BROKERAGE HOUSE CALLS - SHOULD YOU BLINDLY FOLLOW THEM?

By Ruma Dubey

Maruti Suzuki hit a new 52-week high today at Rs.1854.70 after CLSA upgraded the stock from 'Sell' to 'Buy' with a target price of Rs1915 as it feels that the outlook is finally improving for the company.

Bharat Forge reported an over two times surge in volumes and is strongly up the green and this is also purely because Bank of America Merrill Lynch and Barclays put out a note, upping the target price for the stock.

Volumes at Apollo Tyres counter have risen 1.5 times and stock is up over 3% and this is also after brokerage house Credit Suisse put out an ‘outperform’ on the stock, raising the target price to Rs 131 from Rs 89 as uncertainty over Cooper Tire transaction is over.

And M&M Financial is the top loser on the BSE right since morning and this also thanks to another brokerage house – Kotak Securities, which has downgraded the stock rating to 'Reduce' with a target price of Rs 1,100.

So it looks like it is brokerage houses which call the shots, putting out ‘notes’ which decides the fate of the stock that day. They are essentially the movers and shakers on the market, which is why the question comes to mind - how much relevance should an investor like me and you give to such rating downgrades/upgrades by brokerage houses? Yes, we do need to pay heed to the concerns being evinced by these brokerage houses as they do an extensive research on the companies and have a very close ear to the ground. Many a times, they get a whiff of things much ahead of others.

There are many who argue that these brokerage houses have vested interests in putting out these reports. Many allege that when they want to sell, the brokerage houses put out “buy” calls and the exact opposite when they want to buy. They trap investors when they want to get out.

But these are not small time brokerage houses that we are talking about. They are of international repute and could not have reached this far without being fair. So to pooh-pooh their reports completely would be naïve and not very smart just as believing that they do not have any vested interest would be.

Yet, one needs to also question – are they always right? A few months ago, Citigroup and Barclays downgraded L&T on concerns over order cancellations and weak investment cycle in H2FY14. Following this, L&T was beaten down to pulp. But look hard – the company has been consistently reporting new orders, almost one to two on an average per week. And if one may recollect, BHEL scrapped the bottom when foreign brokering houses downgraded and cut their target price of these stocks. Ditto for Axis Bank.

As traders, maybe one might need to act as quickly as possible but as investors, one should look at the reasons for the upgrade and downgrade and if there is no monumental, long term impact, they stay invested. Remember, what they “sell” today becomes a “buy” later. Thus best to stay invested if you are a long term investor. Like for eg: in L&T, the order cancellation could be a big negative currently but it has got nothing to do with the workings of the company, it is more due to the macro factors. So one needs to understand the relevance of the reasons and then take an intelligent decision.

This is a worldwide phenomenon where brokerage houses constantly publish upgrades and downgrades. And all over, they are eyed with a lot of suspicion. They are always blamed, like we do here, of having vested interests while putting out these reports. They surely might have vested interests in most of the reports but it is up to us as to how we treat this information.

Maybe if you have conviction in a stock, say like L&T, when the rating downgrade pushes the stock price down, it could be the best time to actually go contrarian and buy.

Thus it is our decision entirely about how much importance we give to these reports. Brokerages houses, be it domestic or international, are ultimately about making money and all their actions will be about maximizing their returns. We too need to do the same and stop being a cow in a herd.