To BUY or not to BUY?

A recent communiqué to hit the Roadhouse telex machine informed us that Shaw Stockbroking had reduced its recommendation for Exco Resources from BUY to ACCUMULATE. What does that mean?

There was some consternation amongst Roadhouse staff at this particular recommendation as we weren’t entirely certain how it would be possible to accumulate any particular stock without, in fact, buying it.

The people at Shaw Stockbroking were extremely helpful when answering our enquiries.

“Thank you for your email,” Shaw responded.

“Our recommendation definitions are:
BUY: Can be added to the portfolio immediately
ACCUMULATE: Can be added to the portfolio immediately although we believe time exists to finesse entry
HOLD: Fair value at current price or for dividend yield
REDUCE: Reduce holding at current price although we believe time exists to finesse exit
SELL : Divest as fundamentally overpriced, or risk profile outweighs potential reward.”

Although this response did manage to clear some confusion the terms, “time exists to finesse entry” and “time exists to finesse exit” did leave a few furrowed brows.

A further enquiry solicited another response, this time from Martin Crabb head of research at Shaw.

“In simple terms, the difference between an ‘Accumulate’ recommendation and a ‘Buy’ recommendation is simply about timing,” Crabb explained.

“‘Buy’ suggests you buy the stock today, whereas ‘Accumulate’ suggests that you can take your time to do so. For example we might consider a company undervalued, but no catalyst may exist in the short term for that value to be realised – we would use an Accumulate recommendation in that context.

“Similarly ‘Reduce’ suggests you can take your time to sell the stock whereas ‘Sell’ suggests selling immediately.

“I hope this helps.”

What this exercise did prove to us at the Roadhouse was two things. One, that it is possible to learn something new every day; and two, when you are unsure of any investment advice you should always obtain professional guidance of some type.