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It is impossible to assess a share without reference to its price

Everybody’s investments go up and down in price and, whenever one of ours goes down, we will take a long-term view on its prospects based not on emotion but on its new price and valuation

12/01/2018

Simon Adler

Simon Adler

Fund Manager, Equity Value

Financial analysts provide guidance to businesses and individuals making investment decisions. They assess the performance of stocks, bonds, and other types of investments. They also often recommend a course of action, such as to buy or sell a company's stock based upon its overall current and predicted strength.

Last November we noticed a well-known firm of analysts published a very curious reaction to a profit warning by UK defence business Ultra Electronics.

On the evening of Friday 10 November 2017, Ultra Electronics announced increasing budget pressure had caused the Ministry of Defence to postpone or cancel some of the group’s orders, which would hurt its 2017 revenues.

To be fair, Ultra Electronics’ share price was always likely to drop when markets opened on the Monday morning but before they did – at 5.30am to be exact – the analysts downgraded the stock to ‘neutral’.

This was curious, as we say, and for two reasons:

  • The first being that publishing any sort of client advice at a time when your clients cannot act upon it is not overly helpful.
  • Odder by far, however, from our point of view, is the analysts felt able to downgrade the stock over the weekend without having any idea where Ultra Electronics’ share price stood.

Back in August, when the share price was £19.93, those analysts had set a target price of £23.30. 

When the market closed that Friday evening, however, Ultra Electronics’ share price was £15.27 and when the analysts’ downgrade was published at 5.30am on the Monday, they had settled on a target price of £16.30.

At the end of the day, Ultra Electronics closed at £12.00 so which way do you think the analysts went next?

Analysts using their heads or hearts?

Having been confident enough to pick a target of £16.30 that weekend, you might think a share price of £12.00 might see Ultra Electronics upgraded to something more positive than neutral.

But, no, the next move from the analysts was again to downgrade the stock and adjust the target price further down to £12.50 – all but halving it from the high hopes of £23.30 just a few months earlier.

Before we come to the moral of the story, we should underline a few points.

First, we (the Schroders value team) do not own Ultra Electronics (other investment teams within Schroders may do); second, we do not have a view on the company’s prospects; and, third, we are by no means implying we never make mistakes, here on The Value Perspective.

But – and this is a pretty significant ‘but’ – when shares we own do fall, we will always reappraise them on the basis of their new price.

Assessment made on price and valuation

Everybody’s investments go up and down in price and, whenever one of ours goes down, we will take a long-term view on its prospects based on its new price and valuation – not on fear or whatever emotion was influencing those analysts the weekend of 10 November.

Because – with all the goodwill of the season – how anyone can take a view or make a recommendation on a stock without reference to its price is beyond us.

Author

Simon Adler

Simon Adler

Fund Manager, Equity Value

I joined Schroders in 2008 as an analyst in the UK equity team, ultimately analysing the Media, Transport, Leisure, Chemicals and Utility sectors. In 2014 I moved into a fund management role and have had experience managing Global ESG and Pan-European funds.  I joined the Value investment team in July 2016 to focus on UK institutional and ethical-value portfolios.

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