NY Times article about analysts:
There are a lot of people upset with professional stock analysts who
made outrageously high price targets for stocks they recommended. On
nearly every major financial program and in most print media, many
stocks were pumped up to unsustainable levels. Often, stocks with little
or no earnings were rising by dozens of points every day. In Smart Money
magazine, journalist Michael Craig gave some good examples of the power
of analysts. Walter Piecyk of Paine Weber, for example, initiated
coverage of Qualcomm with a $1,000 price target (or $250 when you adjust
for a 4 to 1 price split) in December 1999. Craig also mentioned Henry
Blodgett of CIBC Oppenheimer, who put out a $400 price target for
Amazon.com in December 1998.
At the peak of the frenzy last March, it seemed like analysts were
leapfrogging over each other with higher and higher price targets. There
is little doubt that many buy and hold investors bought these stocks and
dozens more at the highest prices of the year. Of course, technically
these investors have no one to blame but themselves for buying a stock
based on the advice of someone else. Nevertheless, it is very difficult
to ignore the advice of a professional analyst, particularly in the
middle of a bull market. And the advice the analysts gave was buy, buy,
buy--especially the stocks of Internet companies.
There were, however, a few exceptions. According to Craig, Ashok Kumar,
a controversial semi-conductor analyst for Piper Jaffray (a subsidiary
of US Bancorp), downgraded Intel from a strong buy to a buy and the
stock lost 20 points over a two-week period. In the wacky world of Wall
Street, a downgrade from a strong buy to buy is almost like telling you
to issue a sell order. Ironically, other analysts criticized Kumar's
rating, and considered the price drop as a buying opportunity. After
Intel announced lower than expected earnings, the stock plummeted,
sending Intel into the thirties and making Kumar look like a hero.
Another analyst who made a good call was credit analyst Ravi Suria of
Lehman Brothers who correctly warned investors about the
creditworthiness of Amazon.com. His bearish report on the telecom sector
was right on target and on time.
As traders, you must pay close attention to how analysts operate and
what their recommendations mean. Analysts make recommendations when they
think you should buy, accumulate, or hold certain stocks, but very
rarely do they tell you to sell. Instead, they will announce a
downgrade, from buy to accumulate, for example. Why don't they tell you
to sell? Although they won't admit it, keep in mind that analysts are
under pressure to issue favorable ratings on certain stocks. In some
cases, their jobs may depend on getting people to buy the stocks they're
touting. Perhaps this is one of the reasons that only one percent of
analyst recommendations include selling, according to Craig.
Mark Haines of CNBC interviewed two Internet analysts on Squawk Box a
few weeks ago. He asked them point blank why they didn't issue sell
recommendations on Internet stocks. One analyst grew defensive and
refused to answer, while the other analyst replied by spitting out a
slew of numbers and circumvented an answer as well. If we followed your
advice, Haines told the analysts, we put our money in the wrong places,
and now we don't have any money. In fact, Nasdaq dropped another 22
percent after their appearance.
What is annoying to investors is that many of the same analysts who were
setting these outrageously high price targets in Nasdaq stocks during
March downgraded the same stocks AFTER they plummeted by dozens of
points. Now that many of these stocks have been slaughtered and down
over 50 percent, they are finally suggesting you sell. Thanks, guys and
gals. True to form, after they recommend to sell, the stocks fell even
more.
Although it may be impossible to ignore analysts, you can often use
their ratings as a way to make money. Oliver Velez suggests one of the
smartest ways to profit from analysts is to use them as a reverse
indicator. "As a group, they tend to act in concert," he says. "When
Merrill Lynch recommended Yahoo! at $500 a share with an anticipated
target of $1,000, you could see by looking at a chart that $500 was the
high. Yahoo! never saw a day higher after that upgrade. When Merrill
Lynch begins to cool on Yahoo!, this will be a strong indication that
Yahoo! as well as the Internet sector has bottomed."
An astute trader knows how to use the analyst recommendation to make
profits, although it can be tricky. You must be early and on the right
side of the trade or you will feel the full effects of an analyst
downgrade. For example, one of my favorite stocks, Vitesse Semiconductor
(VTSS), fell by 11 points one night last week after an analyst
downgrade. At $40 a share, it was a bargain. Within two days, it had
bounced back to nearly $55 a share. A smart trader would have taken
advantage of the overreaction of the downgrade, and bought rather than
sold. |
