FOOL SCHOOL
Broker Forecasts

November 21, 2001

The problems regarding analysts' recommendations and conflicts of interest have been well documented. Unfortunately, the collective advice of whether to 'BUY BUY BUY' or 'PANIC SELL AND RUN FOR THE HILLS' still seems to be treated with respect it does not deserve, for example in TV slots aimed at private investors.

But although analysts' recommendations are practically worthless, the figures they produce for the investment community estimating earnings numbers do have their uses, as long as you appreciate their limitations. We're likely to see a lot more of them in coming years as brokers look to attract customers by offering more services in this area.

Depending on the size of the company, there may be one or several brokers covering it. Most of the forecasts are compiled with fairly heavy guidance from the company itself. The house broker will often get the first nod and many of the other brokers will follow their lead, making the odd adjustment to make it look less obvious.

Often forecasts for the current year will be more or less accurate, say within 10% or so. But forecasts for smaller companies, or those in fast-moving industries, will tend to be less reliable than those for larger, more mature businesses. The current economic uncertainty means additional salt is required in many cases.

It is now common practice for large companies to issue trading updates at the end of financial periods and therefore several weeks before the full results are published. After this time (known as the close period) a company is not allowed to comment on its results unless it is expected to miss the forecast numbers by a significant amount. Unfortunately, significant in this context is not really defined. Forecasts for subsequent years tend to get less and less reliable with quite astonishing speed.

When a company is doing well it is only too happy to keep brokers up to speed to events. When times are hard the news flow can be less reliable or even come to a complete stop. If you want to place reliance on forecasts it pays to look at the detail behind the consensus figures that are published. These consensus figures contain the latest figures from all brokers covering a stock. Many of them might be months out of date. Watch out for figures that predate any result statements or recent trading statements as they could well be totally obsolete.

It pays to reconstruct your own consensus figure by looking at each individual forecast and discarding old figures. Although this takes more time, and some practice, it is usually worth the effort. Bear in mind the motto "it is better to be roughly right, rather than precisely wrong". On many sites you will need to pay for this data although it can be found for free on FT.com.

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