Hi Everyone,
I know this a very simple question, but just wanted to know your thoughts.
If you calculate a valuation and come up with an intrinsic value say, £10 per share. And the current trading price of that share is £10.
What recommendation would you give?.
Many Thanks
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Hold, because according to our valuation, the stock can have a intrinsic value of 10x. Since it is already trading at 10x, we have no reason to believe it will go anytime up or down soon. Having said that, stock prices rarely move according to them, there are other several factors that play. Cheers!
Buy/Hold/Sell, do you put your money where your mouth is? (Originally Posted: 08/13/2016)
I was always interested in this field and had a question that I wanted to address to Analysts or people with knowledge in this domain,
How many of your own Buy/Hold/Sell recommendations would you include in your personal portfolio aka IRA account?
Are ER Analysts under pressure to maintain a favorable recommendation with publicly listed companies that the banks have a good relationship with?
While a valid line of questioning, for the purposes of sell-side ER, it's ultimately misguided. The main problems are primarily concerned with (1) investment universe; (2) investment horizon; and (3) bias.
As you've accurately pointed out, analysts are influenced by the need to maintain relationships with their coverage for corporate access purposes. In practice, I haven't seen this result in 'wrong' recommendations, but at a subconscious level, it definitely affects analyst behavior.
With regards to the other two issues I raise, the first problem is that analysts only cover a set number of companies ranging from 10-40 stocks within a given sector. This raises the possibility that they could be bullish (bearish) on the whole sector, but note within the sector that certain stocks will outperform peers (i.e. a relative valuation system). Given this, it becomes difficult to say that buy ratings necessarily mean buy and sell ratings necessarily mean sell as it may not be so straightforward. While this does not necessarily apply for an absolute valuation system (i.e. stock XX is forecasted to have a total return of yy%), this still raises the possibility that the analyst believes there are better opportunities outside of their investment universe.
In the case of investment horizon, analyst price targets typically focus on NTM forecasts or FY1 forecasts. If an analyst is making a buy or sell call on a much longer time frame or a structural issue, they may be positive/negative in the short run even if they are negative/positive in the long run. Once again, this adds a certain degree of complexity in what a buy or sell rating actually means.
Bottom line, it's a bit simplistic to look at the headline rating without digging into the reasoning as this could influence whether it's a worthwhile personal investment without any degree of actual or perceived dishonesty.
Also, none of this matters because sell side people aren't allowed to personally trade in their own coverage (or sector for the most part I think).
As pointed out above, most firms restrict your personal trading activity so trading your coverage list is either prohibited or highly restricted. Personally, I just don't do it because I don't want to run afoul of compliance.
However, my firm (buy side) tracks our buy and sell recs which tie heavily into our performance review and thus bonuses, so I am highly vested in the outcome. Most buy side firms have some version of this performance tracking system.
Sell side ER is a little different as mentioned above because recommendations alone aren't necessarily what clients value. Industry contacts, knowledge, special datasets, etc. can be just as valuable as having the right recommendation on a stock.
models_and_bottles Braininajar
Have you ever found yourself recommending an investment just because you have to take action and propose investment ideas?
Or do you only recommend investment ideas based on strong conviction?
Have you also ever found yourself forced to agree with other colleagues investment ideas or pushing for it for the sake of pure personal benefit?
How influenced by others and how do personal interests affect your behavior at work?
There's always pressure to be productive. I haven't recommended a buy on anything that I felt was a bad investment, but I've recommended some buys that were lower conviction since I was under pressure to issue more recommendations.
No to both questions. My firm values differences of opinions. If you just "go with the flow" and don't have your own ideas then people quickly lose respect for you. Of course, doing this respectfully and thoughtfully is very important.
I don't mean to hijack the thread, but I would be curious what others on the buyside have to say, particularly about how many of the investments you recommend you own, and to what extent you diversify outside of those ideas (whether other holdings, passive funds, or other asset classes altogether, such as real estate).
I work at a relatively small RIA (250M - 500M AUM) and I personally eat my own cooking. We are a lean shop with 5 full time employees, so I have to clear trades with our PM, but I hold a relatively concentrated portfolio of 15-18 stocks, all of which we have purchased for our clients.
To answer your other questions below: 1. nope. that is the good thing about small shop--there is no pressure to take action. we are a long only shop with a portfolio turnover somewhere in the neighborhood of 10% per year, so we keep some ideas on deck, but there aren't any requirements of "generate x number of ideas or else" 2. Our PM gets ultimate say (obviously) and I don't always agree with why he does buys something, but he is never motivated by personal gain; he takes his fiduciary responsibility seriously.
Thank you all for providing valuable suggestions and appreciate your concern towards it.
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