Does broker research add value and how can I access it?
Research reports on companies listed on a stock market can provide valuable information to investors, helping them get a handle on the opportunities and threats for a business, thus helping to shape their decision whether to buy the shares or not.
For most retail investors, accessing in-depth written research on companies has always been hard work. Historically, it was only available to big investors like pension funds and asset managers or wealthy private clients of stockbroking firms.
Big investors paid for research through commissions on share trades, which came out of their clients’ funds, whereas private investors paid for it out of their own pockets.
With the introduction of the Mifid 2 directive, big investors had to stop paying for research out of commissions and pay with their own money, which led to a huge drop in research revenues.
This in turn led to a sharp reduction in the number of analysts, with the result that today many smaller stocks are either covered by just one or two research firms or not covered at all, to the detriment of private investors.
However, some senior analysts decided to set up their own independent research firms, some offering paid-for research and some offering it free, paid for by their corporate customers – so-called issuer-sponsored research.
Also, several portals have sprung up in recent years offering access to a wide range of research all under one roof with investors obtaining access on a ‘pay-as-you-go’ basis.
WHAT DO ANALYSTS' RECOMMENDATIONS MEAN?
The definitions can vary from broker to broker, but this is a rough guide:
The shares should rise by 10% or more over the next 12 months
The shares should beat the market or sector over 12 months
The shares will rise or fall by less than 10% over 12 months
The shares will likely lag the market or sector over 12 months
The shares could fall by 10% or more over the next 12 months
FREE TO ACCESS
Among the firms offering free access to their research for retail and institutional investors are Edison, Hardman & Co, Progressive Research and Equity Development.
For example, Edison employs more than 80 analysts and offers coverage of over 400 companies, paid for by the companies it writes about. As well as research it provides interviews with senior executives of companies.
Free research notes tend not to have buy or sell recommendations as they don’t want to show any bias towards the company which commissioned the work. However, these documents are still very valuable in terms of learning about a business. Some will also have earnings forecasts.
A new development in the post-Mifid world is research portals, which gather research notes from various brokers and offer them all under one roof with a centralised account. When a customer buys a research report, the portal pays a fee to the firm which produced it.
Research Tree is one such destination for retail investors as it offers content from more than 30 brokers and research providers. It also has a ‘Short Tracker’ feature which allows customers to see which shares have the biggest outstanding short-selling interest and which have increased or decreased the most in the last month.
BUY, HOLD OR SELL
For the research notes that include recommendations, it’s worth noting there has always been a tendency for analysts to write more buy notes than sell notes.
The reasons for this are two-fold. First, investors are always looking for stocks to buy, and second, writing a sell note on a stock is likely to get an analyst kicked off a company’s call list when it comes to results time.
For the biggest stock in the market, AstraZeneca (AZN), 16 of the 23 analysts who cover the stock have a buy or outperform rating with a minority at hold, underperform or sell.
AstraZeneca shares are up 19% year to date so on paper it seems as though the consensus of analyst views has added value.
However, in the case of Royal Dutch Shell (RDSB), of the 42 analysts who cover the stock – the most for any FTSE 100 company – again at the time of writing 18 have a buy or outperform rating and just two have a sell rating, yet the shares have fallen 44% year to date.
Most investors didn’t need 23 analysts to tell them that during a pandemic AstraZeneca was a buy, just as it didn’t take 42 analysts to work out that if oil prices halved the Royal Dutch Shell price would more or less halve as well so buying the shares was a bad idea.
However, it is worth finding out when the buy or sell notes were issued, as it could be that some of the analysts are saying a stock has gone too high and so it is a sell on valuation grounds, or a stock has been sold down too far so there could be value at the current price.
WHAT IS A ‘HOUSE’ STOCK?
As well as writing research on companies, most broking firms offer corporate services such as making a market in their shares, underwriting share offers and promoting the stock to investors.
When an analyst refers to a company as a ‘house stock’ it means the brokerage has a corporate relationship with that firm and therefore has a vested interest.
That doesn’t mean the analyst has to flatter the company in their research, but it makes it unlikely they would put a sell recommendation on the stock so at worst they might have a hold recommendation.
Alternatively, they might have a neutral recommendation, meaning they expect the stock to perform in line with the rest of the companies in its sector as opposed to outperform or underperform.
If they want to play it safe, they can stick a corporate recommendation on the stock which avoids having to give any kind of view.
House brokers are obliged to make it clear in their research that they have a corporate relationship with the firm they are covering.
DO ANALYSTS ADD VALUE?
Broker research can be a useful tool but only if it supplements your own research and good old-fashioned common sense.
For example, at the time of writing among the most loved stocks in the FTSE – which we have calculated as those with highest percentage of buy and outperform ratings divided by the number of analysts covering the stock – a working knowledge of the companies, the sectors in which they operate and the news flow would have been just as useful as paying attention to the bullish consensus.
Similarly, for stocks feeling the least love from the market, a basic knowledge of the companies themselves, the sectors they operate in and what drives them should have been enough to help investors avoid the big losers.