Free stock research can be expensive for you

Jan 11, 2011

In this issue:
» India Inc's hiring is on the boom
» IT pecking order all set to change
» Onions continue to make India cry
» Greenspan challenges critics, proves he does not understand the US monetary system
» ...and more!!

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Most of us have a brokerage account. Most of us also receive free research reports from our brokers.

Of late though, the quantum of free research from brokerages seems to be on the uptick. Most brokerage houses employ a research team that is dedicated to coming out with stock picks and publishing research reports on the same. A lot of money is spent on setting up these research teams. People, databases, office premises are just a few areas where expenses are made.

So we ask ourselves, when the brokerages spend so much in setting up these teams, then why do they dish out the reports free of cost? Do they get anything in return? Or are they putting up reports to just educate and help their investors?

The truth is far from this. A leading daily has conducted a study of leading brokerages to establish the reasons for giving out free research. The main reason cited is that the stock based research reports help to generate momentum in the concerned stocks. For example if a brokerage gives a 'Buy' report then the prices of that particular stock are seen rising.

By generating this momentum, the brokerages earn their brokerage fee. So the next time you receive a free research report, ask yourself. Are you being given an advice on a stock based on its fundamentals and valuations Or are you just helping the brokerage house in earning more income for itself?

Do you invest in the advises of the free research reports? Share your views or post your views on our facebook page.

 Chart of the day
Today's chart of the day shows the trend in staff costs (as percentage of sales) for Indian companies. Staff costs bottomed out in the first quarter of 2010. However, since then, staff costs have started to trend upwards. This was primarily brought about by a revival in the fortunes of the Indian companies after the crisis that hit the world. With higher attrition rates hitting all industries, most companies are trying to spend more in acquiring as well as in retaining their employees. This means that staff costs would keep trending upwards in times to come.

Data source: Prowess
Note: Data is representative of the BSE-200 companies

Dealing with high commodity prices is certainly high on the agenda of most company CFOs in 2011. But there is another component threatening to weigh heavy on the P&L. That too, not just for manufacturing but also service industries. You may have guessed it right that we are referring to employee costs.

India's rise on the global economic arena has come with its share of downsides. As indigenous companies try to acquire scale by hiring more they have to compete with MNCs. The latter have the lure of global presence and bigger balance sheets. They also have the ability to offer pay scales that are more attractive than their Indian counterparts. In fact, salaries for new employees and higher salaries for existing ones are just part of the total employee outlay. Companies may choose to pay bonuses to bring down attrition levels. The training cost for the new incumbents is also expected to deal a heavy blow to the operating margin. Thus, in addition to high input costs, there seem to be several other woes that India Inc will have to contend with in coming quarters. We believe that this could be a good litmus test to judge the long term sustainability of the businesses of your favourite stocks.

Looks like the great Indian onion Tamasha will go on for longer than expected. The Government's cup of woes on the issue was already brimming over. Despite that, it will now have to contend with a two-day strike called by the Onion traders in and around Nashik, one of the world's biggest markets for the tear inducing vegetable. The reason behind the strike seems to be the Government diktat in some states of not selling onions above Rs 30 per kg in the wholesale markets. To the traders though, these prices are not economically viable as the prices in Nashik itself are ruling at Rs 37 per kg or thereabouts. Furthermore, onions being a perishable commodity, they cannot keep holding the stock for long. Of course, we expect the standoff to be resolved soon. However, incidences like this are becoming symbolic for what India seems to stand for these days. Its polity has become an expert in digging up a well only after it sees something go up in flames.

Meanwhile, the Indian markets were trading above the dotted line during the post noon trading session. India's benchmark index, the BSE-Sensex was trading higher by about 109 points or 0.6% at the time of writing. Banks and healthcare sector stocks are witnessing buying interest. However, realty and IT sector stocks are trading in the red. As for rest of Asia, markets ended on a mixed note, Hong Kong closing higher and Japan closing weak.

Indian markets have been under pressure for quite some time now. In fact, since the start of this year, the BSE-Sensex has shed almost 1,200 points or 6% since its 2010 close. While stocks are up today, the overall sentiment seems that of caution. One reason that can be attributed to this fall is the sell-off by FIIs, who seemingly fear an interest rate hike by the RBI in the near term. While the FIIs have withdrawn a net of US$ 10.7 m from the Indian markets this year so far, their selling has gathered momentum over the past few days.

Anyways, plagued by rising inflation, the RBI is looking to raise rates in the forthcoming monetary policy review meeting on January 25. Well, the higher interest rate fear isn't just an Indian phenomenon. A lot of other central banks in emerging markets are looking to raise rates to fight inflation. Most are willing to go to all lengths to fight rising prices of commodities like oil, food grains and metals, properties, and financial assets. How successful will these banks be in light of a heavy dose of cheap money that's flowing from the west (and thus adding to inflation) will be interesting to watch.

Will the US$ 1.2 bn Patni-iGATE deal change the landscape of Indian IT? Will the combined entity dislodge the behemoths like TCS and Infosys? Well, maybe not.

