Wednesday, April 27, 2016

Is That A Conflict?

Knowing what a conflict of interest is in the investment world is supposed to be pretty transparent. Imagine a mutual fund company or research analyst is giving a talk and mentions a specific security in an interview. Normally it will be disclosed if the firm or analyst have a position in said security. That's all fine and dandy. But what about other conflicts that are not so crystal clear?

A good example is yesterday morning Global Payments teamed up with Goldman Sachs and announced an accelerated share repurchase agreement for $50 million.  That's great for shareholders since it will be $50 million less stock floating around making each share a bit more valuable. Nothing out of the ordinary here so what's the big deal?

The big deal is that morning Goldman Sachs also issued a coverage opinion on Global Payments. Goldman initiated coverage on GPN with a Neutral outlook, but their price target is $82. Yeah that doesn't seem "Neutral" to me either since the stock is trading around $73 as of writing. Apparently having around $10 a share in upside means you think the stock will stay flat.

Now imagine a rookie investor seeing ONLY the coverage opinion and $82 price target.  They might be inclined to think Goldman believes there is about $10 a share to be made all while giving them this info at arms length.  While that could very well be true it's just not seemingly the case.  This situation just appears murky. Goldman is clearly going to get paid for the share repurchase agreement. Also the fact that it's announced on the same day raises a flag.

So as a rookie you think it's a good time to buy shares and proceed to your favorite discount online broker to enter an order. Except the rookie investor normally doesn't follow any indicators let alone know they are flashing overbought on a few. He probably wouldn't realize the stock has just had a good run from the low 50's to the mid 70's so it's likely due to pull back or pause a bit.  Instead he views it as a missed opportunity, and must get in the stock before it hits the $80's! Now all of this is fictional obviously. But what if during the next few weeks shares turn down to the low 60's. The rookie would be sitting on a loss of almost $10/share instead of a $10 profit in the opposite direction. The rookie might be scared out of the position and realize a loss causing emotional and financial distress.
That's a big reason why I like to poke fun at some of the analyst opinions and research that is published. Much of it is not suitable* for investors, and is ripe with conflicts that aren't apparent.  I'll admit that in my younger less experienced years I put some weight into this kind of stuff. I slowly began to learn that none of it meant anything, nor did it help me reach my investing goals. I'm sure to some it is useful information, and very helpful too. Is what Goldman did illegal? No. Is it a conflict? Sure looks like it.

*By no means do I claim to be the smartest person or best investor.

No comments :

Post a Comment