Shares digital

It is the data everyone wants to see: which analysts and which stock calls have generated the biggest profit? Russ Mould and Jeremy Lacey sort the men from the boys

It has been a difficult year for investors. The FTSE All-Share has fallen by 15.5% year-to-date and the small cap and Aim indices have fared worse than the nation’s blue-chips, generating losses of 17.7% and 25.2%. But money can still be made, even in a bear market, and Shares has identified the analysts who can best help investors in their quest for punting profits.

After painstaking research, Shares has compiled a database of all changes in broker recommendations to either ‘buy’ or ‘sell’ over the last three months. This exclusive survey has identified the best 50 broker ‘buy’ or ‘sell’ recommendations since 19 May – and every one of these stock calls has generated a profit of at least 26%, even while the FTSE All-Share has fallen by 12.8% during this period.

The data collected by Shares now means investors know exactly whose views they have to consider when they make an investment decision.

There are clear lessons investors can learn from how these investment ideas were formulated and Shares has interviewed key individuals to identify how the calls were developed and what methodologies were used. The data also reveals which broking firms have made the best calls across the last three months overall.

Best of all, Shares will exclusively publish this data every week in the Honest Broker section (formerly Analysts in Action). The survey will track broker upgrades and downgrades, highlight the most effective recommendation changes, and build up a picture of which analysts and stockbroking houses consistently make investors the most money, showing whose advice the market simply has to heed.

And the winners are...

There are already several existing measures of brokers’ performance. These include the highly respected ‘Institutional Investor’ (II) and ‘Thomson Reuters Extel’ (Extel) surveys, where institutional fund managers vote for who they consider to be the best analyst in their given sectors.

II and Extel provide a pan-European approach, but Shares’ survey focuses exclusively on brokers’ recommendations for only UK-quoted stocks

Just as the ultimate arbiter of any company’s performance is its share price, the ultimate judge of a share recommendation is the subsequent performance.

Two conclusions can immediately be drawn from Shares research.

• Following analyst calls does pay off

While it may be a surprise to some, the analyst ratings tracked over the last three months have outperformed the market hugely. Since 19 May, when this survey began, the FTSE All-Share has fallen by 12.8%. Yet had an investor acted immediately and followed every broker ‘buy’ recommendation and sold every ‘sell’, he or she would have lost just 0.9% of their portfolio’s value.

• The top ten firms

It will not shock experienced market watchers to see UBS establish itself as the leading source of the best ideas over the past three months – the Swiss megabank has mopped up all the awards going for UK and European equity research of late, winning the last eight Extel surveys and last seven in II. An average recommendation performance of 9.6% in such a hostile equity environment is a great achievement. In all, 15 of the 34 firms surveyed generated a profit with their recommendations.

UBS is closely followed by Collins Stewart (CLST), with a 7.1% return. It is noticeable these firms had the highest percentage of ‘sell’ recommendations, at 35% and 50% respectively. This suggests a willingness to call the situation as they see it and produce research independent of any desire to curry favour with corporate clients. Numis (NUM:AIM) generated a very respectable 5.1% return despite producing 19 ‘buys’ for every one ‘sell’ rating, showing the merits of a careful stock picking approach, particularly from its general financial sector research team.

THE TOP TEN CALLS

The profit generated by the top ten calls ranged from 45% to 117%. Seven were buys and three were sells. Eight of the stocks hail from sectors which have fallen horribly out of favour in 2008 as the reduced availability of debt and rising rate of inflation have bitten consumers hard. The three sells latched on to these grim trends. Five of the buys identified financials, pub firms and house builders as oversold, recovery plays after their calamitous first-half declines. The other two stocks – IT security consultant Detica (DCA) and electrical vehicle-to-aerial-platform specialist Tanfield (TAN:AIM) – were both in the process of recovering from profit warnings and were seen to be value plays.

Shares has spoken to the analysts who made these calls and investigated their investment philosophy and thought processes.

HOW THE DATA IS COMPILED

Former Shares editor Jeremy Lacey has compiled the Shares broker data over the past three months

Since May, Shares has been tracking the changes in recommendation made by broking firms and publishing them in a weekly table as part of our Analysts in Action section (now Honest Broker) . This week, we take our first look back at the collected data to see how some of those tips have panned out.

