Broker and Analyst Recommendation Primer

Submitted by Craig Strzelecki on 8 August, 2006 - 02:26

We will look at what these broker and analyst recommendations actually mean: Overweight, Underweight, Sell, Buy, Reduce...

In the Broker recommendations section you may find some analysts or brokers recommending certain stocks listed on the Australian Stock Exchange (ASX). Some may say they are Overweight or Underweight on a stock while others will claim a stock will Outperform. Some others may actually give instructions like Sell, Buy or Reduce. We will have a look at what these broker and analyst recommendations actually mean.

Overweightand Underweight are general terms used in describing an investment position. Being Overweight on an equity means that your position on the equity is stronger/larger than the generally accepted benchmark. Being Underweight means the opposite - which means your position on the equity is lower than the accepted benchmark. For example, if your equity portfolio normally holds 50 percent stocks and 50 percent cash and you liquidate some of your stock holdings to cash then you are Overweight cash and Underweight stocks.

ABN Amro Morgan recommendations are the following: A Buy or Sell stock recommendation is a target of 15 percent or more in upside or downside. An Add or Reduce stock recommendation means an expected upside or downside of between 5 to 15 percent. A Hold recommendation means that the broker expects less than 5 percent upside or downside. The broker notes that due to the volatility of share prices and because the broker does not change recommendations frequently, such recommendations should be interpreted flexibly. Performance in this context reflects only capital appreciation and the time horizon is 6 to 12 months.

Credit Suisse (CSFB) determines their stock recommendations using the projected excess rate of return on a stock relative to the broad market. Their calculations apply a 2.5 percent volatility cushion. An Outperform recommendation generally means a projected excess rate of return of greater than 7.5 percent. A Neutral recommendation means a projected excess rate of return of between -7.5 percent to 7.5 percent. An Underperform rating means a projected excess rate of return of less than -7.5 percent.

At Deutsche Bank, they have three levels for recommending stocks. A Buy stock recommendation indicates that in the broker's opinion that the stock's total return expected to appreciate 10 percent or more over a 12-month period. A Hold rating infers that the Broker expects total return to be between -10 to 10 percent over a 12 month period. A Sell stock recommendation indicates that the expected total return from the stock is set to depreciate 10 percent or more over a 12 month period.

At JP Morgan, they have five levels of stock recommendation. Given a Buy rating means that the stock's total return (nominal dividend yield plus capital appreciation) is expected to significantly outperform (exceed) the total return of the market ASX 300. An Accumulate rating means that the stock's total return is expected to outperform the total return of the market. Investors may add to existing holdings, or initiate holdings on any share price weakness. A Hold stock recommendation means that the stock is fairly priced in the broker's view, and its total return is expected to perform in line with the total return of the market. A Lighten recommendation means that the stock's total return is expected to under-perform (lag) the total return of the market. Investors may consider selling on any share price gains. Finally, a Sell recommendation means that the stock's total return is expected to significantly under-perform the total return of the market.

Macquarie gives three types of recommendations: Outperform, Neutral and Underperform. An Outperform stock recommendation implies a projected rate of return of greater than 5 percent in excess of benchmark return (or greater than 2.5 percent in excess for listed property trusts). A Neutral recommendation implies a return within 5 percent of benchmark return (or within 2.5 percent for listed property trusts). An Underperform rating implies a return of less than 5 percent below benchmark return (or less than 2.5 percent below for listed property trusts).

Merrill Lynch base their recommendations on indicators of expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating. A Buy recommendation means a target of 10 percent or more for Low and Medium Volatility Risk Securities - 20 percent or more for High Volatility Risk securities. A Neutral recommendation means a target of 0 to 10 percent for Low and Medium Volatility Risk securities - 0 to 20 percent for High Volatility Risk securities. Sell means the stock may have negative return.

For Smith Barney Citigroup, a Buy recommendation means an expected total return of 10 percent or more for Low-Risk stocks, 15 percent or more for Medium-Risk stocks, 20 percent or more for High-Risk stocks, and 35 percent or more for Speculative stocks. A Hold recommendation means an expected return of 0 to10 percent for Low-Risk stocks, 0 to15 percent for Medium-Risk stocks, 0 to 20 percent for High-Risk stocks, and 0 to 35 percent for Speculative stocks. A Sell recommendation means that expected total return is negative.

UBS recommends stocks with consideration of a predictability rating. A "Buy 1" rating means that Forecast Stock Return (FSR) is greater than 10 percent above the Market Return Assumption (MRA), higher degree of predictability. A "Buy 2" rating means that FSR is greater than 10% above the MRA, lower degree of predictability. A "Neutral 1" recommendation means a FSR is between -10 percent and 10 percent of the MRA, higher degree of predictability. A "Neutral 2" means that FSR is between -10 percent and 10 percent of the MRA, lower degree of predictability. A " Reduce 1" means that FSR is less than 10 percent below the MRA, higher degree of predictability. A " Reduce 2" rating means that FSR is less than 10 percent below the MRA, lower degree of predictability.

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