Why You Shouldn’t Read Brokerage Research Reports

Why You Shouldn’t Read Brokerage Research Reports

Courtesy of Paul Price at Beating Buffett

Truth can be stranger than fiction. A well-known regional brokerage firm put out this somewhat enigmatic (to me) ‘upgrade’ announcement regarding Lumber Liquidators [NYSE: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-bigcharts

 

ll-5-day-chart-endied-july-26-2012-source-bigcharts

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?

 

Dr. Paul Price July 27, 2012

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