The Relevance of Research In Financial Markets

 In a nutshell, research in financial markets should be taken with a gargantuan truckload of salt. Recently, there's been a massive contradicting research recommendation on Mr. DIY. One house calling a SELL with a target price of RM1.29 (Affin Hwang) ... Maybank was bullish calling a BUY with a target price of RM2.40.

This is expected in research in financial markets, be it stocks or interest rate movements, or economic growth predictions. Differing predictions stem from different ASSUMPTIONS on key factors. Even when these assumptions on key factors are similar, there is a nuanced emphasis/bias on the weightage of each factor. Some will feel certain factors are more important than the rest.

 

How Do We Regard Research Then?

Research papers and opinions are only worth reading according to the author. Analysts and commentators are only as good as their body of work. They are just like actors or novelists, you like to see certain actors more than the rest or will buy the latest book by the author you like ) and trust.

How To Judge Good Opinions or Recommendations

Being correct is one thing but not the most important thing. Some people could be correct because they were lucky. Hence to me, the most important thing is that their justifications and arguments MUST BE PERSUASIVE. It has to be persuasive reading. Persuasion is not a psychosomatic quality that can be manipulated. Persuasiveness is based on laying out points and factors and layering arguments and insights to arrive at building conclusions. It also should not be a one-way street, in that the writer has to point out good and bad stuff so as to present a more cohesive and informed opinion.

Thus we read research reports and opinions, not so much to get an actual recommendation but to look at their justifications and insights. It is more important to come away with additional insights into a stock or industry.

If you have 10 reports on stock, say 8 buys and 2 sells... I would want to read the 2 sells. Always give minority views a chance because they dare not to go along with the crowd. They may be wrong but got to give them a chance as people with something to say, have balls (male/female).

Mr. DIY

The business is easy to dismiss. It is just an aggregation of household stuff. The company keep getting dismissed by investors but they kept charging on with sound financials. People may get lost looking at topline growth or PER. For me, the company's strength is it can weather any economic conditions, people buy useful and silly stuff all the time, whether they need it or not. They weathered the pandemic very well. They were aggressive to close non-performing shops quickly, and now with a deliberate strategy to be in malls as they realize foot traffic at malls is relevant to their business model - people who go to malls will eventually want to buy something, anything before going home empty handed ... Mr DIY is a convenient place to do that.

They now have more than the critical mass to do generic products in their own brand. This yields more value and margins, do not overlook this factor.

As simple as the business model looks, the key is managing inventory. The margins should be hefty as there are multiple choices for each product, and hard to do comparative pricing. Hence now it's just replication in other countries. The company has gone through highs and lows, plus a prolonged pandemic. I am more aligned with the bullish report.

Disclaimer: This is not a call to buy or sell, just an opinion from a market watcher, please consult your dealer or remisier before any action.