They say even a broken clock is right twice a day. If only the same could be said of London's analysts.
The abacus rattlers who spend their days (and nights) researching stocks are often criticised for failing to do what they are handsomely paid to do – point out which stocks are primed to soar, and which are doomed to fail.
READ: Purplebricks hits back at punchy sell note from US broker
More often than not, they will follow the crowd and slap a ‘buy’ or ‘hold’ at the top of their report, without, it would seem, giving it too much thought.
Even those safe, reactive analysts are right sometimes, but when a number cruncher puts their reputation on the line, goes against the grain and makes a big call, the Square Mile sits up and takes note.
That’s what happened last year when Purplebricks Group PLC (LON:PURP) plunged after being slated by US investment bank Jefferies.
Analyst Anthony Codling, who has since left the bank, claimed the shares were worth just 94p as he hit it with an ultra-bearish ‘sell’ note.
At the time, many dismissed his rating and price target as a stretch too far; after all, Purplebricks shares were trading at almost 500p and it was at the beginning of its big move across the Pond.
Critical Codling
Codling was critical of the company’s sales data, claiming that just over half of the homes listed in November 2016 had sold within ten months, well below in-house estimates of 78%.
The analyst was also concerned by Purplebricks’ accounting policies and wondered whether revenue had been overstated.
The AIM firm’s bosses hit back at those particular points but regardless, Codling was adamant that the shares weren’t worth anywhere near what they were changing hands for.
Fast forward a year and Codling has been vindicated – well, almost. Purplebricks shares are down to 114p having lost more than three-quarters of their value since last February.
Teething issues in US lead to profit warning
They are down by a third today (Thursday) after parting ways with its UK and US bosses and slashing its forecasts for the year.
The US seems to be the big problem, where its services are not gaining the sort of traction bosses had been hoping for. Australia is struggling, too.
READ: £100mln wiped from Purplebricks’ value
Purplebricks’ core UK arm is still doing well and is on track to deliver the expected 15-20% revenue growth this year, while the Canadian operation is also ticking over nicely.
But that won’t be enough to overcome the troubles in America and Australia.
Back in December’s half-year results, the company told investors it was on track to generate revenue of between £165-175mln this year – at the lower end of its previous guidance. It is now forecasting revenues in the £130-140mln range.
Original research is more valuable than ever
Codling’s method may not be perfect (so far), but his result was spot on.
More importantly, had somebody followed his advice and shorted the stock, they would have been sitting on a pretty pile of cash right about now.
Good, original research is much more of a necessity than it was just a few years ago as fund managers must pay for reports these days, thanks to MIFID II.
They don’t want to hand over thousands of pounds for some safe research that tows the party line and offers nothing that couldn’t be learned from a few cursory glances at recent news releases.
Let’s hope that will encourage more of Codling’s peers to follow suit and put the cat among the pigeons.