I don't usually pay much attention to what various brokers and investment banks say about whether to buy, sell or hold a certain stock. However, broker ratings are often a useful guide to market sentiment. If anything, my rule of thumb is that once the sell side analysts working for such institutions are covering a company and calling it a 'buy' then the opportunity for massive gains is probably gone. That's often true because if everyone agrees a stock is a buy, then it becomes very expensive, very quickly.
It's no surprise that many brokers and investment banks cover my favourite superstar stock, CSL Limited (ASX: CSL). As you can see from this graph, CSL mostly sells products derived from human blood. Its network of collection centres and significant manufacturing facilities are its key assets and the company recently opened a new facility in Victoria. The ability to always supply these essential products is of key importance to the brand, so additional production capacity is welcomed by shareholders. The various brokers use different terms, such as "positive", "overweight", "accumulate" or "buy", but for simplicity's sake I'll use buy, sell or hold. Here's what brokers are saying about CSL, according to reports in the press (from early 2014, unless otherwise stated):
JPMorgan – Buy
UBS – Buy
Deutsche Bank – Buy
Credit Suisse – Buy (as of December 2013)
Macquarie – Buy
CIMB – Hold
Citi – Sell (as of November 2013)
As you can see, the majority of analysts in this small selection rate CSL as a buy, notwithstanding the fact that the company is undoubtedly already priced for long-lasting growth. It's fair to say, then, that most people are well aware of the company's strength. What are the chances that the market is far off the mark? When buying (or selling) shares, you must always ask why you think you are right, and the market is wrong.
The answer may be that the market is overreacting to certain circumstances, or that the company is too small to have gained the attention of large institutions. Sometimes, cognitive dissonance amongst investors is related to strongly held beliefs. For example, those that deny climate change and dislike environmentalism might be keen to invest in coal companies, whereas I think coal is harmful, and am correspondingly pessimistic about the industry's long-term future.
There are two other successful Australian healthcare companies that are currently on the nose, potentially providing a buying opportunity for investors. ResMed Inc (ASX: RMD) and Cochlear Limited (ASX: COH) have both been sold down in part due to the fact that competitors are catching up technologically and putting pressure on margins with aggressive pricing. Investors might be of the view that the concerns are exaggerated. This may prove correct, because the incumbents will be the primary beneficiaries of favourable demographic trends, as long as they don't lose too much market share.
Foolish takeaway
There's no doubt that CSL is a top-notch company. Personally, I'd call it a long-term hold because I think the market is pricing it reasonably accurately, largely accounting for its very positive long-term prospects. However, it should be at the top of any investor's watchlist, because if and when the market becomes more pessimistic, savvy investors will take the opportunity to buy CSL at an attractive price.
