# Anyone else think that the "Hold" analyst recommendation is non-sensical?



## opulence (19 June 2011)

Not that I'm a big follower of analyst consensus but I just started wondering about it and looked up the definition. 

"_A "hold recommendation" is an analyst's opinion that can loosely be interpreted to mean that a stock should be kept by individuals who already own it, but should not be purchased by those who do not already own it. A hold recommendation is generally better than a sell recommendation but worse than a buy recommendation, and it usually means that the analyst believes the stock will remain fairly stable and keep pace with, but not surpass, the market. Holds are also referred to as "neutral" or "market perform" recommendations._"

So for those not owning the stock, they're saying "don't bother buying it, we envisage mediocre returns so look elsewhere"

To those that do own it " well you're invested now, you might as well stick with it".

The only difference between someone who holds the stock and someone who doesnt is the transaction cost. So the only way this makes sense is if the analyst thinks that the returns will only be sufficient enough to cover the cost of your sell order if you hold.

That's hardly a margin of safety...

Have I missed something??

Edit: I guess there's also the 12month tax hurdle too but most recommendations are not to know the tax situation of the individual. Hence the disclaimer fine print at the end of any advice.


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## Synergy (19 June 2011)

*Re: Does anyone else think that the "Hold" analyst recommendation is non-sensical?*

Yep it's a total cop out. Fence sitting. An each way bet. 

Your logic seems right to me... If it's not good enough to buy, it's not good enough to hold.


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## jaystar86 (19 June 2011)

*Re: Does anyone else think that the "Hold" analyst recommendation is non-sensical?*

Or they are saying,

"To those that own it, please hold your shares in hope while we sell our shares at these prices" or

"To those that don't own it, please don't buy it, we need to accumulate our holdings before upgrading our stance to buy"


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## opulence (19 June 2011)

*Re: Does anyone else think that the "Hold" analyst recommendation is non-sensical?*



jaystar86 said:


> Or they are saying,
> 
> "To those that own it, please hold your shares in hope while we sell our shares at these prices" or
> 
> "To those that don't own it, please don't buy it, we need to accumulate our holdings before upgrading our stance to buy"





Haha. I like the way you think.


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## Tyler Durden (19 June 2011)

opulence said:


> Not that I'm a big follower of analyst consensus but I just started wondering about it and looked up the definition.
> 
> "_A "hold recommendation" is an analyst's opinion that can loosely be interpreted to mean that a stock should be kept by individuals who already own it, but should not be purchased by those who do not already own it. A hold recommendation is generally better than a sell recommendation but worse than a buy recommendation, and it usually means that the analyst believes the stock will remain fairly stable and keep pace with, but not surpass, the market. Holds are also referred to as "neutral" or "market perform" recommendations._"
> 
> ...




I never thought of it that way, good thinking


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## So_Cynical (19 June 2011)

Hold sounds better than do nothing/cant decide/i have NFI


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## skc (20 June 2011)

For those sitting on large captial gains hold is a decent recommendation.

Say you bought $5K of shares and are now worth $10K, you need to pay CGT ~$2K (if no 12-month discount) or $1K (with discount).

Let's say your share is yielding 6% on the $10K so $600 a year.

If you do sell the share you will only pocket $8K or $9K. To get same $600 income from that you will need to find something that's got a dividend yield of 6.7 to 7.5%.

So in the absence of such opportunity, hold is a sensible action (non-action). 

Take a longer term view...

$10K at 15% compounded over 10 year before tax you get $40K in the end. Sell at the end of 10 years you will pay ~$6K CGT and pocket ~$34K.

If you pay CGT every year and want to turn $10K into $34K in 10 years, you need to earn ~19% total return p.a.

"Hold" allows you to take advantage of compounding before tax. Provided all else being equal of course...


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## Tysonboss1 (21 June 2011)

I see it as the following,

Buy - Share is under valued and it's yield and high chance of upward correction means it should be bought

Sell - Share is over valued and it's low yield and high chance of down ward correction mean it should be sold.

Hold - Share is trading at about fair value at a reasonable yield, and has equal chances of being pushed higher or lower due to external market forces.


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## Bowlane (22 June 2011)

A respected business commentator offered these translations of brokerese many years ago:

¦Strong buy (yes, that is a winner).
¦Buy (we are hoping it will become a corporate client).
¦Speculative buy (broker had dinner with a director).
¦Buy on weakness (don't buy).
¦Add/accumulate (the stock has no liquidity).
¦Long-term hold (we are brokers to the company).
¦Hold (we want to get another client out first).
¦Avoid (sell immediately).
¦Reduce/Sell (it is probably too late to get out).