Revenues clocked by both iGATE and Patni in the past one year was US$ 940 m. This makes it almost part of the billion-dollar rich IT club. But it is nowhere close to the top. It is behind mid-tier companies like Genpact, Tech Mahindra, Mphasis and Mahindra Satyam. It is number 10 on the list of pure-play Indian offshore providers. However, increased size and scale will probably help the entity. iGATE will now be able to liaison with a larger client base, and bid for bigger deals. There aren't too many cost synergies however, and margins may not see an improvement.

The key to the long term success of this new entity will be for it to leverage on the increased scale and grossly improve IT capabilities. Without which, it will continue to be on the bottom rung.

Although the credit crisis began in 2007, the seeds of the same were sown way back when Greenspan headed the US Fed. He is in some sense blamed for his loose monetary policies for an extended period of time. These fostered ill-habits in Americans of spending more than their incomes. And his latest interview with Wall Street Journal seems to imply that he has not really understood the US economy at all. For starters, Greenspan opines that inflation is a problem going down the road if the Fed keeps increasing monetary reserves. But recent happenings have proved that there is not much of a correlation between an increase in the monetary base and an increase in the money supply in the economy. Yes, the US Fed has been pumping in billions and billions into the economy. But bank lending is just not happening. And that is because there are no borrowers. Having said that, we believe that inflation will be a huge problem as and when the US economy recovers. This is because money supply then will see a substantial rise. Whatever the scenario, the gargantuan asset purchase program of the US Fed is certainly not going to solve the country's chronic economic problems.

 Today's investing mantra
"Stock picking can't be reduced to a simple formula or a recipe that guarantees success if strictly adhered to." - Peter Lynch

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10 Responses to "Free stock research can be expensive for you"


Jan 12, 2011

yes, i agree that free research reports are a nuisance value. a motivated attempt to generate interest in the counter and benefit from rising volume and price. by experience i can tell that it is for the purpose of offloading a chunk of it in the rising market, and poor, investors who get such reports get trapped and lose their hard earned money. but SEBI has to soon move in this direction and catch the offenders. plus educate investors to read papers and mags and get correct info on the stocks and invest after studying the fundamentals .



Jan 12, 2011

Regarding Free Research Reports, yes, its indeed true that brokerage houses wish to generate momentum/earn commissions and release reports from time to time. Do we buy based on the report? I don't think we should rely completely on the brokerage reports (or any other source for that matter). We must do our due diligence first and only after we are convinced that the stock is a buy should we go ahead and buy the stock. More importantly, before buying, we need to have a clear frame of mind as to expected target returns (or expected company results) and review them every quarter in order to continue holding or exiting. Under no circumstance should we be swayed by current market sentiment (greed or panic) and react to it in a knee jerk fashion.



Jan 11, 2011

Your article free stock research can be expensive is good and true. There are many sites inviting to reap profit and make easy money by subscribing to their advice. They prompt them to throw small fish to get big fish. But if the advice goes to several hands the stock price will automatically goes up and the subscriber think that the advice is true and on long term he realize the share price lowering and eroding his capital. But you have not adviced the remedy for this. Do you advice to look into the company`s balance sheet and verify? I think if that is also included the article would have a better valuation



Jan 11, 2011

These free stock reasearch/brokerage houses not only earn hefty brokerage,but also make a killing by selling their stock which they accumulate before recommendation.At that time there are lot of buyers,but soon they dry up & then rate starts going down.Poor investors then start enquiring about the company then.Sometimes stocks starts falling &circuit breakers
come in to play as there is no buyer at all.



Jan 11, 2011

one should determine own method and for second opnion
reference shoud be refered from search report



Jan 11, 2011




Jan 11, 2011



Adi Daruwalla

Jan 11, 2011

Most Brokerage houses doling out free research, is not true, some of them are. Then there are broking bank firms that are also not doling out free research, they are charging yearly fees of 999/= to 3999/= based on the types of research you subscribe to. Pricing is also based on the availability of reaserach via which medium, mobile, ipad, Comp screen and the type of transaction you want, buy today sell tomorrow,BTST, day trade OTC, 3days momentum etc. Most of which are rubbish because with the high volatility in the stock market, the young reaserach teams who are less experienced in the stock market dont know whether they are going or coming.



Jan 11, 2011

At the very outset let me make it quite clear that I am not an analyst nor an economist !!
The former FED chief (Mr.Greenspan's) remarks prompts me to cite the very appropriate instance that came to my simple mind just now : There are two pythons who are respectively trying to swallow the tail of the other python ?
The state of the US Economy is also somewhat similar !!(in that the Treasury IS buying almost zero % interest bearing Bonds ) pumping(as A STIMULUS INSTRUMENT)and thereby releasing hundreds of billions of dollars into the already over-burdened economy ??

I may be totally wrong in my interpretation.

But what I thought I am just putting into words.



HC Hukmani

Jan 11, 2011

If free can be expensive do not send

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