What Are Broker Recommendations?

Submitted by Marco Palmero on 9 June, 2013 - 06:39

Broker recommendations are guidance documents that brokers periodically release to help advise their clients of companies to watch on the stock market.

Australian stockbroker CommSec, releases a "Research Wrap" document weekly and usually arrives after market close on Friday. The research wrap usually includes stocks which the research arm of the stock broker recommends to watch in the upcoming week or weeks. Keep in mind that the research provided is delayed - since it takes time to compile these reports - and the market may have already moved in favour of the recommendation. Here is a previous Primer for these Broker Recommendations.

Each broker recommendation typically includes a few stocks, their 12 month share price target that the analysts forecast for the stock, upcoming dividends, earnings forecasts and other notes to think about with regard to the company's direction and position in the market. The research from CommSec's Research wrap is sourced from CBA Institutional Equities Investment analysts.

In each of the broker recommendations, they rate the the stock as Overweight, Neutral or Underweight. The rating is from the covering analyst's assessment of the stock's expected total shareholder return (TSR). In this particular case the TSR is the difference between the analyst's 12-month price target and the current share price plus the forecast dividend yield. So if the 12 month price target is $20, current share price is $15 and expected dividend is $1 then the respective stock recommendation would probably be "Overweight". These are the actual definitions of those terms as provided by the broker:

Overweight: Stocks with an Overweight recommendation represent the most attractive stocks under the analyst’s coverage. They are generally forecast to generate higher TSR compared to the rest of the analyst’s coverage.

Neutral: Stocks with a Neutral recommendation are less attractive than stocks with an Overweight recommendation. They are generally forecast to generate lower TSR compared to stocks with an Overweight recommendation in the analyst’s coverage.

Underweight: Stocks with an Underweight recommendation are the least attractive stocks. They are generally forecast to generate lower TSR compared to stocks with a Neutral recommendation in the analyst’s coverage.

You'll probably find the definitions themselves vague and non-exact and leaves it to you the investor/trader to do your own (limited) research to make a decision whether or not to invest in the stock. It may be a good idea to look into the old research if you have access to them and follow up on their performance, or just track current recommendations and follow their progress.

CBA did change their broker recommendation definitions in previous years. Prior to 9 November 2012 they were using a more specific construct:

Buy: Stocks with a Buy recommendation represent the most attractive stocks under the analyst’s coverage. They are forecast to generate significantly positive expected total shareholder returns.

Hold: Stocks with a Hold recommendation are less attractive than stocks with a Buy recommendation. They are forecast to generate flat to slightly positive expected total shareholder returns.

Sell: Stocks with a Sell recommendation are the least attractive stocks. They are forecast to generate flat or negative expected total shareholder returns.

CBA's previous recommendations prior to 25 January 2010 were:

Short term (over 6 months): Buy – appreciate by >10%, Accumulate – increase between 2% and 10%, Reduce – increase by less than 2% or fall by up to 5%, Sell – fall by >5%.

Long term (24 months) Outperform (O / P): exceed market return by >5%, Market Perform (M / P) – be in line with market return, +/-5%, Under Perform (U / P) – be less than market return by >5%.

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