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## ENP (22 June 2011)

Analysts recommendations are useless. They say sell when the price is going down and buy when it is going up. 

Two Warren Buffett quotes spring to mind...

"the dumbest reason to buy a stock is because you think the price is going to go up"

"if it's not worth owning for 10 years, you shouldn't own it for even 10 minutes"


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## Julia (22 June 2011)

Have any of you considered that analyst recommendations may not actually be entirely pure in intent?  e.g. is it, do you think, just remotely possible that they will issue a Buy recommendation if a major client wants to get rid of a chunk of stock?


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## Tyler Durden (22 June 2011)

ENP said:


> Two Warren Buffett quotes spring to mind...
> 
> "the dumbest reason to buy a stock is because you think the price is going to go up"




I know the dude is well-respected and has a successful history...but surely a vast majority of people buy because they think the price will go up? What is the point in buying a company which I think has the right fundamentals but the SP won't go up?

The market is based on sentiment.


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## Ferret (23 June 2011)

skc said:


> For those sitting on large captial gains hold is a decent recommendation.




Agree.  And SKC's explanation is pretty solid too.

All in all, I don't place much weight on analysts' recommendations, but I do think "hold" in a legitimate call.



Julia said:


> Have any of you considered that analyst recommendations may not actually be entirely pure in intent?  e.g. is it, do you think, just remotely possible that they will issue a Buy recommendation if a major client wants to get rid of a chunk of stock?




Don't agree with that, Julia.  Analysts are in a competitive business.  They survive by getting more calls right than the other guy.  Wrong calls will be remembered and they can't afford to intentionally do that.


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## Tysonboss1 (23 June 2011)

Tyler Durden said:


> I know the dude is well-respected and has a successful history...but surely a vast majority of people buy because they think the price will go up? What is the point in buying a company which I think has the right fundamentals but the SP won't go up?
> 
> The market is based on sentiment.




If a company owns strong expanding businesses that are generating ever increasing earnings and for what ever reason the stock market under values it for a short time, you should buy it, Over time you can be assured that it's true value will eventually be recognised and share price growth will come.

This is different to Buying a company inwhich you have no idea of the related values simply because you believe the price will go up. 

It's all about your mind set, Some people buy stocks, others buy businesses.

Think about all the crashes in history, the one common factor is large amounts of people massively over paying and bidding up prices in a speculative frenzy just because they think "prices" will contiune to go up and they don't want to miss out. 

So they end up buying $1 coins for $4 or $5 dollars. The same people after the crash are so shattered and fearful that when the $1 coins are on sale for 40c they refuse to buy.


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## Tysonboss1 (23 June 2011)

Julia said:


> Have any of you considered that analyst recommendations may not actually be entirely pure in intent?  e.g. is it, do you think, just remotely possible that they will issue a Buy recommendation if a major client wants to get rid of a chunk of stock?




I personally don't look at recommendations at all.


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## Julia (23 June 2011)

Ferret said:


> Don't agree with that, Julia.  Analysts are in a competitive business.  They survive by getting more calls right than the other guy.  Wrong calls will be remembered and they can't afford to intentionally do that.



Spoke with a bloke a couple of years ago who had worked as an analyst with one of the larger firms and he admitted this happens.  Says even just the recommendation when published will move stock in the suggested direction.  One would hope it's not that common.



Tysonboss1 said:


> I personally don't look at recommendations at all.



 Me neither.


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## skc (23 June 2011)

Tysonboss1 said:


> I personally don't look at recommendations at all.




I pay a lot of attention to recommendations. I don't necessarily follow them, but one needs to acknowledge the fact that recommendations do move markets.

E.g. I am looking to short XXX, but a major analyst just but a buy on them - you can see the market depth changes to favour the buy side and a shorter like me would get a better entry by waiting a few days.

The major analysts are the likes of DB, RBS, Citi, GS etc...


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## skc (23 June 2011)

Julia said:


> Spoke with a bloke a couple of years ago who had worked as an analyst with one of the larger firms and he admitted this happens.  Says even just the recommendation when published will move stock in the suggested direction.  One would hope it's not that common..




Not surprised that it happens. The supposed Chinese Walls inside a large investment bank is at best paper thin....

However I am surprised that they'd tell you!


