Thursday, June 5, 2008

The 10 Golden Rules of How to Trust/Use Company Analyst Reports

For the last two decades, I have been interested in and specifically writing about the restaurant and investing communities. I also like to manage my own portfolio; so when a colleague told me about the research and writing of Ian Campbell and his new stock research portal, I was fascinated by the depth and breadth of the information and how it could save me time and money.

I had been spending untold hours reading company analysts' reports; and finding them everywhere and nowhere in terms of their coverage, depth and reliability. After reading Campbell, I have to say he made things crystal clear vis-à-vis these reports. Now I take them with a huge grain of salt. I use these 10 golden rules to keep me on track.

1. I read each analyst report with a cynical eye, being very careful to notice whether the company has paid the analyst firm directly to generate the report. If it has, I judge myself accordingly.

2. As a long-time market researcher, I'm always looking for bias; so I want to know whether the firm that employs the analyst generates financing or other fees from the company - or otherwise has relationships with the company that might be construed as a conflict of interest or might promote bias. For me, bias blocks transparency.

3. No two analysts are alike; I therefore take into consideration that such reports are written by persons of differing knowledge and experience, which experience may or may not reflect industry or company specific operations knowledge - and that as a result the opinions expressed may not always be sound. I believe in caveat emptor.

4. Realize that one analyst's definition may not even be close to another's. How do you 'know' what defining words mean? For instance, What do the definitions of 'Strong Buy', 'Speculative Buy', 'Buy', 'Hold', 'Wait', 'Sell' or other 'recommendation terms' adopted by the firm that employs the analyst actually mean? Definitions of such terms typically are found in the fine print and disclaimers on the last page of such reports. Each company is often different.

5. Don't make the assumption that the analyst has access to all the pertinent, complete, information that would be available to corporate acquirers and their advisors who have signed confidentiality and non-disclosure agreements. S/he likely can't access any more data than you can.

6. How do you know what methods analysts have used in their valuations? Moreover, they also don't typically set out the theoretical and practical strengths and weaknesses inherent in the valuation methodologies they adopt.

7. Ask yourself about the reasons why an analyst has chosen any specific company to be a 'peer group' company. Have they given those reasons? Be aware that analysts may not adjust 'peer group' multiples for comparability issues, which they typically should do.

8. In my judgment, opinions expressed in analyst reports should be recognized for what they are: opinions; they should be weighed accordingly. Additionally, they should be read with a critical eye as to the merits of the analysis they contain.

9. Investors need to be aware that their decisions - and the data/opinions they use to make those decisions - are their primary responsibility. They should not simply adopt stated 'target prices' as being reliable without understanding the fundamental assumptions underlying them; where investors themselves conclude those assumptions make sense; and,

10.Investment decisions should never be made in isolation from other inputs. Analyst reports should always be studied as a supplement to each investor's own research and due diligence.


With these 10 'golden rules' I can use analyst reports as the supplemental tools they are...and no more. I know the risk involved and adjust my thinking and decision-making accordingly.

© Roy MacNaughton, 2008, All Rights Reserved

By Roy MacNaughton

Roy MacNaughton is the author of the free, just-published "Restaurant Marketing for Free" ebook. Please read more at his new blog: http://www.restaurantmarketingjournal.com

To learn more about Ian Campbell and his innovative stock research portal, go to: http://www.stockresearchportal.com

Article Source: http://EzineArticles.com/?expert=Roy_MacNaughton

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