China Minzhong - The analysts don't get it?

Let's talk about an interesting topic today. Analysts reports.

I share with you a real time classic case where reports by analysts may cause you more confusion than help!?. :)

China Minzhong released its 4th quarter results yesterday. Frankly I don't know how to play this stock. It can make you very rich but it can also make you very poor, depending on how you have traded it. It is pretty volatile vis-a-vis the market. If you don't have a strong heart, i suggest you watch from the sidelines. hahaha The weekly chart below for your reference.

Lets just read the different headlines of the analysts reports issued on this company this 2 days and you can get pretty confused.

Macquarie dated 27 Aug 2012

Macquarie continues to give an outperform rating and a $1.40 target price.

Maybank-KimEng 28 Aug 12

Kim Eng went one step further. Not only did it maintain its buy rating and its target price of $1.16, it also had a sexy header on its report suggesting a possible dividend payout since IPO.

Then someone more neutral decided to come into the picture.

CIMB 28 Aug 2012

CIMB downgraded the stock to Neutral and lower its target price to S$0.78.

I always have a hard time trying to understand exactly what "neutral" means in most reports. Does "neutral means sell?" or "does neutral means I don't know?" or "does it mean invest at your own risk?". Neutral is like sitting on a fence, refusing to take a position or stand....

and finally lagi best, we have one report at the other end of the spectrum, an "underweight" rating. Probably underweight means saying sell in a nice way.

JPM 27 Aug 12

JPM says underweight with a price target of $0.70. JPM says a re-rating in future will come via a meaningful dividend.

In case you don't know what China Minzhong do, it is a vegetable grower and the various vegetables are presented below for your consumption.(source from JPM report).

Well here you go. One company, 3 differing analysts' views. Read what you want to read and believe who you want to believe. Isn't this a beauty?!

Most importantly, i give you my view so that you have another view to choose from.

My View

If you have been following my blog, you already know my biased views with regards to companies from certain countries and certain industries such as agricultural and biological assets. sorry to disappoint you ah...my views remain consistent. hahaha

Lesson time - Analysts reports

Anyway, back to my lesson today - analyst reports.

It is good to read the analyst reports for a overview of what the company is doing but do read it with a huge pinch of salt for the following reasons.

Lesson 1 - Companies only invite analysts for site visits because they want them to issue a buy report. 

If you are the management, would you invite analysts to your company if you don't have a good story to share? By the same token, the management will only show the analysts what they want them to write about.

Lesson 2 - Some brokerage firms may have other business dealings with the company and the report is just one of the many dealings. 

It is not unheard of where the 'conclusion' is already given to the analysts by their bosses and analysts have to write the reports without compromising their integrity. Business dealings include corporate finance, share placements, etc. The better governed brokerage firms will usually declare their interest in the reports issued to address any perceived conflict of interest.

Lesson 3. Treat the target price and ratings for guidance only. 

If you are in the investment line, you probably know how financial modelling works. If you don't, here is the key word in financial modelling. Garbage in garbage out. In other words, the model is only as good as your assumptions. If the analyst made some wrong assumptions, then the forecast will be hay wire and you know what assume means right? Assume makes an ass out of you and me. Hence i guess the lesson here will be to follow the right analyst (for example the award winning starmine analysts?) instead. The most important attribute any analyst must have is consistency. As long as the analyst is consistently right or consistently wrong, they are good analysts. hahaha... you don't want to follow an analyst who is right some times and wrong some times, that makes it very difficult for us to profit from their calls.

Lesson 4. Valuation methodologies are subject to changes.

The best part to analysts issuing a target price is that there are many different valuation methodologies to choose from. You can use the Price Earning Ratio, you can use Discounted Cash Flow, you can use Price to Book or when you run out of ideas, use Sum-of-the-parts! In most cases, you can probably start with the target price you want to see and then works backwards to see which methodology meets your needs. hahaha..As such, treat all target prices (including those in my blogs) for reference only. If i am really so good, probably i won't be blogging?! :-P

Lesson 5.  How i use analyst reports

Don't get me wrong and think that analysts reports are useless. They are useful and there are probably some very good analysts out there but the key is to find out for yourself, who the better analysts are.

I primarily use analysts reports to generate investing and trading ideas. The reports help me know the companies better and whether i feel that the reports had been  written in an objective manner.

I also use analysts reports to determine if i should get into certain trading positions. I prefer to long stocks with favorable analysts recommendations primarily because they will re-issue the report every now and then and that will help create momentum and liquidity to the stocks i am trading.  Similarly, it is easier to short a stock that has sell recommendations from analysts.

For long term investing positions (such as those in my SRS account), i will usually read the reports just to keep myself updated on how the company is performing and watch out for any red flags raised. It is good if they agree with my analysis but if they don't it is fine with me as well. As you can see I bought starhub a few years back when most analysts had a sell call on it. Right now they are issuing 'sell calls' again but i am continuing to hold on to it.

That is it for today. 

Happy analyzing and if you like this posting, you follow me either on facebook or twitter.