Hi Geoff,
In the case of UBS’ Regis Resources (RRL) call, they have moved from a hold / neutral to a sell, recommending investors sell their position (now) as they expect the share price to move to $1.90 over the next 12 months, from $2.03 on Friday.
More broadly, sell side analysts at brokers tend to run on three different recommendations and generally provide a 12 month price target based on their analysis. The calls are generally in 3 camps with brokers using different terminology for essentially the same call.
- Buy/overweight/positive
- Hold/equal weight/neutral
- Sell/underweight/negative.
In a general sense;
- Buy etc. tells you the analyst thinks the stock will outperform the market/peers over the next 12 months.
- Hold etc. tells you the analyst thinks the stock will perform inline with the market/peers over the next 12 months.
- Sell etc. tells you the analyst thinks the stock will underperform the market/peers over the next 12 months.
In a practical sense, MM view’s buy/overweight as positive, but hold and sell is a quantum of relative negativity. A downgrade of any recommendation is not great, it means the analyst is cooling on the stock for a specific reason, which could be valuation, risk, macro inputs, or some other internal/business reason, such as trade flow on a stock, or the potential (or not) of getting paid for corporate work.
Importantly, brokers have more buys and holds than sells. Not many corporates will hire a broker to raise them money if they have a sell on the stock, so it limits their potential customer base. Some brokers are more corporately driven than others!
While we do listen/read/think about broker research, we do not rely on it to make our decisions, it’s simply a tool in the kit that we use in multiple ways. One such insight is using broker research as a representation of market positioning. We actually get concerned if a stock is all buy-rated or all sell-rated, CBA is a good example of the latter where analysts tend to always have a sell rating on relative valuation grounds, but it’s the bank that typically outperforms the sector.
We would caution against using broker ratings on face value alone.
