Hi!
As you noticed, a new recommendation policy was launched today:
I thought I’d open a separate thread related to this topic, as we will surely receive questions/comments about it. Let us know what thoughts this brings up! 
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Will this bring about a global shake-up where all recommendations are reviewed (when?), or will this affect new recommendation changes moving forward as companies individually address the issue, meaning for a while there will be two types of recommendations made in different ways?
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Did I understand everything correctly now? We’re talking about companies’ risk profiles and they’re categorized into groups, but aren’t these risk profiles already baked into the price in the old model? A bit like Titanium being too dependent on a single product, which is reflected in a lower target price/valuation level.
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Is the main reason behind the change that they wanted to get rid of those %? Now the analyst has greater freedom regarding the recommendation regardless of the target price. For example, before, one could not give “buy” if the difference between the target price and the current price was only 10%, but it was “add”; now, depending on the situation, it could also be slapped with “buy”.
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There won’t be an update for all companies at once, but little by little. All updated after the Q3 earnings season at the latest. Indeed, we analysts have been following this new policy in reality for years already. We have, of course, always considered the risks and reflected them in the return. For example, my analysis comments will not change from this in any way. As I stated in the video (Inderesin uusi suosituspolitiikka), we will get rid of artificial fiddling with target prices to align them with the recommendation. In this sense, we also don’t have two types of recommendations, because the analysis continues as before. This is ultimately a communication issue
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Okay, so there are recommendations made with two different policies for the transition period. Would it be too difficult for the pages to show that (yes, I know that if it was made before day X, it’s according to the old policy, I was mainly thinking of the average investor who might not notice). And I understand that the actual difference is small, but in some situations, it could be.
Yes, baking has, of course, been done before (Titanium is a good example). Now, we are simply clarifying communication and genuinely putting companies on an equal footing. For example, in Sampo, a 6% dividend yield may be sufficient compensation for a positive recommendation, whereas for Loudspring, the required return must be significantly higher to justify a positive recommendation. You should watch that video; I tried to explain this as clearly as possible in my own words
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You’re spot on! This is the whole point, to give analysts more leeway and get rid of those artificial % shackles.
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This will not be done, as I said, there are no two different recommendations. If you look at that Kajaani Tikkurila report, it has the exact same arguments as before, now just with a risk indicator included. Not a single target price or recommendation will change as a result of this policy change; that’s perhaps the clearest way to put it. The risk indicator will indeed be added to the Inderes.fi company pages as soon as we get around to it. 
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Just an idea, could the recommendation somehow be made to update automatically in relation to the course level? That is, the recommendation would update as the risk-adjusted return expectation changes. Quite often there are situations where the recommendation no longer adds value, e.g. when the course corrects significantly soon after the update. Of course, this also has its problems, i.e. if something big happens, the recommendation updates before a new analysis can be released… In that case, the date of the latest analysis would still be under the recommendation, which would indicate the freshness of the view.
On the other hand, this may not be necessary, because the “potential” on the stock comparison page serves a similar purpose.
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What is your definition of risk and how can you assess it? Is it a numerical assessment or something based on feeling? Is it up to the analyst themselves to decide?
We assess risk on a four-step scale, where the values are formed through five subcategories (operating environment, business model, financial risk, predictability, and equity risk). Beneath the subcategories are several more classes per category, ranging from share liquidity to company indebtedness. Thus, the risk number from 1-4 is generated through a total of about twenty four-step valued parameters, which have been given different weights overall. Therefore, there is a clear and, in my opinion, quite developed set of metrics behind it, but ultimately the values entered into the model are the analyst’s subjective assessments, as are many other things in the analysis process.
Assessing the risk of shares is, of course, not a new thing for us; previously, analysts have outlined different risks of various shares, for example, in the cost of capital (opportunity cost and WACC-%) of DCF models, and different risk levels have also been reflected in acceptable valuation multiples. The companies’ risks and risk profiles have also been commented on in the text sections of the reports. In connection with this recommendation policy update, we introduced a new tool for investors that, in our opinion, describes the risk levels associated with different shares from a new perspective.
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Can the risk profile be thought of as reflecting the required return, such that a company with the lowest risk would have a required return of, for example, 6%, and then incrementally up to 12% for the riskiest? Is the risk level also a forecast for the next 12 months?
When considering the reform, did you think about the possibility of describing a company’s long-term (5-10 years) potential and risk? Of course, one would have to make many assumptions, but that’s what we long-term investors have to do. I myself am most interested in the long-term annualized return of a stock, and I am not bothered by even greater volatility.
Based on the video, I understood that company-specific return requirements would be given openly when new updates arrived, so that they could then be challenged, etc.
From the DCF calculation, you can at least see the required rate of return used in each report.
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It’s understandable that a higher probability of negative scenarios reduces the expected value of returns and that heavy downsides require a larger upside.
But does this mean you also accept a lower expected return if the dispersion is smaller?
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If by diversification you mean less risk, then of course we accept it. The smaller the risk, the smaller the expected return is sufficient and vice versa.
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Required rates of return are always found in DCF calculations (cost of equity). It’s important to remember that this isn’t an exact science (you can justify pretty much anything between 5-8% as Sampo’s required rate of return). Because of this, it’s much more important to understand the big picture (what return you’re getting and what risk you’re taking) vs. whether the required rate of return is 6 or 7%.
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There’s no need to limit that return requirement to any exact figures. The fact is that at least 75% of companies fall into the 6-9% return requirement range. For this group, our old recommendation policy worked well. The problem is with these extremes (Elisa and Loudspring). In my opinion, 12% is not enough to describe the risk level of the riskiest companies (e.g., Enedo & Nurminen).
The risk level describes the company’s current risk level; I don’t really understand how this could be predicted 12 months in advance? 
In my opinion, the extensive reports provide a fairly comprehensive description of companies’ potential and risks also in the longer term. In connection with this reform, that 5-10 year range was not on the table.
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To clarify, Sauli, in this context: Do you mean the cost of equity, or WACC (weighted average cost of capital, and also the discount rate used in DCF) specifically when you say “required rate of return”?
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