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‘Approach companies like a secondhand car’

Investors should be wary of blue-chip companies wooing analysts who overlook discrepancies in their accounts because their businesses are fashionable, says New Star UK alpha manager Tim Steer.

Steer hit out at a string of poor analyst recommendations in recent years in a presentation to New Star’s top retail brokers and intermediaries.

He said fund managers should beware of trend investing and look under the bonnet of firms as carefully as they might at secondhand cars advertising one lady owner.

Steer gave the example of Compass Group, which has suffered poor performance in the last three years but was supported by analysts from Lehman Brothers, ABN Amro, Goldman Sachs and Merrill Lynch following its 2001-02 accounts because they were keen on playing the theme of growth in the support services industry.

Steer said Compass’s decision to write down 600m of acquisitions over 10 years, despite the majority of its contracts lasting only three years, made buying the stock a risky option.

Steer also gave the example of Amey which, according to a note by analyst UBS Warburg in 2000, had “joined the top tier of UK outsourcing companies” capitalising on the growth in private finance initiatives.

The firm, which financed the building of Croydon’s Tramlink system, reported 38.9m profit in its accounts in 2000 but admitted there was “uncertainty” about 19m of this.

Steer said: “A number of analysts have pushed these stocks and turned out to be wrong. I do not know if you have ever been on Croydon’s Tramlink but nobody pays. Forty-eight per cent of Amey’s profits were subject to uncertainty,and the share price reminded me of the great high cliff divers of Acapulco.”

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