Thursday 10 September 2015

The width of the analysts knowledge

mask, glowing

It has become many reflections lately which comes from that I have been unable to publish any for so long due to quarter reports, annual reports and general updates on analysis. So now that I once again have time especially since I have decided to allow the Personal index funds (that you all hate) only a yearly moment in the spotlight I will publish some more reflections.

I found that on the financial times they were giving out very interesting information regarding companies. It was a bit troublesome to get hold of the information but it was possible and what interested me the most was what did the analysts following the companies that I own say regarding the guided price?

The reason why I find this interesting is because these are professional people that are analysing companies all day every day. These are the people often believing in EMH (Efficient Market Hypothesis) either because they were told so in school, due to conviction or well I guess kind of being forced to believe it to work in the financial institute. Today I would also assume that they are giving the guided price based on DCF (Discounted Cash Flow) valuation but that is only a presumption of me.

These guys look at the reports, maybe even look at press releases and calculate a share price that the company should have. Based in this share price they will then also give recommendations to buy, hold or sell. Sell very rarely appears as suggestion which leave then more or less buy and hold which is an excellent strategy bur hardly what these guys wants you to do since that will give them much less money in terms of fees.

So let us take a look at my current companies their share price and the guided price according to the analysts...

Companies, analysts, share prices

The first observation could be that many of my holdings are in the region of the low price that the analysts gave which should hopefully mean something for the future but that is irrelevant now. Instead I would like to observe the high to low calculation.

One, Eniro, gives 0% which in this case simply means that they are followed by one analyst so easy enough. The other companies do however have anything from three to in some cases over 30 analysts following them.

What I want to have explained to me is: How can it be that professional analysts, sitting with the same information according to EMH, are putting a guided price on a company having a difference of as high as 135%? This should not be possible! Is there anyone out there that can explain this to me?

Sure few analysts follow Kernel so let us instead look at at the DAX30 companies of E.On, Commerzbank or K+S all of them showing a difference of 100%! Can anyone explain how this can happen?

Another highly fascinating thing is that the one analysts giving the lowest guided price often also gave a sell suggestion. What does it then mean when the share price is below that guided price as it is with for instance Tessenderlo? Is then the recommendation automatically a buy?

Conclusion: If the analysts sitting with all the knowledge gives share price variations as large as 100% then anyone can sit and tell the future from the crystal ball. To me this means that the guided prices from analysts are bunk and it will never become the reason for me to either buy, hold or sell a company.

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