Saturday, February 26, 2011

The Olam and CLSA Saga

Or why being a stock analyst is not easy

I am sure by now that you are aware of what has happened between listed company Olam International and brokerage firm CLSA. CLSA published a report critical of certain aspects of Olam International's business model and accounting practices, sending the latter's stock price to plunge. Olam International in return has clarified the issue.

This episode is interesting because it highlights the fact that at least most stock analysts, cannot be aware of every intricate details relating to business operations and accounting practices of the listed company it is following. Said in a different way, unless Olam International came out to clarify the issue, most stock analysts would not have known much about how the Nigerian Export Incentives work. Most retail investors do not really care though.

The more banal point that I would like to talk about is, that listed companies hardly take any action when a too positive a report is published. They seem to only want to hear only the good stuff, and will go all out to fix those that say otherwise. Notice the irony in its press release clarifying CLSA's point:

We refer to CLSA’s Analyst Report on Olam dated 21st February 2011 containing adverse comments on some issues to which we feel we should respond. Olam as a policy does not comment on analyst’s reports regarding the company. There are currently around 21 analysts covering Olam (please refer to Appendix 1 for the current list of Olam’s analyst coverage) and on an average they issue four reports a year after each quarterly results announcement and additional reports covering any major announcements the Company makes from time to time. We respect the important role that analysts play and we strive to provide investors information about the Company in a timely and transparent manner to enable them to assess and model the Company’s prospects.

The question is, do the 20 other analyst know something that that CLSA analyst does not? Or maybe they are all wondering the same thing but dare not ask? Or even worse, maybe they might not really care to dig further but just accept the company's line in its entirety. In good faith, these analysts have to cover results of more than a handful of companies, which tend to announce their earnings at about the same time. There might not be enough time for reflective or critical thinking.

However, considering that analysts often act as some form of intermediaries between its investment banking division and prospective clients (although a firewall is prescribed), it would not be surprising that certain critical information is withheld from its for-distribution reports, but passed on internally. I really think that happens.

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