Let us begin with some facts:
First fact: Almost everyone recommends buying Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) shares. You will not find any really pessimistic review about the company. In the worst case, an analyst will write a "neutral" report, as Merrill Lynch has insisted on doing for a long time. The more usual fare (which is good for the company) is highly complementary "Buy" recommendations.
Second fact: The favorable recommendations for Teva are for extended periods, even when the share was in a slump a year ago and when it is at a peak, such as nowadays. Most analysts simply agree: the direction of the company's business and its share is upwards.
Third fact (get ready - here comes the downside): Mutual funds have sold 21.5% of the holdings in Teva over the past year.
If you look at sales of Teva shares on Hon.co.il, it shows that mutual funds owned 5.36 million Teva shares on the TASE and Nasdaq on January 1, 2007, but held 4.21 million on December 31. In other words, mutual funds sold 1.15 million shares during the year, or 21.5% of Teva's shares.
So much for facts.
Is there a problem here?
On the face of it, there is a problem. One would expect that the investment houses giving "Buy" recommendations for Teva would follow their own advice and buy shares on the market. Over time, one would expect that investment houses that have continuously recommended Teva to increase their holdings in the company, not reduce them.
In practice, it is somewhat different. "Globes" examined Teva's share during 2007. At the beginning of the year, the share was at rock bottom, which is why some institutional investors increased their holdings in the company. This means that sell-offs during the year were made from a high opening position. While possible, and investment houses gave this explanation to "Globes", it does not explain all the sales.
In addition, the fact that an analyst of an investment house recommends buying Teva shares does not oblige an investment manager at that investment house to follow that advice. This is the meaning of the concept "Chinese Walls" (which one hopes exist) between the analysis and investment management department and other departments.
The conclusion that ought to be drawn here is that analysts' recommendations should not be taken as gospel. The analyst may recommend buying, but his colleague next door may be selling.
Published by Globes [online], Israel business news - www.globes-online.com - on March 9, 2008
© Copyright of Globes Publisher Itonut (1983) Ltd. 2008