Who do you trust?

Monday, 1st March 2010 22:08 - by Riddler

Welcome to a new month fellow traders. We enter March with yet more conflicting data coming out of the U.S. and G.B. We had data during January suggesting that unemployment figures rose, yet both sides of the Atlantic have just released very encouraging GDP figures, which leaves us with the feeling that we just don’t know which figures to trust. If you are a cautionary investor you will look towards those payroll figures, the fact that companies are still going into administration and believe that any recovery in 2010 is more than priced into the FTSE which trades at c.5400 as I write. Optimists will look at recently released GDP figures as signs that we could enjoy further gains in 2010. I have noticed quite a lot of posts on a number of forums concerning the value and utility of not only Broker tips, but also Analyst tips from well established magazines such as Investor’s Chronicle. On forums such as LSE and others, posters often complete hours of research and post them as ‘Buy’ recommendations, which we all use as a starting point for potential buys. There have been some heated debates on the issue of the apparent ‘ramping’ of shares, whereby only the positive aspects are mentioned, and sometimes exaggerated. Broker tips and upgrades should also be taken with a pinch of salt as they are commissioned by individuals with a vested interest in that particular company, although the research notes attached are excellent starting points towards researching companies, due to the detail contained. Cynics argue that if they were to have followed many of the ‘Buy’ tips contained in Investor’s Chronicle over the last 6 months, then their portfolio would be in the ‘red’ rather than ‘blue’. I have subscribed to that magazine for 2 years and believe it to be a valuable addition to any investor’s bookcase, with the following caveats: 1. The ‘Buy’ and ‘Sell’ recommendations don’t come with any technical or contextual data, and I often wonder “How can this stock be a ‘Buy’ when it has already risen 100% in 3 months and is trading on a p/e of 20+ and sits on a RSI of 75/100?” Therefore, I always look at the wider picture and assess the merits of the ‘Buy’ recommendation. 2. They do not give a timeframe for these ‘Buy’ recommendations, and I believe they should state whether buyers would expect a return in the short, medium or long term. 3. They are, as we are, slow to accept or return to ‘Buy’ recommendations which go horribly wrong, and offer views as to why these trades didn’t go to plan. As an experiment, I am going to focus on a ‘Buy’ recommendation which I believe is a little ‘toppy’ from a technical point of view. In this week’s edition, they have Shire Pharmaceuticals (TIDM code: SHP) as a ‘Buy’ and give many bullish points as to why they believe this. What irks me is that they say “the tip is up on our buy tip (19th Dec. 2008 @ 1063p) and should have further to run”. Not only is the current share price only 1406p, which is only 40% up over a 15 month timeframe, but the p/e is now 23 which means that Shire has to work hard to maintain this strength. Technically, the overbought signs are there on the share graph, but also they didn’t mention that the share price DROPPED to 764p after their original ‘Buy’ tip. Now that is not unusual given the 2008-2009 market falls, but I feel it is a bit rich to rely on a ‘Buy’ tip which is 15 months old! I believe that SHP will struggle to make 15%+ over the next 6-8 weeks, so let’s see who we trust!!