The world of research brokers. while im on holidays
The following is a tongue-in-cheek review of my 30+ years dealing with the research side of broking. This group is highly heterogeneous, much more than I suspect other highly paid professions like doctors, dentists, pilots etc. I would add they are amongst the most different in ability and usefulness that exists at this level of pay. The following is a shirt lift due to the constant comments about broker calls and PT’s that the retail punters seem to consistently hold with some type of esteem.
Another factor to be remembered is that broking is, firstly, and probably lastly, a business. These dudes are here to make money, if that means their clients make money great, if not well, ahh, move on. The best way for brokers, in this case, to make money is to generate trades, a buy is obviously better than a sell, since the client can always buy but may not own the stock to sell it. It helps if the stock is in the cross hairs with uncertainty or volatility to help dislodge wavering insto’s. When I read a broker report the first thing I look at is who wrote it. As the years go by and my knowledge of the existing brokers fades (with churn in the industry etc), that is becoming less worthwhile but it still highlights the importance of the variability in the quality of the report, focussing on who wrote it? Below are my generalisations of brokers over the years I have encountered.
1. The MBA dux of the year. This guy is usually straight out of university and with first-class honours and has been a brilliant student. On joining a broker he is given an industry to follow, a few months to come “up to speed” and then launched into a marketing campaign with the report in tow. Outside of a “new set of eyes” and a huge, brilliantly compiled spreadsheet with a few thousand lines, unfortunately, these guys probably still have some work to do to become good analysts and add real value. In time some do. They know the theory well, but not the depth of knowledge that comes with experience.
2. The industry stalwart. This guy knows a lot about the industry having come from a division of one of the big operators. He knows the product sets of each company in the industry, knows some of the people, and the intensity of competition, strengths and weaknesses or at least has an informed view. He also does not know anything much about the stock market or valuations. His valuation work can be quite elementary and may contain some issues. The point is this guy is useful because he fills in the void of industry knowledge not in the disclosed financials. I wouldn’t necessarily rely on his valuations or PT’s.
3. The golfing buddy. This guy knows the CEO or CFO intimately. He can give you a rundown of his social connections, how he spends his time when away from his wife, for instance, or his temperament and his character. For the broker, his relationship with the C suite is a chance for ECM or M&A work, much more lucrative than broking! I wouldn't rely on his price targets. As an aside some of the stuff, I have heard from these guys are a CEO who couldn’t keep out of the girlie bars when on post-result tour, another CEO who made an overseas acquisition because he had a mistress there (there may have been two of these lol). Put that into your DCF!
4. The market animal. This guy is all over market movements, continually on the phone gathering information on who is buying who is selling, and most importantly, have they privileged info and where did they get it. These high-energy guys rarely write any written reports or small “immediate buy now” reports because they have come onto something. The antics here are variations of front running and I found the whole thing a bit dicey. Not saying the information wasn’t useful, it was, it was just hard to fit into your process at times and keep your virtue. Didn’t bother others! Their price targets can be variable and transitory.
5. The disinterested. This guy has a real interest in banks for example. The broker hierarchy has also given him the insurance sector to cover. He has no real interest in insurance and does the basics in coverage to get by. Post results notes, price target and buy/sell recommendation. Of course, the sectors here can vary. I would pay attention to their skilled work and not much to the other work.
6. The technician. This guy wants to take himself away from the hurly-burly of market obsessions with beats and misses, momentum stories, index changes, high-level macro calls etc etc and just sit in a bubble and look at the fundamental company dynamics. Where the company will sit in a few years given the industry changes and current valuation. These guys are probably the most useful, to me anyway. When I took on a new sector, I met an experienced analyst and asked him what other institutions had asked, ie what I had missed, he sighed and said all they want to know is if the next result will be above or below consensus. They may not be the most popular on the dealing desks for obvious reasons.
Ok so that’s a cynical view of the world, but that’s the way of the world in this case. My biggest beef with brokers was that they gave you what they wanted to give you, not necessarily what you needed or wanted, that’s life. Given the above ramblings, I have a huge issue with punters relying on individual broker price targets or buy/sell calls from any of the above without knowing where that broker sits in the tree, alternatively comparing their valuation with your existing one can be a useful starting point.
Have to admit writing this did give me a few laughs