Posted by Scott Keefer on Jun 21st, 2008

Most of the financial press over the last few days has concentrated on the sharp movements in share value of Babcock & Brown Limited (BNB) and its related entities. Much of the commentary has turned to the underlying strategies of the B&B model and the huge levels of debt involved. Some blame has been placed at the feet of those nasty hedge funds and short selling but it would appear, as has been the case with the other major casualties so far this year, that the real story is about the level of debt being carried by the organisation and in Babcock’s case the debt involved with the entities from which it draws its impressive fees.

The fall in shareholder value is a intersting point of discussion, especially for holders of these investments, but of greater interest to me has been how the expert advisers – the financial analysts – prepared their clients for and protected them against the fall of B&B share prices. We took a look at the analyst recommendations provided by E*Trade, a well known online trading provider, as of the 13^th of June (Friday). To our astonishment (not really) we found that of the eight analyst opinions, 1 was a strong buy, 3 were moderate buys and 4 held hold opinions. The analysts included – UBS, Credit Suisse, Merrill Lynch, Deutsche Bank, Wilson HTM, Baillieu Stockbroking, Citigroup and ABN Amro.  Overall a fairly positive view of Babcock.  If you were an investor and subscribed to this analysis you would most probably still be invested.  BNB has fallen from $11.16 at close of trade on the 6th of June and was valued at $5.25 at close of trade on the 13th, a 53% fall in value.

What this points out to me is that the experts, with all their research efforts, and capabilities, have not been able to predict this significant collapse in shareholder value. It provides more anecdotal evidence of the failure of an active investment approach based on supposed expert advice.

One Comment to “BNB – analyst recommendations provide no protection”

1. on 23 Jun 2008 at 11:13 pm1ozstock

   Good observations there.

   I would just like to confirm and perhaps add some reasons to your findings.

   Firstly, note to all investors – take the analysts reports with a grain of salt, whether they UBS, Credit Suisse, etc.

   Second – analysts do their analysis based on fundamentals of the business. This involves forecasting of profits, growth, competition (the micros), interest rate, world economy, inflation (the macros). They predict an intrinsic value of the company – sometimes they can be quite wrong. Or sometimes, the market can be quite wrong.

   But even if they are not that wrong, their prediction is for the longer term. Their analysis cannot track the FEAR factor that caused BNB to plummet, for example.

   Thirdly – for their own reputation, when the analysts make a call – they would not change their analysis unless they have good fundamental reasons.

   The BNB case must be very embarassing for the analysts. It is right that the stock is highly leveraged and in this environment, debt is the enemy (last year debt is the best friend). The smarter analysts should have seen this coming last year and downgraded BNB. To downgrade a recommendation now would be to admit that they are wrong – worse still, when the irrational market rushes to buy BNB next week, that would leave the analysts even more red-faced if they changed their recommendations.

   —–
   ozstock.blogspot.com

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