James,
How important are the analysts opinions?
Very important, short term (up to 1 or 2 quarters). Usually irrelevant, long term (5 or more years holding).
Historically, analysts (collectively) are "off" by an average of 10% (up or down) in their price predictions (a good figure to remember when trying to project a company's future price).
When an analyst downgrades a stock, that stock will almost always suffer a short term price drop. When an analyst upgrades a stock, the price almost always goes up short term. The effects of the analyst's report can last anywhere from a few hours (witness some of the amazing intra-day turnarounds in the internuts recently) to a few days (very normal) to perhaps a few quarters. Analysts affect how investors perceive the company, and that perception is reflected in the price of the stock. But taken collectively, investors have very short term memories, and the next "event" in the stock or the market will move the price up or down depending upon the new perception. There is an old saying that "earnings move the market". But the real truth is that earnings influences investors' perceptions, and perceptions moves the market.
When an analyst (or several analysts) upgrade/downgrade a stock is this a time to buy or sell? If so, which way? Against the recommendation because short term the move is often overdone? or with the recommendation because their followers will move the stock as the analyst predicted?
The correct answer will vary with your individual investment style. For a long term buy-and-hold guy like me, the answer is to buy on the downgrade if the company is an otherwise good long term holding. If you're a short term investor or a daytrader, then you're looking for immediate price movement from the upgrade/downgrade and you'll likely follow the analysts' recommendations. Caveat: Don't play this game with extremely volatile stocks (for example, the internuts).
KJC |
