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The Basics are not so Basic

Buy, Hold, Sell, Out Perform, Under Perform, Market Perform, Sector Perform, Strong Buy, Strong Sell, Underweight, Equal Weight, Neutral, Accumulate – these are all ways that analysts can put a recommendation on a stock.  But what do they all mean?

One of my favourite sites to track the news is www.marketwatch.com and what I found was a guide for what these recommendations mean from each firm:

http://www.marketwatch.com/tools/guide.asp

The confusing thing about these recommendations is that there is no standard.  Each analyst may mean something different when they say Buy or Sell, Outperform or Underperform.   This is EXTREMELY confusing especially when you read the headlines for a lot of stocks and the details are rarely provided.  It is up to the investor to read the analyst report in order to get a better understanding of what the analyst is really saying.

Even the page on markewatch.com does not have the details for every analyst.   This information is not easy to find on websites although the last few pages of every analyst report should explain the recommendation.   I was thinking of trying to create my own set of details for everyone but I tried looking for the information in a few sites and just couldn’t find it.  I imagine it would take me a while and a bunch of emails just to get everything together.  It’s something on never ending list of things to do.

You can see that when UBS makes a recommendation for “Strong Buy”, it means “Greater than 20% excess return potential; high degree of confidence” but when Buckingham Research says “Strong Buy”, it means “Expects stock to appreciate 25% or more within next 6-12 months. There is good visibility and nearer-term earnings or events catalysts are expected.”
For Wachovia Securities, when they say “Sell”, it means “Believes stock is overpriced relative to soundness of co.’s fundamentals and long-term prospects. Co. has significantly weak fundamentals or flawed business model. Sell.”  When Prudential says “Sell”, it means, “Expected to depreciate a minimum of 20 percent viewed on total return basis over 12-month time horizon. ”

The recommendations are exactly the same but the verbiage describing what the recommendation is has significant variation in both clarity and time frame.  Timing when buying stock is everything especially for those shorter term investors.

Since I’ve noticed that UBS does a lot of coverage, I went into more details to see one of their analyst reports:

Absolute Stock Rating System
Buy
We believe the stock is undervalued relative to current market prices.
Hold
We believe the stock is valued in line with current market prices.
Sell
We believe the stock is overvalued relative to current market prices.
Under review
Upon special events that require further analysis, the stock rating may be flagged as “Under review” by the analyst.
Suspended
If data is not valid anymore, the stock rating may be flagged as “Suspended” by the analyst.
Restricted
Issuing of research on a company by WMR can be restricted due to legal, regulatory, contractual or best business practice
obligations which are normally caused by UBS Investment Bank’s involvement in an investment banking transaction in
regard to the concerned company.

Sector Relative Stock View
Outperform Expected performance versus benchmark is above 10% on a 12-month horizon
Marketperform Expected performance versus benchmark is between minus and plus 10% on a 12-month horizon
Underperform Expected performance versus benchmark is lower than minus 10% on a 12-month horizon.

This was even more confusing because the marketwatch.com website did not provide as much detail.

The lesson learned here is that investors need to look at the analyst report to understand their recommendations and read all their disclosures.   I use to think that a Strong Buy from one analyst was the same as Outperform from another analyst since it was the top recommendation for each.  Now I know that they can mean very different things.

I’d like to start a movement to standardize these recommendations as well!  Who is going to join me?

You can download the UBS investor’s guide here and see page 45 for the analyst recommendation details:

http://www.ubs.com/1/e/wealthmanagement/wealth_management_research/ubs_investors_guide.html

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