It’s all in the numbers
Buy or sell?: everyone has different opinions
The Financial Post takes a weekly look at investing products worthy of a spot in your kit: This week: analysts’ stock ratings When it comes to metrics such as price targets, equity analysts are more than willing to show their work, impressing us with the complicated math and reams of data they go through to arrive at a forecast.
However, when it comes time to decide between a “buy” or “sell” rating or going from “outperform” to “neutral,” the math gets a little more vague, the conclusion is more subjective.
“Everyone has a different opinion on stocks. It’s part of what makes a market,” Brian Yarbrough, an analyst with Edward Jones, said from St. louis. “There’s nothing specific, but most analysts will definitely look at valuation. Otherwise, a lot of it is gut feel and what I think of the company and its management.”
Analysts covering the same company may start off with the same set of numbers, but where they go from there can vary depending on their firm’s stated investment objectives, coverage universe or general market philosophy.
Mr. Yarbrough doesn’t get specific directives from Edward Jones on how to determine ratings, but some firms will use specific performance thresholds to differentiate between ratings.
For instance, a stock may be rated “outperform” or “underperform” if it is expected to do respectively better or worse than its direct peers, sector or even the index by a certain percentage in a certain period.
“We’re longer-term. We look out three to five years, while some of these guys will make ratings changes based on things that could happen in the next few months,” Mr. Yarbrough said. This was certainly the case with
Snc-lavalin Group Inc., which has been under pressure from a series of unfortunate headlines in the past year including frozen contracts in libya, weak earnings and allegations one of its execs had ties to the Gaddafi family.
The Montreal engineering firm’s losing streak came to a head last week when, upon completing an internal investigation, the board alleged its chief executive, Pierre Duhaime, had pushed through $56-million in unauthorized payments. Mr. Duhaime resigned and the company now considers the matter closed.
Following the news, the vast majority of analysts, including Mr. Yarbrough, maintained their recommendations (the stock currently has 10 buys and five holds as surveyed by Bloomberg), although a few lowered their price targets.
However, Corey Hammill at Paradigm Capital proved to be the exception as he downgraded Snc-lavalin to a hold from a buy. “Given what we believe is an increased risk profile, combined with lacklustre guidance, we are lowering our target to $43 (from $67) and reducing our recommendation to a hold,” he said in a note.
Mr. Yarbrough, on the other hand, maintains a buy on the stock, based on a longer-term outlook on the company’s prospects.
For the investor trying to sort through all this, the point isn’t to decide which analyst is right, as it is entirely possible for both to be right or for both to be wrong. Rather, investors need to understand the reasons behind a ratings call, identify which rationale fits their own philosophy and not take for granted that all “buys” are created equal.