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Why You Shouldn’t Read Brokerage Research Reports

July 27, 2012 | About:
Truth can be stranger than fiction. A well-known regional brokerage firm put out this somewhat enigmatic (to me) ‘upgrade’ announcement regarding Lumber Liquidators (LL) on Thursday July 26th.

It was further distributed by Barrons.com later that same day. I am withholding the name of the opinion’s authors to protect the guilty.

Barrons noted that with LL at $41.31 the brokerage firm was moving from a SELL rating to NEUTRAL. The researchers noted that LL had had downgraded to SELL on February 14, 2012 on fears of a declining growth rate and management’s desire for a sharper focus on existing operations.

LL’s closing price on February 14, 2012: $21.16 Rating: SELL

ll-feb-15-2011-feb-14-2012-daily-source-

ll-5-day-chart-endied-july-26-2012-sourc

The trio of analysts fessed up to having been wrong while the shares had doubled. They gave explanations for missing two key factors that might have kept them from the misguided Valentine’s Day lack of love for LL.

In a final, hard to imagine, conclusion they noted their ‘fair value’ estimate was now $35 as “…beats and raises are required for the remainder of the year to justify current valuation.”

Translation: Barring unexpected good news our Neutral rating would allow for a 16.9% drop to our own estimate of true value.

Do clients see value in this type of research? Why did Barrons.com republish this?

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 4.1/5 (13 votes)

Comments

kfh227
Kfh227 premium member - 2 years ago


These people largely just reiterate what is in the risks section of the annual report than anyone can read on their own.

They also lack alot of understanding of important things like cognative biases. Then again, that doesn't matter. Their role is to get the names of their comapnies out in the public as much as possible in order to drive people towards their mutual funds.
Dr. Paul Price
Dr. Paul Price premium member - 2 years ago


I don't think that selling just before a double and going neutral at 17% overvalued is the right way to attract clients.
mitchellong
Mitchellong premium member - 2 years ago
Unless they might be on the other side of the trade?

Gaffey
Gaffey - 2 years ago


The current Morningstar and Bank of America assesments of Amazon are similarly baffling.

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