Thanks John, I have not done any formal studies, but I have observed bold analyst recommendations very carefully and then observed the stock price of my biotech and other equities over the next six months or more. My observations agree with your analysis, and I too, do not pay any attention to buy/sell/hold recommendations. They can have a significant impact on stock price in the short to medium term, as you say.
I often see a recommendation change just before or after the technical analysis 200 day moving average trend changes. Usually a stock price spurts up or down depending upon the trend change. I am not a trader, so I don't allow this to influence many of my decisions, but it can be useful to watch the trends in the stocks that one holds.
When I look back on analyst downward recommendations, I often see that it was a great time to acquire a stock When a flurry of buy recommendations occur as a stock has become overpriced relative to its fundamental trends, viola, the stock often tanks. This does call into question whether some analysts are part of a strategy to make money while churning stock and tempting to public take a contrary position. This is a polite way of saying that I don't trust some of the folks on Wall Street to have my best interests in mind. As short term traders, they can only make money often if I or others get tricked into selling at the wrong time.
I call your attention to a recent article in Fortune Magazine by Joe Nocera that has a good discussion of this point. According to Fortune, "Of the 33,169 buy, sell, and hold recommendations made by stock analysts last year, only 125 were pure sells. That's 0.3%." The article also states, "Whereas once Wall Street analysts were divorced from the investment- banking business--the better to make unbiased stock calls--now they are at its center, expected by the firms that employ them to use their status and clout to help land underwriting deals and then cover the companies once they go public. Implicitly that means offering positive coverage--coverage that too often stays upbeat even when the company's stock starts to sink. "It's become harder to downgrade a banking client," says Buyer. "Even after you've taken a company public, there is also the prospect of future banking business, which you're putting at risk.""
Also stated in this article-"What else? She [Lise Buyer] was discouraged, she says, by the extent to which analysts were rewarded for being cheerleaders for their sectors--a pressure that came not only from their firms but also from the banking clients: "They wanted me to do whatever it took to move the stock," she says--because that's how many modern clients view the role of the analyst. It bothered her that researchers were often rewarded for what amounted to self-promotion: setting outrageous "price targets," for instance, that had nothing to do with a stock's fundamentals and everything to do with generating press. A straight shooter by instinct, Buyer learned to speak in the veiled code of the modern analyst: Without sell recommendations, her primary means of signaling that she thought her clients should dump a stock was adjusting her earnings targets."
This article is located in the Fortune Website at fortune.com
Thanks for your response John. Have a nice weekend. |
