over the past few weeks, I have settled on a "new" routine: ignore all analyst reports, at least until I have exhausted my mental capacity thinking about companies using my own reading of primary materials, COBF discussions, etc. In the spirit of "dinner before desert", I wish to take this even further and ignore even the quoted price / market cap and just determine my own estimates of fair value before even looking at what the company is trading for (which is Buffett's approach, from what I have read). I guess that's the last, and toughest step.

 

In the meantime, a fun anecdote about TSLA, if you are interested. I think this is a real-life illustration of the limitations of sell-side research, and how seemingly tough it is to be an original thinker on Wall Street:

 

Until July 2015, BofA was the most bearish of the big investment banks in their views on TSLA. Analyst John Lovallo routinely issued target prices of around $60-80 for TSLA. His last report from June 2015 had a target price for TSLA of $65. This is whilst the rest of Wall Street was bullish. Well, it appears that John Lovallo has been "pushed" from covering Tesla. He's been replaced as a TSLA analyst by John Murphy, and BofA promptly moved the target price to $180, from Lovallo's $65. In fact, Lovallo may have been not just reassigned from TSLA, he may have been fired: his name is off BofA's coverage universe since June.

 

My take on this: BofA got tired of being left off TSLA investment banking / underwriting business (e.g. Goldman and Morgan are apparently running the recently announced top-up equity underwriting, and unsurprisingly, both of these houses are generally issuing bullish research reports on TSLA), so they let Lovallo go.

 

[sc2248]

As a former research analyst, I'd like to reinforce that research reports should be ignored except to learn cold facts such as numbers in a financial statement.

 

Analysts are very smart, hard working, decent people. But there is a major restraint to the quality of their work and that is the short term bias that is pervasive in the industry for a multitude of reasons.

 

I'm sure everyone is aware of this, but just wanted it to be heard from someone who's been in the industry.

 

I second Meph's opinion. I'm a buy-side analyst, but know a good deal of sell-side friends. Their problem is structural, not personal...

That being said, one sometime useful bit of information is when the sell-side discussion or chatter focuses on some particular issue that is causes short-term fear, but has little impact on the long-term value creation of the business.

Cheers!

[sc2248]

Thank you all for your responses.

 

After giving this topic quite a bit of thought over the past few weeks, I have settled on a "new" routine: ignore all analyst reports, at least until I have exhausted my mental capacity thinking about companies using my own reading of primary materials, COBF discussions, etc. In the spirit of "dinner before desert", I wish to take this even further and ignore even the quoted price / market cap and just determine my own estimates of fair value before even looking at what the company is trading for (which is Buffett's approach, from what I have read). I guess that's the last, and toughest step.

 

In the meantime, a fun anecdote about TSLA, if you are interested. I think this is a real-life illustration of the limitations of sell-side research, and how seemingly tough it is to be an original thinker on Wall Street:

 

Until July 2015, BofA was the most bearish of the big investment banks in their views on TSLA. Analyst John Lovallo routinely issued target prices of around $60-80 for TSLA. His last report from June 2015 had a target price for TSLA of $65. This is whilst the rest of Wall Street was bullish. Well, it appears that John Lovallo has been "pushed" from covering Tesla. He's been replaced as a TSLA analyst by John Murphy, and BofA promptly moved the target price to $180, from Lovallo's $65. In fact, Lovallo may have been not just reassigned from TSLA, he may have been fired: his name is off BofA's coverage universe since June.

 

My take on this: BofA got tired of being left off TSLA investment banking / underwriting business (e.g. Goldman and Morgan are apparently running the recently announced top-up equity underwriting, and unsurprisingly, both of these houses are generally issuing bullish research reports on TSLA), so they let Lovallo go.

 

That is sad for Lovallo...yet, the type of institutional imperative investors should take advantage of...