Investment banks, stockbrokers and commercial banks employ analysts to write reports about companies — and they contain useful information which you can use.
These reports will look at the financial fundamentals of companies and the industries in which they operate, often triggering a recommendation on whether you should buy, hold, or sell the stock.
READ: Buy, sell, or hold?
But before you go pouring through the reports on companies you follow, here are a few things you should know about them.
Where can I find reports?
Most reports are restricted to a firm’s clients, however you may see reports among company announcements.
Last year, the ASX launched the ASX Research Scheme, allowing people to receive reports about certain companies just by signing up.
In return, you will receive a few per week — although which companies and brokers you’ll get them from are seemingly random.
Some online brokers may offer access to one or two analyst libraries, for instance CommSec offers Morningstar and Goldman Sachs research. However you have to pay for them, and it’s usually the luck of the draw as to whether or not there will be a report on the stock you want.
Reports may be one page or several. Analysts will often rewrite reports after significant events such as game-changing partnerships. They may write reports about the state of entire sectors and include analysis of where each stock stands in the context of these sectors.
What will I find in them?
Usually this will be a recommendation to Buy, Sell or Hold, but each bank will have different criteria.
For instance, they may recommend Hold when they expect the share price to stay within a 10 percent range of its current price but Buy or Sell when they expect the price to exceed that range.
Other times they might simply say the stock is ‘underweight or overweight’ or decline to give a verdict. If they provide a verdict, they will include the underlying factors behind their assumptions.
In spite of all the financial metrics that lay people may not understand they will provide a plain English conclusion.
For instance, after Virgin Australia (ASX: VAH) released positive half yearly results in February, JP Morgan issued a report predicting the stock to fall.
Despite acknowledging the domestic results would please investors, they were pessimistic about the future.
The report said: “we think the company continues to face numerous challenges (as demonstrated by the disappointing results in VAH’s other segments…given the acknowledged ‘uncertain market conditions”’, we find it had to get excited about the outlook and therefore this stock”.
Analyst reports will contain all information found in their financial statement as well as ratios such as earnings per share (EPS) and share price versus earnings (commonly used in the expression ‘trading at X times per share).
They will also make projections about future financial years which may be the company’s assumptions or analyst assumptions.
If a business is not profitable, a projection as to when this will happen will be included.
If a target price is included, it will come from valuations of the business at the end a fixed period of time – sometimes at the end of their forward projections or more short term.
Last October, EverBlu Capital released a report on LiveTiles (ASX: LVT) who are the time were 46 cents. EverBlu set a 12 month price target of 65c.
Six months on, they are more than halfway towards that target at 56c (at the time of writing).
But EverBlu also looked further ahead and predicted $50.5 million in revenue, as well as achieving profitability, in the 2021 financial year.
A stock’s metrics are particularly compelling when they are compared to their industry peers. Alternatively, a stock could be sold off just because of issues their peers are having.
For example Southern Cross Electrical (ASX: SXE) fell from 75c in late August to 58c on 8 April.
Noting the share price decline, a Moelis report from 1 April noted:
“We believe this [decline] could be partly due to negative sentiment towards the sector, particularly contractual issues experienced by peers RCR [RCR Tomlinson] and LLC [Lendlease]’.
They then set out reasons why they believed their investment thesis remained intact. These included revenue diversification, growth outlook and the late stage nature of their service offering.
The latter reason alluded to the fact that unlike their peers, while Southern Cross provides instrumental installation they do not usually take on design risk. This means lower risk profile and also mitigates wage costs.
Among the more helpful reports will show tables directly comparing the company and its peers on various metrics such as initial capital expenditure and expected revenue.
Some may even show several price targets, for example mining reports might show price targets dependant on the price of that commodity and foreign exchange rates.
Risks with reports
The biggest risk is that they can be wrong.
One recent local example was Foster Stockbroking’s November 2018 report on Yojee (ASX: YOJ), an online trading platform for logistics companies. It was publicly available on the Fosters’ website to depict to potential clients its capabilities.
This specific report was issued after their first quarterly release for FY19. The report covers the highlights of the release both financial and logistical.
Fosters concluded with a price target of 12c which was 33 percent more than the price at the time.
Over the following two months, Yojee plummeted by 33 percent to 6c; although it has slightly recovered to be at 7.3c.
Another risk is that the reports themselves can be the drivers of share price growth and decline.
To use an American example, the user review service Yelp (NYSE: YELP) fell over 7 percent at the opening of trade on 10 January just because Morgan Stanley cut its price target and estimated that its revenue would decline to the point they would need 40,000 new accounts to offset this.
There was no company news released that day, the report was enough to send the stock down. Since then, Yelp has stagnated and is only down 1.1 percent since that date.
Should you trust reports?
In short, while you should not certainly act impulsively and buy or sell a stock based on one report, some information contained may be useful for your decisions — which ultimately are yours alone.
But considering that share prices can swing significantly on a single report they are worth knowing about.
If you are a client of a research provider, you will find it more trustworthy to rely on a stock that has been covered for a long period of time, especially where the recommendation has changed over time.
One accusations made of share analysts by lay people is that they rarely, if ever recommend sell.
CNBC analysis back in 2017 found that the total amount of sell ratings on the S&P 500 has never exceeded 10 percent in the preceding 20 years. In Australia, in the last 12 months, this metric is 19 percent — slightly higher, but still a minority figure.
Star Investing analysis has found that of the ASX 200 stocks only 10 have had 50 percent or more sell ratings by major analysts and brokers. If you were wondering which stocks brokers and analysts have been rated sells by 50 percent or more, here they are.
Ultimately, it is investors that determine the share prices’ movement.
On one hand, investors might make more informed decisions if they had access to more reports with fundamental financial information – as some small cap reports argue.
The other they probably still would. The only difference the report would make is providing more justification as to their choice to buy or sell.
This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions. While LiveTiles are in a commercial partnership with Star Investing, they did not sponsor this article.
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