Sorry about the previous post, here is the full article, fromt todays AFR
. Mixed reactions to list of undervalued companiesUpdated 08 Jan 2019 — 12:17 PM, first published at 11:52 AMSaveShareChanticleer's list of the 100 most undervalued companies generated a mixed response from brokers, fund managers and investors.One observer noted that legendary investor Warren Buffett once said the following: "I don't read analyst reports. All in all, I prefer to read 'raw' financial reports and talk to industry representatives."But for those investors lacking the analytical skills of the Oracle of Omaha, work done by analysts remain a critical component of the financial information supply chain.Chanticleer's list of the 100 most undervalued companies generated a mixed response from brokers, fund managers and investors. David RoweAlso, it is common knowledge that increasingly powerful quantitative hedge funds have trading strategies tied to target prices. These machine driven funds can respond quickly to changes in target prices.It would seem target prices cannot be ignored even if there are doubts about the ability of analysts to predict financial performance.AdvertisementOne trader says the best leading indicator of analysts' price targets are stock prices."On balance analysts buy high and sell low," he says.Nevertheless, investors continue to be guided in their investment decision making by the difference between stock valuations and share prices.On Tuesday, influential global research group Morningstar released its 2019 Market Forecast Report which includes the firm's most preferred stocks for the year ahead.The analysis is similar to the one published by The Australian Financial Review. It arrives at a fair value for each stock and compares that the current share price to come up with a list of most preferred stocks.RelatedCheck how much your stock is undervaluedBy ChanticleerOther measures used by Morningstar include its "moat rating", its "uncertainty rating", earnings per share growth, dividend yield, price earnings multiples and dividend franking.Some of Morningstar's most preferred stocks ranked by their discounts to fair value are as follows: Myer 38 per cent, Telstra 32 per cent, Woodside 32 per cent, InvoCare 30 per cent, Aveo Group 30 per cent, Pendal Group 27 per cent, James Hardie 27 per cent, Newcrest 26 per cent, Southern Cross 24 per cent, Carsales.com.au 22 per cent, Crown Resorts 21 per cent, Link Administration 19.6 per cent, G8 Education 19 per cent, QBE Insurance 18 per cent, Ryman Healthcare 13.6 per cent, CSL 12 per cent, Iluka 10 per cent and Coles Group 8 per cent.Another broker highlighted the apparent correlation between large share price discounts to the mean price targets and the largest short positions on the ASX.AdvertisementA short position is where investors have borrowed stock in a listed company and sold the stock in expectation of a share price fall. The short seller profits from buying the stock back at a lower price. The profit is the difference between the cost price and the sale price minus the cost of borrowing. Top shorted stocks in Australia. ShortMan.com.auThree stocks in the top 10 in terms of discount to target price – Syrah Resources, Orocobre and Galaxy Resources - also happen to be in the top 10 shorted stocks, using data compiled by research website, ShortMan.There are two ways to interpret this correlation. First, the short sellers have got it right by identifying red flags and positioning themselves to profit from the imminent declines in stock prices.Second, the short sellers have got it wrong and are about to be burned by share price rises triggered by strong earnings and equally strong forecasts that may be issued with the half yearly results published during the reporting season in February.The focus on analysts' share price targets comes at an interesting time in the evolution of broker research. Reforms introduced in Europe designed to remove conflicts of interest, called MIFID II, have resulted in analyst remuneration falling and experienced analysts leaving the sell side (brokers) and joining the buy side (funds management).TONY BOYD
(20min delay)
