Thursday, March 4, 2010

>The “Sell-Side” Consensus: Growing Conviction in Stocks (MORGAN STANLEY)

Key Debate: When we last visited the consensus ratings in Jul-09 on our coverage universe, they were the most bearish since we started collecting this data in Jun-06. Has the performance of markets changed the views of sell-side analysts? Are we approaching levels of conviction that should worry money managers?

Growth and earnings estimates have been raised by “sell-side” consensus over several months, although they appear to be lower than MS estimates. We are ahead of the consensus in terms of our top-down estimates. Our economist expects GDP growth of 7.2% and 8.5% for F10 and F11, respectively, versus consensus expectations of 7% and 8%. We expect earnings for the BSE Sensex constituents to grow at 15% and 23% for F10 and F11, respectively, versus consensus estimates of 3% and 22% for the same period.

The mean consensus rating for the MS coverage universe has been on an upward trajectory after plummeting to a low in Jul-09, and is currently at a 12-month high. On a relative basis versus July 2009, the positive conviction among the consensus appears to be stronger across the cap curve. Consensus seem sto be most bullish on mega caps, followed by mid-caps and small caps, and least positive on large-caps (market cap of US$6-9 billion). The overall conviction level has risen to 0.28 (wherein a stock rated buy gets 1, hold gets 0, and sell gets -1) from 0.07 seven months ago. Please see slide 6 for methodology even as stock prices have headed higher and valuations are richer. We find that the consensus as well as MS have a “buy” or equivalent recommendation on 51% of our coverage universe considered for this study (versus 32% in Jul-09).

MS analysts differ from the consensus on about 43% of our universe considered for this study. The MS rating is below the consensus rating in about half of these stocks and above for the rest. The strongest differences in opinion can be identified in 11 of these 46 stocks (see page 5 for details).

Within the MS coverage universe, there are 21 stocks in which 70% or more of the Street has a “Buy” or equivalent rating. MS analysts differ with the Street on three out of these 21 stocks. About half of these 21 stocks are in the Financials and Industrials sectors. Similarly, there are six stocks in which 65% or more of the Street has a “Sell” or equivalent rating. Four out of the six are in the Telecoms sector. Interestingly, MS analysts’ ratings for these six stocks are no different from the Street. The consensus ratings are most positive for Consumer Staples, Technology and Utilities, and least positive for Telecoms, Energy, and Consumer Discretionary. Our sector model portfolio is underweight Consumer Staples, Technology, and Utilities whereas it is overweight Energy and neutral on Consumer Discretionary.

Conclusion: The sell-side consensus conviction is rising but is still not at levels comparable with the end of 2007, which would worry us. We believe that the consensus needs to raise earnings estimates for the coming 12 months, which gives us comfort with respect to the rising positive opinions among the sell-side consensus. The sector level positions may be interesting, especially in Consumer Staples, Technology, Utilities, and Energy.

To read the full report: INDIA STRATEGY