how financial analysts value securities?

Answer 1

There are many methods, but the most accurate method is DCF or Discounted Cash Flow. This is where you forecast the earnings and cash flows of a certain company, then discount it by a risk-adjusted factor.

Another method is the multiples method. This is for lazy analysts, who just want to get an industry average and multiply it with the ratios of a certain target company.

Another method is the APV or adjusted present value method. This is not used as much as the abovementioned methods. It is almost similar to the DCF except that it does not consider capital structure into the equation.

Answer 2

It rather depends on the financial analyst. Many are very optomistic and tend to value securities in the best possible light totally ignoring such things as debt, inventories, receivables, and other various important data.

Basically, they are all over the map. Let us consider one stock. BLL There are 5 strong buy recommendations, 2 buy recommendations, 2 hold recommendations and 1 sell recommendation. Rather surprizingly there are more strong buys than the rest of the recommendations combined. But there was one sell recommendation. What does that analyst see that the others do not see.

Let us consider another: GE. 9 strong buys, 11 buys, and 1 hold.
Analysts are very bullish on GE. Makes one wonder why the stock has been languishing 32 and 36 for a year, doesn't it. Those same analysts were probably recommending the same thing back in 2000 when the stock was selling at 60.

Answer 3

I wouldn't trust an analyst as far as I could throw him (and I probably could barely pick him up ;-) They can be very bias depending on many things, and will value a company on many measures....do I like the company because of the kickbacks I get?....will my company fire me if I don't rate them well?....would my company like to buy more shares (and so should I put a sell on them?....you probably get my drift ;-)