Thursday, May 20, 2010

Two Changes I Would Like To See In Our Research Reports

In light of the posting If You Want To Lose Money, Here's A Great Tip


  • Goldman Sachs Group Inc. racked up trading profits for itself every day last quarter. Clients who followed the firm’s investment advice fared far worse. Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who followed the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday.

Now here are two issues of the stuff that I would really, really like to see in our local research reports.

1. No More Vested Interest Coverage.

Stop writing reports in which the research team or associates has a vested interest in the stock.

Example?

A. Posted last week: Review Of Green Packet Earnings Again

Green Packet continued to lose money. Yes, it lost 'less' money but fact still remains that Green Packet had lost money for the last 27 months!!! Losses total 275 million so far. And Green Packet only 'hopes' to break even by end of this fiscal year. Hopes to only. How much losses would Green Packet have accumulated for this Wimax venture? But yet OSK claimed it as a trading buy. Why? Would it have different views and a different recommendation if Green Packet was not a 16.2%- owned investee company of OSK Ventures International?

B. iCapital.

They claimed to be independent and also integrity. But why do they choose to write stocks their associates have vested interests? December 2005: Mieco: Part II - Ze Buy Recommendation!

Despite clear facts that Mieco business fundamentals had deteriorated badly (see posting Mieco: Part II - Ze Buy Recommendation! ) in which net earnings and margins declined, company cash depleted from 182 million to a mere 18 mil and borrowings surged from zero to 190 million, iCapital gave it a buy call. And yes, it did acknowledged the vested interest in the stock. But what was the conclusion? At 2.36, it was a buy for the longer term. At 1.37, Mieco was still a buy for the longer term and at 1.00 (yup Mieco back at the time of writing in Dec 2005 was trading at 1.00!!), Mieco was still a BUY!!! Mieco today is a mere 0.395!

Or how about Swee Joo? iCapital And Swee Joo. In that posting, I highlighted a report where iCapital gave the usual buy for a longer term for Swee Joo on 20/7/2007. Swee Joo closed trading on that day at 1.38. Despite the CLEAR weakness where there was sharp decline in earnings and deterioration in Swee Joo's balance sheet, iCapital gave it a buy recommendation. What was glaring again was that it did mention its associates had vested interest in the stock.

How?

Both OSK and iCapital examples, I do have to ask, if the vested interest was not there, would the recommendation been different? And seriously, why the need to make a research on these companies? Yes, there are so many listed stocks in the exchange to choose from. Why choose the stock in which you have vested interest? Why?

How?

My say? Stop the research houses from covering stocks that they have vested interests. Disclosing the fact is not enough.

B. I like to see all research report include "Recommendation and Target Price History".

S&P does such a practise. At the end of each report they SHOW the reader the following table.

Now isn't that nice?

S&P shows the reader clearly what was their previous recommendation and target prices. At least the reader know how to gauge what the analyst.

For example.... aha... OSK's coverage on Astro All Asia is a good example.

July 2009, I wrote this Featured Report: OSK On Astro All Asia Again!

I had to compile the following MYSELF.

  • 16 Dec 2008. Trading Buy Maintained 2.90.
    4th Feb 2009. Downgrade to Neutral. TP downgraded to 2.20.
    17th Feb 2009. Neutral maintained. 2.20.
    4th March 2009. Neutral maintained. 2.20.
    18th March 2009. Neutral maintained. TP downgraded to 2.00.
    17th April 2009. Trading Buy upgrade. TP upgraded to 2.92.
    21st May 2009. Trading Buy maintained. 2.92.
    1st June 2009. Trading Buy maintained TP upgraded to 3.50.
    15th June 2009, Trading Buy maintained 3.20-3.50.
    20th July 2009. Trading Buy maintained. TP upgraded to 4.20.
    31st July 2009. Trading Buy maintained. TP revised to 3.92.

Look at the time of the recommendation.

See how fastly the 'value' of the company (reflected by the target prices) kept changing in such a relative short time frame? (pls read the posting Featured Report: OSK On Astro All Asia Again! to understand more) and as mentioned, if one did not read or follow his previous calls, would one realise how topsy turvy or how flip-floppy the recommendations were made?

How?

My say? Get the local research houses to state in bold, all their previous recommendations on the stock. State the date and target price. S&P table should be a benchmark in my opinion.

Yes, these are the two changes I would like to see in our research reports and of course, I hope that everyone understand clearly that a research report is just a research report. Nothing more. And that a research report is not the passport to make money.

How?

5 comments:

random said...

excellent post!

Unknown said...

Yup, I second that.

Unknown said...

Yup, I second that.

Mun Wai said...

Moo, I glanced thru some reports issued by foreign houses and found out that the following houses (Credit Suisse, Bank of America Merrill Lynch, JP Morgan) adopt the practice of presenting readers with the history on stock recommedation & TP.

However, my observation might not be conclusive as the sample size is rather small.

I do recognise the role of such disclosure in improving/governing the integrity of analysts.

Moolah said...

Mun Wai: I strongly feel that a stock recommendation history is a MUST.