For analysts, the key is to keep it simple

Christopher Niesche | THE AUSTRALIAN | 29 JUNE 2016



APP Securities, a firm with just a handful of analysts, has edged out larger brokerages for the Research Award.

APP started the financial year with four analysts, and ended with three, but still got more stock picks right than brokerages with 10 times that number of research analysts, says Brett Le Mesurier, head of research at the firm.

Le Mesurier says the key is in keeping things simple.

“I think the larger houses go into irrelevant amount of detail, whereas we’re focused on an outcome,” he says. “We don’t try to write a piece of research just for the sake of filling in a space. We have a different focus to a large firm, which would have a certain quota of reports that they would need to write.”

APP’s small size is one of the reasons the firm does well at research, says Le Mesurier, because analysts get a view across sectors rather than being too specialised.

For example, Le Mesurier says that by covering both banks and insurers he gets a better idea of the relative values of stocks in both sectors and which stocks should be better performing.

“When you look at insurers they’re struggling for growth and margins are under pressure; banks have got small growth, margins are pretty stable but they’ve got capital challenges; and of course bad debts come up from time to time, so you can understand where the value lies by looking at the comparisons between them.”

The award was determined by looking at two factors: first, what analysts were recommending at the time of an earnings downgrade by a company, and second, what they were recommending on the 10 best and 10 worst performing shares in the ASX200 in the financial year to date.

Of the 16 earnings downgrades examined, APP was the best performer with six negative recommendations at the time of the announcement.

Every broker picked at least one winner of the best 10 performers, which included Pacific Brands, Blackmores and APN Outdoor Group, along with four gold stocks.

Among the worst were Orica, Spotless Group, almond producer Select Harvests and law firm Slater & Gordon. The analysts at APP pick stocks by looking at which assumptions have been included in the price and how their view might differ.

“I think we’re fairly disciplined in understanding how to value a stock, whereas there’s a lot of confusion at other places as to what’s important,” Le Mesurier says.

“It’s understanding what’s included in the share price and therefore the extent to which you take a different view, and why the view is different and how likely is that to be like.”

Le Mesurier says he can’t name any of the firm’s best stock picks; instead he focuses on how happy the firm’s clients are. “That is measured very tangibly by the business they do with us,” he says.

The analyst who left APP and reduced the research team to three was Le Mesurier’s daughter, Kristen. “We were the only father-daughter team in the market and unfortunately she was too good and AMP poached her,” he says.