The formal job description of a research analyst, particularly for
equities, is to identify specific stocks that the analyst feels have
more than an even chance of out performing the broad market. But this is
just part of the story. Ultimately the job of a research analyst
involves the entire spectrum of studying and understanding various
industries and their behaviour over the economic/business cycles and the
way specific companies are expected to fare within the industries. A
well-run company in a growing industry is a definite candidate for
investment analysis, while a well run company in a poorly performing
industry may not be a great investment even if it is a great company.
PAGE: How do you arrive at the recommendation of a
"Buy" or a "Sell" for any stock?
An analyst puts a 'Buy' recommendation on a particular stock if it
expected that over a certain period of time, say for a year, its price
or market value is likely to rise more than the overall market. The
opposite holds for a 'Sell' recommendation. However, this is
simplification of an analyst's job who is looking at the fundamental
for a company. I have to consider the overall sector growth prospects
to determine and quantify the demand for the company's products which
lead directly to the forecast of capacity utilization. Followed by a
comparative analysis of the industry, one can assess the pricing power
of the company which directly affects both the top line revenue as
well as the gross margins. One then has to look at the cost related
factors including operating efficiency and effect of leverage before
one forecasts the bottom line earnings and cashflow. All of this leads
to the valuation exercise where I deft various scenarios against my
base case assumptions and ultimately make a judgment call about the
possible range of fair value of the company's share.
PAGE: There maybe a conflict of opinion regarding a
stock recommendation between the trading desk and the research. How do
you avoid such pressures?
The inherent conflict between the need for independent research and
needs of the sales team and trading desk is a major issue and a
problematic one in the securities industry all over the world. This
conflict is not just limited to the sales and research but also
investment banking and research. Recently, in developed markets
particularly the US, the regulators have taken strong measures to make
research more independent from the brokerage houses' sales and
corporate finance functions. In Pakistan currently there is no such
specific regulatory framework in this area. So it really boils down to
the analyst's own professional ethics and personal integrity to resist
pressures from sales and corporate finance to give predetermined
recommendations. It also depends on the ethics of the brokerage
houses' management whether they allow independence in analyst's
recommendations rather than directly or indirectly influencing or
forcing them to make recommendations that the sales desk or the
corporate finance function demands.
PAGE: Why is the research coverage limited to a
very few sectors and concurrently a handful companies?
characteristic of the Pakistan market is severe lack of share
liquidity in all but the most blue chip large capitalized stocks. As a
result, it is not worthwhile to cover all the companies as hardly any
trading takes place in them. Further, shares of these illiquid
companies are held by the sponsors and thus their stock exchange value
can diverge vastly from their fundamental value due to 'sponsors block
trading' or some times even stock price manipulation. In reality, 90%
of the trading volume is generated by not more than 20 stocks and
hence analyst cover of the same.
PAGE: What is the difference in the investment
perspective of local and foreign investors?
investor is mainly looking at the macro level country risk because he
or she is likely to invest in the largest capitalization, top 10 or 12
stocks. If the country risk is reducing then on an average all these
blue chips will move up and if the country risk is deteriorating most
will move down. That is the key concern for the foreign investors. For
domestic investor while country risk is an important factor company
specific fundamentals as well as short term trading opportunities tend
to be more in focus. The domestic investors' potential universe is
likely to be 40 to 50 companies, whereas foreign investors usually
focus top 10 to 12 stocks.