Between the lines

Saturday 1st September 2001

How to decipher broker-speak

Faced with increasing conflicts between their independent advice, the touchiness of corporates and the demands of the investment banking parts of the business, analysts have learned to speak in a new language in their reports - one that goes as close to the reality of the situation as possible, without upsetting their big clients. All investors have to do is learn the code.

Here are some tips:

The most crucial sign for investors to look for is a change in status of a stock. Seasoned investors know that when an analyst downgrades a recommendation - from a "buy" to an "accumulate", or "accumulate" to "hold", for example - he or she's probably telling punters to sell. If the analyst skips a grade - "strong buy" to "hold", or "buy" to "reduce", for example - that's a strong negative message. On July 14, for example, US-based analyst Kurtis King cut his rating on personal computer maker Gateway from a "strong buy" to a "buy". Investors took the hint. They sold. The stock fell 16%, rising again only when King put the strong buy message back.
You might think that those portfolio recommendations (overweight, underweight and so on) are designed for larger or institutional investors. Don't ignore them. They can be the way brokers convey a sell recommendation without offending the corporate. "Recently I was looking at one firm's picks on Telecom," one investor told Unlimited. "The company was marked a 'buy', but when you looked at the weighting, it was 'underweight'." That means sell.
Similarly, when analysts change the portfolio recommendation from overweight to marketweight they probably mean sell. And once analysts start using the innocuous-sounding word "underweight", you know they're worried. When they say "reduce" they actually mean "sell".
Find out as much as you can about your brokers' non-broking activities so you can make better informed decisions. Read to the end of those tedious reports - brokers have a duty to disclose any conflict between their broking and other activities, like being the advisors for a float. Keep an eye out for another tell-tale sign of involvement - a broker simply dropping a company off its recommended list.
And ring your broker before you buy, advises Arthur Lim. The market changes constantly, so even if you aren't talking about huge sums of money, call up to see whether your broker's recommendation still stands.

Nikki Mandow
nikki@unlimited.net.nz

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