Photographer: Justin Chin/Bloomberg

Every Stock Was a Buy to This Analyst Team, Then Shares Tanked

  • Emperor Securities touted 173 companies’ shares in past year
  • Hong Kong broker forecast big gains as its trading fees soared

Companies probably love getting attention from analysts at Emperor Securities Ltd. in Hong Kong. Investors who followed their advice for the past year, not so much.

The unit of Emperor Capital Group Ltd. issued buy recommendations on every one of the 173 companies it reported covering from April 2015 through May 16. Its target prices, which the company says forecast trading levels within weeks, predicted gains of 25 percent on average. They are frequently the most bullish among analysts who cover the same stocks and list their calls with Bloomberg, including those based on the standard 12-month horizon.

The picks ended up being so wrong during the past year’s rout of Chinese and Hong Kong stocks that shorting every one would have resulted in gains of about 6 percent after just four weeks and almost 13 percent if all were held through last week.

Emperor’s record highlights the perils of equity trading for new retail investors flooding markets in China and Hong Kong. Individuals piled into stocks as the Shanghai Composite Index recorded one of its best rallies ever and policy makers relaxed restrictions on mainland and Hong Kong citizens trading in each other’s markets. Emperor, which caters to such traders, said its revenue increased 64 percent in the year ending March 31 thanks in part to big increases in brokerage fees and margin-lending interest payments.

For Bloomberg Intelligence’s China Financial Risks Primer, click here.

The firm was hardly alone in making bad calls during the turmoil. Forecasts by firms covering mainland Chinese equities were off by bigger margins on average than those of analysts researching stocks in the rest of the world’s 20 largest markets. Analysts covering Hong Kong-listed companies, Emperor’s focus, were second worst, with their average year-ago targets overshooting the benchmark Hang Seng Index’s current level by 44 percent.

“It’s our style to have a buy with a target price and a stop-loss price and not have hold or sell” recommendations, said Stanley Chan, director of Emperor Securities Research, by phone. The “small, local brokerage” offers trading ideas based on “market sentiment” and “news, events or momentum,” he said, not valuations, earnings potential and other fundamentals. “We pick stocks with a one-to-two-week horizon,” Chan said.

An investor buying each of the 173 stocks on the day of Emperor’s recommendation would have lost 0.9 percent after a week on average, 2.9 percent after two weeks, 4.2 percent after three weeks and 6.1 percent after four weeks, by which time 119 of the stocks had fallen, data compiled by Bloomberg show.

“Last year, the market was highly volatile, and our short-term picks had unsatisfactory performances,” Chan said. “It was difficult to make good calls in such a falling market.”

The plunge in mainland stocks, the worst since the financial crisis of 2008, spilled into Hong Kong. The Hang Seng Index fell by 25 percent in the past year, making Hong Kong the world’s fifth-worst performing stock market as of last week’s close.

Securities analysts are biased toward buy recommendations, Bloomberg-compiled data show. The median rating for stocks in benchmark indexes for the developed world, emerging markets, the U.S., Hong Kong, China, Europe and Japan range between 3.8 and 4.7, on a scale of 1 for strong sell to 5 for strong buy.

Exclusively issuing buy recommendations is unusual. Of 366 individuals or teams that analyze stocks in the Hang Seng Composite Index and that cover at least a dozen companies, less than 8 percent have buy or similar ratings on all their stocks, data compiled by Bloomberg show. Among them: Lv Ming at Guotai Junan Securities Co. in Shanghai and Hu Yanchao of Zhongtai Securities Co., formerly as Qilu Securities Co., in Jinan, China. Neither responded to emails, and they couldn’t be reached by phone.

Emperor’s calls, each with a price target, were off even by the 12-month standard usually associated with such forecasts. A year after Emperor’s recommendations, 14 of the 15 stocks recommended more than 12 months ago were down, with all 15 off by 29 percent on average. If all 173 of the stocks were bought on the date of the recommendation and held through Friday, the investor would have lost 12.9 percent.

Chan said the recommendations “include many day-trade ideas.” More than half of the stocks closed lower than they opened on the day of the pick; on average, they closed 0.4 percent lower than their opening price, data compiled by Bloomberg show.

One in 10 of Emperor’s recommended stocks was forecast to increase upwards of 50 percent. More than three-quarters were seen increasing 10 percent to 50 percent. In the two months before each recommendation, two-thirds had no five-day rallies as strong as the targets implied. Of 132 stocks with target prices from two or more analysts, Emperor’s were the most bullish submitted to Bloomberg for 36 -- more than a quarter of them. No other analyst had more than three most-bullish forecasts.

Chan said it is “inappropriate” to compare Emperor’s recommendations with those of analysts focused on valuations and earnings potential. Moreover, he added, other small Hong Kong brokerages make more aggressive predictions. “We are not the most bullish brokerage,” he said. “We upload our reports to Bloomberg while some other brokerages may not.”

Emperor Capital Group, the parent company, provides financial services from 11 offices in Hong Kong and three in mainland China.

Founded in 1993, it began trading on the Hong Kong Stock Exchange in 2007 and has gained more than 270 percent since then, compared to the Hang Seng Index’s 0.1 percent increase. In the past year, the stock has fallen 59 percent, more than twice the benchmark’s decline. Its market value is HK$3.9 billion ($503 million). The companies it recommended, all but one listed in Hong Kong, have a median market value of $7.7 billion.

The company’s latest annual report, for the year ended Sept. 30, said it enjoyed an influx of customers following the relaxation of cross-border trading rules for individuals in November 2014 under the so-called Shanghai-Hong Kong Stock Connect program. New clients and increased “securities turnover” fueled a 65 percent increase in brokerage revenue, to HK$151.5 million, the company said. Commissions and fees income on dealing in securities rose to HK$115 million, from HK$46 million.

Emperor’s latest earnings statement, released May 18 for the six months ending March 31, reported another 20 percent increase in brokerage revenue from a year earlier. Revenue from margin loans and other lending rose 141 percent to HK$373 million. At the end of the period, the company was holding HK$13 billion worth of securities as collateral for margin loans.

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