Banks and brokers employ so-called sell-side analysts whose job is to monitor everything happening in a certain sector, evaluate the impact on the companies they cover and report to their clients. In order to understand the strange job title of these people, you should know that there are also buy-side analysts. Buy side analysts don’t work for banks or brokers. They typically work for a large investment fund that can afford its own in-house analyst team. Smaller funds lack the critical mass to cover the analysts’ salaries and depend on sell-side research.
The sell-side analyst is hired to monitor a sector and pick the best companies to invest in. This involves gathering information, crunching numbers, forecasting and many other micro and macro related assessments specific to the company, sector and larger economy. In the end the analyst has to summarize all this work in just one word: BUY, SELL or HOLD. The analyst reports and recommendations then serve as input for the investment decisions of fund managers.
As Niels Bohr, Nobel Laureate in Physics already said, “Prediction is very difficult, especially if it’s about the future.” Tossing a coin gives you a 50% chance of making the right (investment) decision. Another approach is to pick stocks by having a blindfolded monkey throw darts at the stock market page of a newspaper. The analyst is paid to increase the odds of picking the winners. This may seem like an easy hurdle to take, but the success of “passive” investing shows it isn’t. If an analyst consistently makes the wrong calls, he won’t keep the job for long. The stock price ruthlessly and very publicly shows who’s right and who’s wrong.
In the case of Evolva, we have four sell-side analysts actively covering our company. They all get the same information from us. We don’t give anyone a preferential treatment. And yet, their conclusions couldn’t be more different: two of them have “Buy”, one says “Sell” and one is neutral. Many investors don’t understand how this can be.
Analysts, like all people, bring a wealth of personal experience and perspective when applying meaning to data and abstract information in an attempt to predict the future more precisely than the next analyst. That is their job, challenge and passion, the reason for the long working hours, their added value. Analysts compete on the quality of their financial forecasting models and on the depth of the input they collect. The phrase “garbage in, garbage out” definitely applies here.
The analysis “machinery” contains many screws that the analyst can turn to influence the outcome. A first area where analyst views differ are the chances of success of Evolva’s products as well as their market potential. As Evolva is a development-stage company, most analyses include estimates of the probability of a product making it to the market. Depending on the product these range between zero and 100%. This obviously has a big impact on the analyst’s view on the company. Once a product reaches the market, the forecasts on their potential also vary widely. Some believe our stevia product EverSweet will generate revenues of USD 100 million, while others think it could top USD 500 million. A huge range!
Then there are also some more technical “screws” like the discount rate. Analysts use these rates to calculate today’s value of future profit streams. Currently, the discount rates used in Evolva’s case vary from 9% to 15.5%. A gap of more than 70%!
Seeing how much difference there is on how “loosely” or “tightly” these different screws are turned, it’s hardly surprising that the analysts come up with contradictory conclusions.
So, if analysts are not in agreement on Evolva’s future, what does Evolva think? We don’t comment analyst reports or recommendations, but we are convinced of our products’ potential and working hard to make this company a success!