Investors familiar with recommendations from major broking houses have probably learned to take them with a pinch of salt – I know I do.
However, they can be worth reading as businesses such as Bell Potter, Goldman Sachs, and Deutsche Bank have expertise and research that is generally far beyond what the average investor has access to.
It is important to remember that these recommendations have a one-year time frame and are made by human (and thus fallible) analysts.
Bell Potter recently reconfirmed its Buy rating on Macquarie Group Ltd (ASX: MQG) with a price target of $91.50, declaring that Macquarie's Esanda acquisition was good for the business.
However, the bullish price target reflects quite a short term view and overlooks the potential for weakness in international markets to hurt Macquarie over the long term. I believe that Macquarie is an acceptable buy at today's prices if you've got a long time frame and are willing to tolerate a few cyclical peaks and troughs along the way. It's worth noting that Goldman Sachs is 'neutral' on the stock.
Goldman Sachs is also Neutral on Medibank Private Ltd (ASX: MPL) – lifting its price target 6% to $2.65 – believing that Medibank would focus on reducing growth in the number of claims it receives and that profit margins would improve just 0.3% by financial year 2018.
Medibank has stated previously that a small number of claimants make for most of its claim expenses, and a focus on reducing chronic illness in its customers will be valuable going forwards. In the near term, a Productivity Commission review into the healthcare system has the potential to either help or hurt earnings, depending on which recommendations are adopted.
Goldman Sachs' recommendation looks to be spot-on, although I think there is room for upside over the next few years.
Deutsche Bank left its Hold rating on SEEK Limited (ASX: SEK) and price target of $12 unchanged, pointing out that while SEEK's most recent reported Net Debt / (divided by) EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) was a solid 1.3x, the Net Debt/EBITDA applied to the company's domestic operations only is a less comfortable 3x.
In other words, SEEK's net debt is 3 times as large as the 2015 earnings before tax on its domestic operations. Deutsche Bank believes this leaves limited capacity for further investment, which will be a hindrance in light of SEEK's focus on international opportunities.
Like the Goldman Sachs recommendation above, this one makes a fair point. Again it also overlooks the very sizeable international businesses, their potential growth, and network effects of the website as well as the ability to cross-sell related services (like education).
Curiously, of the 13 analysts polled by Nabtrade, 6 recommend buying SEEK, 5 say hold, and 2 say sell. Perhaps more than anything, the take away from today's article is be wary of whose advice you follow when making a purchase.
