Analyst calls:
Something has to give
The Singapore market has had such a strong run since the May declines that many analyst consensus calls on stocks have hit a paradox: they are still rated "buy" or "outperform" when the target price is lower than the last done price. One most noteworthy example is CapitaLand, which according to Reuters is still rated an "outperform" even though the last done price north of S$5.70 is substantially above the analyst consensus price target of S$4.96. This is particularly perplexing for the throngs of retail investors who sit down to read research reports but never actually read past the call and price target. What are they to do?
Well, in my view there are four possibilities to correct this situation:
1. The analyst changes the call. Assuming their initial price target was well-founded, this would be the most logical choice. If they think the stock is only worth S$4.96 then anything above that must mean that it is expensive.
Simple, isn't it?!
In theory.
The reason they are reluctant to do so is because it makes them look bad, no matter what they do. If they lower the call to "neutral", "hold", "fully-valued" or even an "underperform", "underweight" or "sell", they will look bad if the stock continues to run up. Plus, what will the sales department think if they lower the call to anything other than "you should rack up more trading commissions by continuing to sink your money into this stock".
2. The analyst changes the price target. In order to maintain an outperform call, there has to be a reason – a catalyst, in analyst jargon – to assume that the stock is worth more than they previously thought it was. Given the dilemma of lowering a call, they could invent a reason and get themselves out of this situation. While not the most logical, this would presumably be the most likely approach.
3. The stock continues to outperform – in a falling market. Outperform doesn't mean the stock will continue to rise. It just means the stock will do better than the benchmark against which it is measured. Assuming the call of "overweight" and the price target of S$4.96 still stand, the market would need to fall for the prognosis to be fulfilled. CapitaLand would fall along with all the other stocks, but still outperform the index. Given the strong run in the STI and the looming economic slowdown in the US and – I was reading on the weekend, in Japan – this may be the most likely outcome.
Whichever of these may occur, if anything occurs at all, of course, it shows how difficult it is to make calls like these. The Business Times ran a story on the weekend that probably puts in best with the comment that the analysts don't know any better how to value stocks than the rest of us. Afterall, value is in the eye of the beholder. Which is why it's so important for retail investors to learn enough about how to value stocks themselves, rather than just look for the call and price target whenever they pick up a research report, and ignore the rest.
Come to think of it, retail investors should start to learn the meaning of value in a whole lot of other things, such as the value of good information, the value stockbrokers provide, the value the Singapore Exchange provides, and so. If they understood the concept of value, rather than expecting every investment-related service to be free, perhaps their understanding of how to value companies would also improve.
Mark Laudi
ArchivesWell, in my view there are four possibilities to correct this situation:
1. The analyst changes the call. Assuming their initial price target was well-founded, this would be the most logical choice. If they think the stock is only worth S$4.96 then anything above that must mean that it is expensive.
Simple, isn't it?!
In theory.
The reason they are reluctant to do so is because it makes them look bad, no matter what they do. If they lower the call to "neutral", "hold", "fully-valued" or even an "underperform", "underweight" or "sell", they will look bad if the stock continues to run up. Plus, what will the sales department think if they lower the call to anything other than "you should rack up more trading commissions by continuing to sink your money into this stock".
2. The analyst changes the price target. In order to maintain an outperform call, there has to be a reason – a catalyst, in analyst jargon – to assume that the stock is worth more than they previously thought it was. Given the dilemma of lowering a call, they could invent a reason and get themselves out of this situation. While not the most logical, this would presumably be the most likely approach.
3. The stock continues to outperform – in a falling market. Outperform doesn't mean the stock will continue to rise. It just means the stock will do better than the benchmark against which it is measured. Assuming the call of "overweight" and the price target of S$4.96 still stand, the market would need to fall for the prognosis to be fulfilled. CapitaLand would fall along with all the other stocks, but still outperform the index. Given the strong run in the STI and the looming economic slowdown in the US and – I was reading on the weekend, in Japan – this may be the most likely outcome.
Whichever of these may occur, if anything occurs at all, of course, it shows how difficult it is to make calls like these. The Business Times ran a story on the weekend that probably puts in best with the comment that the analysts don't know any better how to value stocks than the rest of us. Afterall, value is in the eye of the beholder. Which is why it's so important for retail investors to learn enough about how to value stocks themselves, rather than just look for the call and price target whenever they pick up a research report, and ignore the rest.
Come to think of it, retail investors should start to learn the meaning of value in a whole lot of other things, such as the value of good information, the value stockbrokers provide, the value the Singapore Exchange provides, and so. If they understood the concept of value, rather than expecting every investment-related service to be free, perhaps their understanding of how to value companies would also improve.
Mark Laudi
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