iBooyah.com: Analyst reports - To believe or not to believe?
The analyst reports which are issued by the big brokerage firms tell us to buy, hold, and sell. What the heck does that mean? Should you trust it? The common belief is that analyst is supposed to have access to wealth of data that you and I as individual investor don't. Therefore, such reports should be trustworthy, right? If you're buying or selling base on these analyst's report, you probably shouldn’t be investing your hard earn money. It would be much more fun to loose your money in Las Vegas.
Although these reports should serve as a tool when making investment decision, one needs to be careful. These brokerage firms usually have a relationship with the companies they're covering. For example, company X might be a large customer of the analyst's firm. Such relationship is not uncommon; the analyst could be pressured to provide positive report in spite of the fact. Think about it. What company is going to continue doing business with a firm bad mouthing you. There have been many investor lawsuits in recent years that where large brokerage firms have admitted to providing inaccurate reports for their self-interest. Do you remember the dot com bust?
As investor, keep in mind these analysts are not there to look out for your best interest. Their main goal is to push stocks and obtain a fat commission. Despite what these firms may claim, your success is not their number one priority. The only true way to really decide what to invest your in is to learn how to evaluate companies yourself. Here are some ideas:
1. Cash Flow is probably one of the most important statements. Forget about the company's gross revenue. It doesn't tell you anything worthwhile. Company can bring in record revenue, but if they can't hold on to it, it's basically worthless. Concentrate on where the money is coming from and where it is going.
2. Are the fundamentals intact? Companies could report below the view of Wall Street, but if the business is doing well, this could represent an opportunity to their stocks. For instance, this morning Costco (COST) reported a lower than expected profit due to tax liability from overseas operation, but their fundamentals remains strong. The stock takes a 5% hit. This is an opportunity!
3. Merger and Acquisition activities suggest companies are tapped out. When companies decide they need to buy another company to show growth, it should be viewed with some caution as their core business is probably lagging. In some cases, companies will buy another company to cover up financial problems through fancy accounting. Enron's M&A activities are a prime example of this tactic.
Best of luck!
