Everyday research analysts at broking firms are pouring over numbers, tweaking models, meeting management and sifting through annual reports before issuing reports to their institutional clients, who pay big money to hear their opinions.
They don't know everything, but when they change their recommendation from "sell" to "buy", or vice versa, the market listens - and reacts.
So into which companies are the wonks at the big investment banks like Macquarie, Goldman Sachs and UBS telling their clients to put their money? To give you the inside scoop, we've identified the 23 stocks on the ASX that receive a perfect five out of five from the analyst community - the strongest possible consensus "buy" recommendation, as measured by Bloomberg. We limited the field to those companies with at least three analyst opinions.
How one analyst defines a "buy" compared with another can be tricky, as you are not always comparing like with like. Sometimes it's based on the estimated absolute share-price performance over the coming months, other times it's a relative game compared with the sharemarket as a whole. What they do have in common is that an analyst sets a 12-month price target and, factoring in the risk around their estimates, will generally base their recommendation off that. But as you can see, Corporate Travel Management has an implied 12-month return of 9 per cent, well below Linc Energy's 263 per cent, so there's more to it than the distance between the share price now and the estimated number in a year's time.
Looking through the list, it's clear that the analyst community still reckons there are opportunities in the mining sector in the coming 12 months, although there is a bias towards more speculative miners and alternative energy plays. Six of the 23 companies are not expected to make money this financial year. Mining services companies are also well represented.
Of course, a well-placed "sell" recommendation can be just as powerful as a "buy", and there are a number of companies in the analysts' bad books.
Scoring the lowest for consensus analyst recommendations are three real-estate investment trusts, or REITs: Growthpoint Properties, Ale Property Group, and Commonwealth Property Office Fund. Next comes troubled timber company Gunns, followed by Platinum Asset Management. Ten Network, David Jones and Harvey Norman receive the next-lowest consensus scores, with Australian Agricultural Corporation and another REIT, Aspen Group, rounding off the bottom 10.
Does that mean you should forget any thought of buying shares in these businesses? Or dump the ones you already own? Not necessarily it could be the perfect opportunity to pick up an under-appreciated business on a cyclical low. And a consensus "sell" could simply mean that a good business is being way overvalued by the market - the sharemarket is so often a relative game. That also goes for a positive view on a stock.
Finally, keep this in mind: you might be happy to hold on to an "underperforming" stock because you're investing for the long term: three or five years, or longer. Analysts, like much of the professional investment community, are often tied to the short term. Broker recommendations are just one piece of the investment puzzle.