AAII Investor Update: How Analysts Frustrate Investor Relations Pros

Thursday, April 12, 2012
Charles Rotblut, CFA
AAII Journal Editor

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 28.1%, down 10.0 points
  Neutral: 30.3%, down 3.7 points
  Bearish: 41.6%, up 13.8 points

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »


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Individual investors are not the only ones frustrated with the research provided by brokerage firms. A survey by IR Magazine found many investor relations (IR) professionals who are unhappy with the work done by some analysts.

Investor relations professionals assigned an average rating of 6.5 to brokerage (“sell-side”) analysts, on a scale of one to 10. But more than two-thirds expressed no strong feelings either way. Behind these numbers are many IR professionals who preferred to be tight-lipped about their opinions. Among the minority who were willing to share their opinions, complaints surfaced.

The top gripe was the quality of coverage. Many cited a variance in the quality of reports, with plenty of analysts producing either above-average or below-average research reports. One survey respondent described the situation succinctly: “One third is great, one third is ‘ehh,’ and one third is worthless.” The second-most-common gripe focused on inactive and unengaged analysts. These analysts were described as not doing their background research. They also are slow to update their earnings projections, target prices and buy/sell recommendations.

Several IR professionals thought many analysts are simply passing along recent news and, at times, rumors. Some survey respondents suggested that this happens because analysts focus on providing research to trading firm clients. Others thought that certain analysts are covering too many companies. Some IR professionals opined that American analysts were too focused on domestic operations, even when the company under coverage generates significant revenues and profits abroad.

Having worked with research analysts, I am not surprised by the responses. Some of my former colleagues were very talented, dedicated and thorough. Others were less so.

If you conduct background research on a company—such as reading the annual report and recent earning releases—before looking at a research report, you can get a sense as to whether the analyst is adding any value with his report. You should also look for a person’s name on the report, as some companies publish quantitative research reports, which lack qualitative analysis conducted by analysts. (Keep in mind that a quantitative report may be updated more frequently than a qualitative report written by a subpar analyst.)

You can also get sense of how good a job an analyst is doing by listening to an earnings conference call or reading a transcript. Some analysts are very alert and ask insightful questions. Others appear to be fishing for information to plug into their reports and their models. I’ve also read transcripts where seemingly important questions aren’t even asked.

I think analyst research can be useful in providing an additional opinion and potentially pointing out something an investor has missed. Changes in earnings estimates are particularly noteworthy because, as a group, analysts are usually good at projecting whether earnings will be better or worse than previously thought. However, I never think analyst research should be used as the primary source for determining whether to buy or sell an investment. Bluntly put, there is no substitute for doing your own research.

First-Quarter Earnings Preview

First-quarter earnings for the S&P 500 are expected to have risen 3.3% last quarter, according to data from Thomson Reuters. Excluding Apple (AAPL), profits are projected to have risen 1.9%. These projections represent a sharp decrease from January, when brokerage analysts were projecting 5.5% growth.

Part of the reason for the drop in projections has been company guidance. Out of the 122 companies that have pre-announced results, 83 have issued warnings while just 28 have raised guidance. This equates to a 3.0 negative/positive ratio, which is the worst we have seen since 2008.

Industrial and consumer discretionary companies should report the strongest growth. Materials companies are projected to report a 12.7% drop in profits, even after factoring in Alcoa’s (AA) positive earnings surprise. Telecom, a smaller group, is projected to experience a 13.6% drop.

More on AAII.com

The Week Ahead

Federal tax returns have to be filed by Tuesday.

Earnings season will hit full stride next week with 75 members of the S&P 500 scheduled to report earnings. Included in this group are Dow components Coca-Cola (KO), Intel (INTC) and Johnson & Johnson (JNJ) on Tuesday; American Express (AXP) on Wednesday; Bank of America (BAC), DuPont (DD), Microsoft (MSFT), Traveler’s Companies (TRV) and Verizon (VZ) on Thursday; and McDonald’s (MCD) on Friday.

The week’s first economic reports will be March retail sales, the April Empire State manufacturing survey, the April National Association of Home Builders (NAHB) housing market index and February business inventories, all of which will be published on Monday. Tuesday will feature March housing starts and building permits and March industrial production and capacity utilization. The April Philadelphia Fed survey and March existing home sales will be published on Thursday.

The Treasury department will auction $16 billion of five-year inflation-protected securities (TIPS) on Thursday.

No Federal Reserve officials are currently scheduled to speak.

April stock options will expire on Friday.

AAII Sentiment Survey

Bearish sentiment surged from being below average to an unusually high level in the latest AAII Sentiment Survey. Meanwhile, bullish sentiment plunged to a seven-month low.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 10.0 percentage points to 28.1%. This is the lowest level of optimism registered by our survey since September 22, 2011. The historical average for bullish sentiment is 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, fell 3.7 percentage points to 30.3%. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, surged 13.8 percentage points to 41.6%. This is the highest level of pessimism registered by our survey since October 6, 2011. It also the first time bearish sentiment has been above its historical average of 30% since December 29, 2011.

The difference between bullish and bearish sentiment, the bull-bear spread, fell to -13.5 percentage points. This ended a 14-week streak of positive double-digit differentials, the longest such streak since March 2004. It is also the first negative double-digit spread since last October.

Though there have been underlying concerns about the pace of economic growth, the disappointing March jobs data appears to have brought these worries to the surface. Adding to individual investors' nervousness are the ongoing European sovereign debt crisis, rising gasoline prices, concerns that the market's rally may be losing steam and uncertainty about China’s economy.

At current levels, bearish sentiment is unusually high (one standard deviation above average), but not at levels that we would consider to be a contrarian signal. It may be worth noting that bearish sentiment stayed above 40% for most of last August and September.

This week’s special question asked AAII members what their expectations for first-quarter earnings were. Responses were mixed, though the majority anticipated companies would report higher profits. Some respondents thought earnings would be flat relative to the fourth quarter. Others were bracing for either below-forecast earnings or a decline in profits.

Here is a sampling of the responses:

  • “Most companies will meet or exceed analyst expectations.”
  • “First-quarter earnings will be up slightly from the fourth quarter; they will also be positive for most companies.”
  • “I’m expecting earnings will be slightly up for most companies. Any major surprises and the market will head down.”
  • “Not as strong as in the recent past, but still positive.”
  • “Lower than expectations in most cases and throughout most industries.”

» Take the sentiment survey