For this survey, we are looking only at new buy or sell recommendations and their equivalent (such as overweight and underweight, outperform and underperform), made in the 12 weeks from 19 May. It does not take account of recommendations from before that date or those that have simply been reiterated by the analysts. The survey therefore reflects either changes of recommendation (upgrades or downgrades) or new coverage of a stock by a broking firm.

Many firms, particularly those such as the large investment banks with a predominantly institutional clientele, will say they take a longer view than three months – typically six months to a year. However, the point of this exercise is to give private investors such as Shares readers an idea of how much they might take analysts’ recommendations into account when making their own investment decisions – when you read that so-and-so firm has upgraded or downgraded a stock to buy or sell, should you take that as a signal to do the same?

There are many more analyst recommendations made – hold or neutral, add, reduce, etc – but these are of less interest to the private investor and more relevant to the institutional fund manager who is running a large portfolio of stocks. A fund manager is more likely to be considering whether to tweak his exposure to a particular stock than to take a completely fresh holding or to ditch it completely. For most private investors and traders, especially traders, to buy or sell is the critical decision.

For that reason, for the purposes of this survey only, the buys and sells figure in the calculations. These are straightforward: for each new recommendation, we take the starting price (at the date when the recommendation was first tracked by Shares) and the finish price – ie, the price when the recommendation was changed again or, if it is still current, the closing price at 11 August, when our calculations were performed.

For buy recommendations, the analyst is credited with the performance of the share price over that period, so if the price rises the performance of his recommendation is positive. For sell recommendations, the opposite happens – that is, a fall in the share price generates positive performance and a rise gives negative performance. The best 50 individual performance figures are listed in our Top 50 Calls table.

In the table showing broker firm performance, we have taken an average of each firm’s buy and sell performance figures over the three months. But a word of caution here – many of the recommendations we have tracked are less than three months old and some will only have been in place for a couple of weeks, so it could well be that a firm which appears to have made poor calls will be vindicated in the weeks and months to come. Shares will continue to monitor what is happening and produce more reports on the outcome as time goes by.

1 & 3: Paragon Group of Companies (PAG)

James Hamilton, Numis Securities;

Ian Poulter, Landsbanki

Numis Securities’ James Hamilton issued a ‘buy’ rating on buy-to-let specialist Paragon at 53.8p on 7 July. He valued Paragon on the net present value of future cashflows. While accepting the stock could have easily turned out to be a value trap the analyst comments: ‘At some point you have got to stick your neck on the block, prices cannot go down forever.’ This stance paid off in spades when Paragon received a bid approach on 22 July. Hamilton also made three other top 50 calls. He turned buyer of Alliance & Leicester (AL.) at 248.5p just a week before Santander’s 307p bid and also generated returns of 44% and 31% with ‘buys’ on sub-prime lender Cattles (CTT) and Provident Financial (PFG). The analyst now says the ‘one to definitely go for is HBOS (HBOS)’, which he sees as a recovery play.

Landsbanki’s Ian Poulter also generated big returns on Paragon for his clients, when he advised a ‘buy’ at 66.8p. The analyst was early in his call, as the stock plunged a further 30% to 47p, but he correctly toughed it out. (SK)

2. Mitchells & Butlers (MAB)

Stamatis Draziotis, UBS

6. Styles & Wood (STY)

Andy Brown, Panmure Gordon

A management buyout collapse and profit warning amid market uncertainties by shop fitter Styles & Wood (STY) was enough for Panmure Gordon’s Andy Brown to rate it as a ‘sell’ on 23 May. It was a good call as the stock plummeted from 101.5p to our 11 August cutoff at 15.5p, aided by a second profit warning on 24 June. If we had taken the 22 May closing price as the starting point, Brown’s recommendation would have netted a 85% return. However, it would have been impossible to sell the shares at 101.5p as the market would have already priced down the stock before trading opened on 23 May. To Brown’s credit, taking that day’s closing price of 40.8p, as we have done, still gives a 62% return, putting the analyst in sixth place. ‘With the MBO out the door and retailers cutting back on shop fitting projects, I simply saw no upside potential,’ he says.

