How to make most of stock research reports

Stock Market | admin | October 21, 2011 at 5:16 am

Research reports are no more the prized possession of a chosen few. These days, every investor has access to these reports on companies, as most broking firms and various investor groups keep sending them via email to their members. Even otherwise, all one has to do is google the name of the company and chances are that you may get at least half a dozen reports on it.

In short, finding access to research reports is not the least of the problem faced by investors these days. Most investors have a tough time making sense of some of these reports. "An investor may get at least five research reports daily, but they would find little value in most of them," says Alok Ranjan, portfolio manager, Way2Wealth.

MAKING SENSE OF REPORTS

With so many research reports floating around, the first thing you have to do is to figure out whether they serve any purpose. Remember, your hard earned money is at stake here. To begin with, check with your friends who invest in stocks and advisors about the quality of the research reports from a particular source. Don't go by their word alone, though.

Keep track of the reports for a while to be doubly sure about the credibility of the report. For example, when you compare what the analyst said in the report with what has actually happened over a period of time, you get a fair idea about the credibility of the brokerage house.

"You can judge the quality of reports only if you read them from the same brokerage house over a period of time," says Radhika Gupta, founder, Forefront Capital.

ARE THEY MEANT FOR YOU?

Reports differ a great deal in shapes, sizes, number of pages. They may also be written after a particular event, mostly a major one, in the industry. Or there could be a daily report, too. The point is you have to find out whether the research report is intended to serve you."Research reports are written for various classes of investors. You need to understand the context in which the research report was made, and whether it is really meant for you before acting on it," says Aseem Dhru, MD and CEO, HDFC Securities.

For example, there are reports meant primarily for institutional clients like mutual funds and foreign institutional investors. These investors typically invest in largecap stocks. Brokers bring out reports to update clients on quarterly results, the impact of any developments (the downgrading of SBI by Moody's, for instance), and so on. Institutional investors have to invest in stocks and they can't hold much cash unlike retail investors who can hold cash or even invest in debt products. Reports made for these clients won't serve the purpose of small investors.

OUTDATED REPORTS

Often, research reports reach small investors very late. By that time the whole market would have read it, acted on the advice and the stock would have gained or lost. So, check the date of the report. It goes without saying that a report made six months ago on the banking stock or sector may not have any relevance today, because of the changes in the economic scenario and monetary stance of the Reserve Bank of India. It is possible the analyst would have changed his/her views.You would do well to check with your investment advisor and be doubly sure about the report rather than assuming things before taking a final call.

CAN THEY BE TRUSTED?

There have been umpteen cases in the past where unscrupulous brokers have come up with buy recommendations and the stocks have crashed subsequently in a short period, leaving investors high and dry. "Many times the company promoters or a group of investors want to exit a stock and, hence, a buy report may be made," says Radhika Gupta.

A research report is often used as a sales tool by brokerage houses. Hence, an investor needs to be cautious of too many buy recommendations coming from the same brokerage house. Most reputed brokerage firms have disclosures at the end of the re-port which tells whether the analyst or promoter holds the stock or not. Keep an eye for analyst/broker's stake or action.

WHAT TO LOOK FOR IN A REPORT

Check the time frame for which the recommendation is being made and the target price recommended by the analyst. This will help you calculate the returns you can expect in a stock and take a decision accordingly. So if the current market price of a stock is.`100 and the target price is .`125 in a year's time, you can expect a 25% return from the stock. Also if the stock is being recommended with a time frame of a year, you can allocate your funds accordingly. Some brokerages come up with hold recommendations for investors already invested in the stock. They also come up with buy levels for new investors.

The report should be well articulated, easy to read and understand and should reach a logical conclusion. "You need to check if there is consistency and clarity of thought process in the report," says Daljeet S Kohli, head of research, India Nivesh Securities.

ACTING ON A REPORT

Instead of acting solely on the basis of the report, you can also put in some extra efforts to be on the safe side. For example, if you have a buy recommendation, you could read the annual report of the company to make sure that the report got everything right about the company. You can check the annual report for factual things like expansion plans and financial performance. Annual reports of companies are available on their websites. In case of a sell report, check the price movement of the stock. If it has moved up very fast in a very short span of time compared with its peers, it may be a good idea to sell and book profits.

"If you are really convinced about a research report and want to act on it, do a double check by also reading the annual report and exchange filings," says Pankaj Pandey, head of research, ICICI Securities.

FOLLOW A REPORT TO THE LAST WORD

This specifically happens in the case of technical call reports. For example, a report may say: "Buy Reliance at the current price of Rs 780, with a target of Rs 850, and a stop loss of Rs 750." While many investors buy the stock, what they don't or forget to do is to apply the stop loss. When the stock starts moving down, they convert their trading position to long-term investment positions. They then start reading fundamental reports on the stock and making opinions. "Investors need to follow the report in totality, even if it means exiting a stock at a loss," says Aseem Dhru.

Source: Economic Times