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## Tysonboss1 (23 June 2011)

skc said:


> I pay a lot of attention to recommendations. I don't necessarily follow them, but one needs to acknowledge the fact that recommendations do move markets.
> ...




It is not a factor in my Analysis at all.

My analysis is niether right or wrong because some body else aggrees or disaggrees. 

As you mentioned it might play a part in some short term speculative play, but that is not the game I am in.

It would be silly of me to ignore my own analysis which is done knowing my time frames risk profile and expectations and use some one else's whom my be operating using different expectations timeframes and risk profile.


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## InvisbleInvestor (23 June 2011)

Tyler Durden said:


> I know the dude is well-respected and has a successful history...but surely a vast majority of people buy because they think the price will go up? What is the point in buying a company which I think has the right fundamentals but the SP won't go up?
> 
> The market is based on sentiment.




The quote was, 'don't buy stocks you _think_ will go up.' Maybe Buffet is hinting to only buy stocks you _know_ will rise. And Buffet being a value investor obviously meant long term. The market is based on sentiment in the short term.


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## TabJockey (23 June 2011)

Warren buffet does not care about market price unless its very cheap. He never buys stock to sell at a gain, he buys stock to own businesses that produce cash flow.

To understand analyst ratings you have to understand the job and objectives of the analyst. Analysts use industry experience/connections and financial valuation to identify stocks that are undervalued on a fundamental financial basis. They will often give a price target, which is usually close to the fair value of the firm in one years time. Sometimes the market re rates the stock within the year closer to actual value, sometimes it does not.

Analysts aim to find and expose value creation "stories" that ring true with funds managers and high net worth clients and this creates brokerage revenue for the firm. Also analysts can attract investment banking business, by giving the company exposure in hope that the company will chose their firm for any corporate finance business in the future.

The "Hold" rating happens when a stock that was previously initiated at a buy, is now almost fairly valued for whatever reason. The stock now has a predicted total shareholder return of ~10% over the next year and if you are holding allot of stock, to sell now would a) incur capital gains b) drive down the price and c) throw away the possibility of further out performance by a stock with a track record.

Of coarse there are many many other ways a stock could goto a "hold" for example if the stock tanks 50% on sentiment, and the immediate future looks bleak, but its still undervalued fundamentally. If it was a buy at $1 and nothing in the future cash flows have changed, it cant be a sell at 50c.

A major reason why analysts seldom put a stock on "Sell" but do put them to "hold" when bad times hit, is that a Sell rating will impact the share price even more to the downside and put the analyst into the bad books with that company. The analyst could get a reputation in the industry as someone you don't want to cover your company because you could get down graded to a sell!

The job of an analyst has very delicate politics involved within his/her firm and with external parties. It is not an easy job by any means to balance all the stakeholders! Many analysts have been led astray in the past, and it takes a judge of character to identify what analysts are going to be the most reputable in their research.

So as a retail investor, the best bet is to read analyst reports, but ignore recommendations! Analyst reports are almost always very high quality financial analysis and you can draw your own conclusions from the legwork that has been done by somebody else.


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## ENP (23 June 2011)

Tyler Durden said:


> I know the dude is well-respected and has a successful history...but surely a vast majority of people buy because they think the price will go up? What is the point in buying a company which I think has the right fundamentals but the SP won't go up?
> 
> The market is based on sentiment.




You buy because you think the business itself will improve and generate more profits/earnings over time. Not because the stock on the market will make you money by its price increasing. There is a difference.


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## Julia (23 June 2011)

ENP said:


> You buy because you think the business itself will improve and generate more profits/earnings over time. Not because the stock on the market will make you money by its price increasing. There is a difference.



There are several threads on this forum comparing fundamental and technical analysis.  You might broaden your outlook and therefore your potential profitability if you were to do a search and read some of these.


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## Boggo (24 June 2011)

ENP said:


> You buy *because you think the business itself will improve* and generate more profits/earnings over time. Not because *the stock on the market will make you money by its price increasing*. There is a difference.




I have highlighted the two bits where you are right, there is an enormous difference, think and make being the two operative words.
Unless you own the company the latter highlighting is the one that applies to you.

One makes money for you directly, the other makes money for managers, directors, flashy offices and any other necessary outlays, then you may eventually _reap_ the benefits of what is left over.

Look at Qantas, bet none of the "investors" on here who espouse their virtues were on the Grange Hermitage distribution list last Christmas.


