Today I’m reading a news article in *Expansión* which I’d rather laugh off, but which is actually enough to make you burst into tears – or rather, to make you foam at the mouth with sheer indignation. The news report reads as follows: «UBS withdraws its board recommendation just one day later’ to sell »Red Eléctrica’. This story is yet another example (the umpteenth) of the mediocrity of the analyses produced by the research departments of banks as high-profile as UBS itself. But the saddest thing is that this can be extrapolated to virtually the entire banking sector.
The sequence of events is as follows: Last Friday, the Government implemented a electricity reform which, unsurprisingly, is having a negative impact on the financial results of companies in the sector. And the brand-new «analysts» at UBS have spent (or should have spent) the weekend racking their brains and recalculating the impact that this reform will have on the financial results of companies in the sector. These are extremely complex calculations and valuations which, after a whole weekend of painstaking effort (sic), lead them to the conclusion that they must revise all their target prices for the shares of these companies (target prices for what timeframe? That’s another matter entirely…). This task is carried out, naturally, by the «specialists» in analysing companies in the energy sector, who are supposed to know these businesses inside out. They also reformulate the usual recommendations for buy, sell or hold, which most mediocre investors regard as if it were an oracle.
Well, in the case of Red Eléctrica, the new recommendation issued yesterday (Monday) by the brilliant analysts at UBS was «sell», and the new target price was set at 36.5 euros per share, whereas before the weekend they had set it at 38. One would assume that this «sell» recommendation and the target price of 36.5 published on Monday were the result of painstaking calculations and valuations feverishly carried out since last Friday by the bank’s leading specialists in analysing electricity companies. But that doesn’t seem to be the case. Because just 24 hours later, as soon as Mr Market proved them wrong and the company itself quantified the impact of the reform on its accounts at just €100 million, the UBS analysts saw the ground vanish from under their feet, melted like ice cubes in hot tea, and immediately redid their ‘calculations’ so as not to look out of place in the photo.
Today, Tuesday, these same analysts« recommendation is »hold’, and their target price is yesterday’s closing price, i.e. 40 euros (today it is once again the top performer on the Ibex and is already at 40.66). Could it be any more mediocre? In light of the market’s reaction, the analysts are accepting as valid the calculations of the impact on the accounts published by the company itself, and are even adjusting their forecast to the current share price! What a load of rubbish… They’re taking their clients for fools! Anyone who listens to that bunch of good-for-nothings is, at the very least, being very poorly advised.
The bottom line is that these analysts have absolutely no understanding of the business they are attempting to value. They haven’t the faintest idea of the impact the reform might have on the company’s accounts (they may not even have a clear understanding of the company’s accounts), and they simply go along with the analysis departments of other banks so as not to be caught out. Their mantra is: If we get it wrong, we’ll all get it wrong (UBS, Credit Suisse, Citi, BBVA, Santander, LaCaixa, Deutsche, etc.). He wouldn’t want to be singled out, as this could harm his sales figures, which would be fatal to his job security. It doesn’t matter if we give up on analysing things properly just to go against the market. The only important thing is not to stand out in the group photo of bank analysts and the financial sector’s consensus. The The Criterion of Mediocrity Unfortunately, this is the direction the banking system continues to take, both in the management of its funds and in the sale of its products.
The worst thing is that everyone does the same. There isn’t a single bank willing to take the risk of being wrong on its own, in the hope of getting it right. When what is reasonable clashes with the consensus, the analysts They abandon, without a moment’s hesitation, reason in favour of aligning themselves with the consensus. Because analysts can take the risk of getting it wrong (they often do, and their bosses tolerate it quite well), provided that the error is collective and widespread. They will never dare to defend a valuation or a point of view that is radically different from what that schizophrenic Mr Market has to say. Why? Well, basically because their analyses are, at best, superficial. And so they will never dare to stand firmly by their recommendations or price forecasts. What’s more, their bosses put pressure on them to feed the bank’s eager customers a daily diet of forecasts. And these clients, whether out of naivety or sheer gambling addiction, indiscriminately stake their money on the «well-thought-out» recommendations of their banks« »elitist research departments’. These recommendations pass through (and are ultimately prostituted by) the sales department, which acts as a conduit between analysts and clients. That’s how things are for them, and that’s how they’ll continue to be.
Although I would prefer to think that the analysts The analysts at UBS (and elsewhere) spent the whole weekend calculating Red Eléctrica’s depreciation ratios resulting from the reform, the forecasts for the coming financial years, and so on and so forth. I can just imagine the discussion amongst them when they realised yesterday that their predictions had accidentally and recklessly strayed from the consensus:
-Hey, Red Eléctrica has said that the reform will only cost them 100 million… and today the share price is skyrocketing.
-Ugh, what do we do now? Look, change the «sell» recommendation we’ve put out, and do it straight away!
-But why do we say «buy»?
-Come on, don’t go overboard – set it to «neutral» just in case.
-And what target price should we set? Because at 36.5 we’re making fools of ourselves – it’s already at 40 and rising.
-Well, just use today’s closing price with a «neutral» recommendation, and that way we won’t get it wrong. And next time, don’t commit yourself by giving prices and recommendations until you’ve seen what the other banks are saying, or until the company itself publishes its own valuation. Agreed?
-OK, sorry, it won’t happen again.
-This is what I get for delegating… I just have to keep a close eye on everything myself, because the moment I take my eye off the ball, these kids make a right mess of things!