8. JD Wetherspoon (JDW)

Richard Carter, Numis Securities

A revival in trading growth for the 11 weeks to 13 July prompted Richard Carter at Numis to reconsider his rating on pubs group JD Wetherspoon (JDW), having previously been worried about deteriorating market conditions. Like-for-like sales moved from a 0.1% decline in the third quarter to growth of 0.4%. Carter believed the 68% drop in the share price in the preceding 12 months more than discounted a weaker economic backdrop and industry cost pressures. Saying all the bad news had been priced into the shares, Carter nudged the stock from an eight-month ‘hold’ period to ‘buy’ on the back of the trading update on 16 July. Taking that night’s closing price of 193p, anyone following Carter’s timely upgrade would have seen their investment gain 50% by our 11 August cut-off point.

9. Daily Mail and General Trust (DMGT)

Charles Peacock, Landsbanki

10. Redrow (RDW)

Mark Stockdale, UBS

The highly experienced Mark Stockdale has a great advantage over many of his rivals as he has covered the building sector during the 1991 downturn. Early June saw the analyst slash forecasts for not just Redrow but also Barratt Developments (BDEV), Persimmon (PSN) and Taylor Wimpey (TW.). ‘We forecast a 20% decline in prices and a 50% decline in volumes by 2009, substantial reductions to earnings per share, significant dividend cuts and possible write downs of around £2.1 billion against the currently anticipated £0.9 billion,’ explained the analyst. After Redrow had promptly plunged 45% Stockdale took the stock back to a neutral rating, arguing: ‘Given the collapse of share prices since April, our cashflow/net tangible asset model makes it hard to maintain sell ratings, particularly as covenants are being re-written.’ Berkeley Group (BKG) remains Stockdale’s only ‘buy’ in the

sector.

OTHER STAND-OUT CALLS

14. Southern Cross Healthcare (SCHE)

Chris Glasper, Brewin Dolphin

A 72% drop in Southern Cross’s (SCHE) share price at the end of June following a disappointing trading update was overdone, according to Brewin Dolphin’s Chris Glasper, who placed a ‘buy’ recommendation on the stock at the start of July. Although Glasper downgraded his two-year forecasts by 21% and 35% respectively, he says the shares were oversold and that ‘on looking objectively at the business and our revised expectations, a fair valuation for the group was 160p, based on conservative valuation criteria (PE of 8 and EV/EBITDA of 5).’ Despite the disappointments and short-term funding issue, Glasper reckons the shares were good value. Glasper joined Brewin Dolphin (or Wise Speke as it was then) in 1999. After six years working as an investment manager, Glasper moved to the investment banking department’s equity research team in 2005 and is now an analyst primarily focused on the healthcare sector, covering around 15 UK-quoted companies. (RR)

16. JJB Sports (JJB)

David Stoddart, Altium

Stoddart recommended JJB at 85.8p because he felt the market had overreacted to gloomy comments from Marks & Spencer’s (MKS) Stuart Rose’s gloomy comments about the retail market. He believed JJB had good scope to improve gross margins this year and the stock was oversold. He closed out his ‘buy’ rating at a month later, believing the shares were now overbought, and he remains bearish about most retailers. ‘The lesson of Japan in the 1990s and the US more recently is that lower interest rates alone will not kick start recovery,’ says Stoddart. He is recommending ASOS (ASC:AIM), which he argues is ‘a breed apart’, the TV shopping group Ideal Shopping Direct (IDS:AIM) and Mulberry (MUL:AIM), which is seeking to ‘develop an international luxury brand with huge potential’.

41. Ashmore Group (ASHM)

Jason Streets, Evolution

A bit of good old fashioned digging led Streets, an analyst of 23 years experience, to put a buy on emerging markets debt fund manager Ashmore. Using statistics readily available on the company’s website, he was able work out, before everyone else, that net inflows during the fiscal fourth quarter were going to come in positive. The market was expecting a repeat of the third quarter when the business recorded net outflows of $0.8 billion but true to his prediction Ashmore’s year-end trading statement on 17 July revealed net inflows of $1.2 billion. Streets, 45, joined Evolution in November 2006 from UBS where he had worked for ten years. Directly before leaving UBS he was covering the asset managers and speciality finance, in the past he has also covered leisure and media companies. He remains a buyer of Ashmore. (SK)