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## InvisbleInvestor (24 June 2011)

Boggo said:


> One makes money for you directly, the other makes money for managers, directors, flashy offices and any other necessary outlays, then you may eventually _reap_ the benefits of what is left over.




Sounds like management isn't doing what they should. In the interest of the shareholders, profits should be passed on, not spent on flashy offices, or an overseas trip, right?


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## Julia (24 June 2011)

InvisbleInvestor said:


> Sounds like management isn't doing what they should. In the interest of the shareholders, profits should be passed on, not spent on flashy offices, or an overseas trip, right?



 Perhaps a 'flashy office' helps that CEO to think better?  Perhaps his foreign buyers place considerable importance on the appearance of status which is represented by an impressive office?

Perhaps the overseas trip is to make new contacts to advance the business?  Or simply to keep the company's management up with what's going on outside of the antipodes?

Why should all profits be 'passed on'?   Many very successful businesses put much of their profit back into growing the business which in turn may be expected to grow the SP for the benefits of shareholders.

Could go on.
Sigh.


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## Tysonboss1 (28 June 2011)

Julia said:


> Why should all profits be 'passed on'?   Many very successful businesses put much of their profit back into growing the business which in turn may be expected to grow the SP for the benefits of shareholders.




Which is great provided those funds are invested in such a way that justifies those funds being retained. But unfortunatly there are many cases where the funds are invested poorly and value is destroyed.

For example if a company retains $1M and uses it for a deposit to make a $10M investment which in latter years due to poor performance has to be written down in value to $5M.

Fosters take over of southcorp happened this way, Hundreds of millions was written of that investment with a stroke of a pen, which could have been prevented by not overpaying in the first place. Just because a CEO is a good operator does not always make him the best allocator of capital.

Alot of CEO's make big investments at the wrong time, over paying for take overs and destroying value, Or buying back company stock at $50 and having no funds or no confidence to buy back stock at $30 ( think BHP)

Coles could end up being a big write down for wesfarmers, the return on the capital they invested is low, which is a sign they may have over paid and may need to make some write downs.


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## Boggo (28 June 2011)

Another example perhaps...

_AMP announces merger with AXA to cost $30million in first half of 2011
    From: AAP
    June 28, 2011 8:23AM

AMP reported in a statement today that M&A transaction costs for the first half of 2011 are expected to be *$30 million* and relate primarily to the costs associated with the merger of AXA and include legal, financing and investment banking costs.

"These M&A transaction costs are not part of the merger integration budget," the statement reported.

AMP said AXA's financial results for the three months to June 30, 2011, would be reported separately at AMP's first half results announcement on August 18, 2011.

Also, AMP said it would provide an update on integration costs as part of its results announcement._


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## Julia (28 June 2011)

Tysonboss1 said:


> Which is great provided those funds are invested in such a way that justifies those funds being retained. But unfortunatly there are many cases where the funds are invested poorly and value is destroyed.



Well, yes, quite obviously it's only useful to shareholders if the invested funds are placed wisely.

I was simply trying to explain to whomever it was who suggested the shareholders weren't getting a decent deal (or words to that effect) unless all profits were paid out as dividends, that these profits can actually bring greater returns to the shareholders if wisely ploughed back into the business in such a way as to promote growth of the SP, this latter often being ultimately more rewarding to said shareholders than the value of an increased dividend.

OK?


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## kingcarmleo (29 June 2011)

IMO hold is a way for a broker to say " I told you so" , they can easily flip it positive or negative. Nothing is ever really a hold imo you can't sit on the fence for stocks.


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## lazyfish (2 July 2011)

opulence said:


> Not that I'm a big follower of analyst consensus but I just started wondering about it and looked up the definition.
> 
> "_A "hold recommendation" is an analyst's opinion that can loosely be interpreted to mean that a stock should be kept by individuals who already own it, but should not be purchased by those who do not already own it. A hold recommendation is generally better than a sell recommendation but worse than a buy recommendation, and it usually means that the analyst believes the stock will remain fairly stable and keep pace with, but not surpass, the market. Holds are also referred to as "neutral" or "market perform" recommendations._"
> 
> ...




You can look at this from another angle. Research reports are mainly written for institutional clients. Unlike retail investors it is rather hard for institutions to enter or exit large positions and the associated costs esp related to illiquidity could be high. A hold means the stock is expected to perform inline with market (i.e. +ve most of the time), and is therefore valuable if your exit costs are high, and/or that you have nothing else to buy.


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