Interpretation of broker consensus on Investment sites

[TheMotorcycleBoy]

Hi everyone,

It took Mel and I, a little while to figure out that some of the free sites (e.g. 4-traders) and the subscription-based ones (e.g. stockopedia) have a feature where a collection of brokers, apparently, send in an opinion about the desirability/buyability/performance and so on of a particular stock, and these sites then publish these brokers' opinions.

So 4-traders use the following range of opinions:

BUY
OUTPERFORM
HOLD
UNDERPERFORM
SELL

Apologies in advance, for seeming stupid, but when they say "SELL" do they always mean "the firm is looking pretty bad these days - sell now to cut your losses", or how about "the stock is at the top of it's upward trajectory - sell now to make your profit"? (I assume they mean the former). Another opinion I'm slightly curious about is "OUTPERFORM", so is this staying "the firm is doing really well - buy while you have the chance, just that it's doing really well (and could be pricey)".

BTW, Mel and I are not swayed by using these indications as trading tips, firstly due to the ambiguity (IMO) and secondly I suspect that the analysts opinions are almost always out of date.

M & M

[tjh290633]

I suspect that what happens is that they collect the published views of the brokers who cover each share, and use the latest pronouncement to get to their rating.

When a broker says "Sell" it can mean different things. It can mean that the shares are overvalued and it is time to exit. On the other hand it may mean that they would like to buy some, if only people would sell to get the price down. I am cynical of any such announcement, especially when a target price is given. You will often find wildly diverging comments from different brokers.

Stick to tea leaves or consult Mystic Meg.

TJH

[LooseCannon101]

A broker is only interested in his or her commission and hence trading volume. Their opinions are IMHO totally worthless.

If investors sit on their hands, who loses? For sure, not the investors.

[Pendrainllwyn]

My understanding is that "outperform" or "underperform" means that the broker expects the stock to outperform or underperform the market or the company's peer group. That's different from saying they think the stock price will go up or down.

Some brokers use these or similar terms to state what they think the stock will do over the next 12 months or some other timeframe. That's important to remember if you have a longer term investment horizon. So to sell because a broker says sell or underperform may not be a good idea if you are a LTBH investor and think the stock will do well over the next decade. The broker might just think that there is no catalyst to drive the stock up in the next 12 months (relative to the market or its peer group). It doesn't necessarily mean they think the company is not well positioned to do well over the long term and that they won't put a buy or outperform rating out when a catalyst draws near.

A broker is only interested in his or her commission and hence trading volume. Their opinions are IMHO totally worthless.

Absolutely you should read any broker recommendation with a critical eye. However the broker, or at least the good ones, also care about their reputation and over time brokers with a reputation for quality research will attract more commission than those without it.

For what its worth I am a LTBH style investor so I take more interest in what LTBH fund managers are buying and selling than what commission oriented brokers with a shorter outlook are saying. Having done the former I do sometimes read the latter for an alternative opinion albeit knowing they probably have different timeframes in mind.

Pendrainllwyn

[richfool]

One can also get more of an insight by reading the particular broker's rationale behind their recommendation.

For example, with a "Sell" recommendation, I sometimes see comments like: we think it time to take some profits from this stock (maybe accompanied by a comment like: with it having risen quite strongly over the last 12 months), and/or we see little further upside for a while yet.

As mentioned in previous posts, the broker may also be looking at a shorter time frame than a LTBH investor.

[TheMotorcycleBoy]

Ok.

Thanks for replies. This comment was the one which I'm in most agreement:

My understanding is that "outperform" or "underperform" means that the broker expects the stock to outperform or underperform the market or the company's peer group. That's different from saying they think the stock price will go up or down.

Some brokers use these or similar terms to state what they think the stock will do over the next 12 months or some other timeframe. That's important to remember if you have a longer term investment horizon. So to sell because a broker says sell or underperform may not be a good idea if you are a LTBH investor and think the stock will do well over the next decade. The broker might just think that there is no catalyst to drive the stock up in the next 12 months (relative to the market or its peer group). It doesn't necessarily mean they think the company is not well positioned to do well over the long term and that they won't put a buy or outperform rating out when a catalyst draws near.

Regarding this:

Stick to tea leaves or consult Mystic Meg

No can do. We are common enough to use tea-bags, but not too common to read the Sun. Thanks!

Otherwise, the only thing I can draw from their quoted "opinions/suggestions", is really that buy/sell really just a depict a certain level of attractiveness/repulsiveness of owning this particular stock.

Mel and I are really more interested in ourselves getting more of a handle on valuing a stock. Qualitative or quantitative. And yes, we realise it's not easy, hence the search for clues.

Matt

[DiamondEcho]

The detail behind a rating is often $-per-view, so most of little guys don't get to see it.
Either way I approach these things with some cynicism. Overall you'll find a far greater weighting towards buy recommendations than sell.
For example during system testing on the Euro-conversion project, for the prior test conversion exercises we had to manually create additional dummy securities rated Sell and Strong Sell as so few existed in reality. So my cynicism dates to 1998
The view then was ratings agencies 'buy favour' with their ratings. Give a flattering rating, boost the SP, make the Directors richer, and you [yr Investment Banking division] too burnish your creds when it comes to the business of launching their next chunk of corporate debt/similar lucrative work.

So I look at it in a very broad way; as a pretty biased and blunt tool. But if there is a concensus of negativity IME it's worth digging deeper. Individual broker upgrades have relatively very little effect IME.

[TheMotorcycleBoy]

Either way I approach these things with some cynicism. Overall you'll find a far greater weighting towards buy recommendations than sell...

Yes, agree. The freebie site I view from time to time (4-traders a.k.a. MarketScreener) does seem to either say "BUY or HOLD", and sometimes "OVERPERFORM".

It seems that "HOLD" is maybe used a) if they don't really have a strong view or b) on a more cynical note they don't think that firm is performing that great, but as they have a holding they don't want to frighten folk into selling!

M&M