Why You Can’t Always Trust Analyst Reports

Can we really trust analyst reports when it comes to stock recommendations?

My answer is no. I’ve never trusted analyst reports. While I do read them, I don’t rely on them to decide whether or not to buy a certain stock. Sometimes when the opportunity is right, I’ll even go in the opposite direction of what these reports tell us to do. When they’re all saying “Buy”, I’ll sell. When they say “Sell”, I’ll wait a few more weeks and then start buying in.

The sections I always have the biggest issue with are the valuations and target prices.

If you’re one of those who have always taken analyst reports to be the gospel truth, perhaps this will make you think twice.

The above screenshots are taken from The Edge.

In summary, what happened was:

  • Former banker Yeo Jiawei asked his remisier friend Kelvin Ang Wee Keng to help find analysts able to produce a report to justify the US$ 2.4 billion valuation of PetroSaudi Oil Services (PSOSL).
  • The clients (associated with 1MBDB) were willing to pay up to US$ 300,00 for the report.
  • Kelvin Ang turned to NRA Capital and confirmed that they could produce this report. For producing this “substantial” report, NRA Capital was paid US$ 300,000.
  • Kelvin Ang received US$ 235,000 from NRA Capital in the form of a referral fee.
  • Kelvin Ang pleaded guilty in court on 24 May 2017 for bribing research analyst Jacky Lee Chee Waiy with S$ 3,000 to speed up the preparation of this valuation report.
  • MAS has now publicly announced its intention to serve prohibition orders to Mr Kevin Scully, Chief Executive Officer of NRA Capital, and its former Head of Research, (Jacky) Lee Chee Waiy.

You can read the original reports here, here and here.

Note that NRA Capital touts itself as an “independent equity research house” (their words, not mine). In case we differ in our understanding of the word “independent”, I’ve turned to the proper dictionary definition for the term.

Credits: NRA Capital, taken from their DeClout report

Please tell me I’m not the only one who can see the huge irony here.

A 80% upside? Seriously? But DeClout has not done so well in the past one year, and neither was the listing of
Procurri as successful as NRA Capital said it could be.Take a look at its share price below:
Not that I’m surprised… Remember
how I predicted that Procurri’s share price would tank in my INDEPENDENT analysis
 two months after NRA Capital published theirs? 

In MAS’ announcement, they also had this to say:

“Mr Lee had been the primary person in NRA working on the valuation. Apart from accepting the bribe, he was also found to have applied inappropriate methodology and assumptions in the valuation of PSOSL. As CEO of NRA, Mr Scully had failed to ensure that his analyst…had exercised sufficient care, judgment and objectivity in the valuation of PSOSL.” (The Monetary Authority of Singapore, 30 May 2017)

Now we know that not all analysts reports are as independent as they claim to be.

I’ve always found it disturbing that so many retail investors depend on their brokers and analyst reports for their investment decisions. XX just issued a “Buy” call on Stock A with Target Price of $3.50? Okay, I better buy now then!

I owe a thank you to my friend TTI for first sounding the alert on this, and I hope that more people become aware about this serious matter. Please, think critically the next time you read analyst reports.

With love,
Budget Babe

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