In an earlier column we raised several red flags to watch out for when researching publicly-traded companies. Now let’s turn our attention to a few things to be cautious about when reading broker and analyst reports, plus one thing to remember about company statements.

• Analyst reports are not written for individual investors

Most reports on companies are 40 to 50 pages long and are designed to impress company execs into giving corporate finance business to the analyst’s firm.

Even most fund managers don’t bother to read all the pages in these reports. The reports are, for the most part, a beauty pageant designed to win fee business.

They are great for background material on companies, perhaps even industries, but they need to be carefully considered because of all the inherent conflicts of interest in the securities business.

• “We are cautiously optimistic”

When a market strategist or stock analyst says this, ignore it completely. It means nothing.

The statement essentially allows the speaker to have it both ways: If things work out, they say, “See, we told you we were optimistic.” If things don’t work out, they say, “See, we told you we were cautious.”

As a signpost, it guides you to the exact middle of the road.

• Hold recommendations

When an analyst says hold, does it mean “We don’t like it, but don’t want to offend the company,” or “This stock is going absolutely nowhere?”

If the former, the hold should mean sell. If the latter, the hold should mean sell. If the analyst means the stock is okay, but the overall market is going down, that should also be a sell.

In other words, if you see a hold recommendation, immediately turn it into a sell to avoid any extra confusion.

• Price targets

Price targets are only useful in generating extra, unnecessary trading in stocks. Placing a price target on a stock means analysts are predicting earnings, growth rates, interest rates, market multiples, market sentiment, external shocks, financing availability, profit margins, tax rates, discount rates and dozens of other factors.

Any single prediction in the above list is difficult to nail down, at best. To extrapolate dozens of input factors and distill them down to a single, specific price 12 months hence just seems, well, not very likely to be accurate.

• “Some orders were delayed, or pushed into the next quarter”

This is a statement that dozens of companies will use as an excuse for missing earnings or revenue estimates. While the statement may be completely true for most companies that use it, investors still need to be extremely cautious when they see or hear it.

Sales are the precursor of profits. Without one, you won’t get the other. It doesn’t matter what the excuse is: Lost or delayed sales means lost or delayed profits.

Sales are delayed or cancelled for a reason. If that reason persists, you may own a stock that is destined for a whole heap of trouble.

Remember everyone in the investment business — companies, analysts, brokers, bankers — have something to sell you or something to gain from you. It’s good to be an optimist in life, but it pays to be extra cynical when it comes to your money.

Peter Hodson, CFA