Thursday, August 2, 2012

Thanks for That Advice!

I know that the job of analyzing companies and making buy or sell stock recommendations is very difficult.  It is also extremely lucrative, so one can reasonably assume a high standard.  Yet all too often, "sell side," or Wall Street, analysts fail the investors--professional and amateur alike--who rely on their advice.

As with economists and market strategists, there is considerable "career" pressure not to be outspoken and wrong.  Of course, being outspoken and right is fine, but the penalty for the opposite is much greater.  So, like with many other human activities, there is a "herding" tendency among economists, strategists--and analysts.  They tend to move en masse to change their opinions in response to news.   But with analysts, responding after the fact to developments concerning a company and its stock is much too late to do any good in most cases.

I recently wrote about "Operation Barn Door," the tendency of analysts to lower their rating on a stock after bad news--often disappointing earnings results--and after a stock has plummeted immediately after the news, before an investor can respond.

Today there was the opposite--upgrading the rating on a stock after unexpectedly good news.  First Solar reported strong earnings for the second quarter, and the stock surged 24%.  One analyst upgraded the rating on the stock to neutral from sell, but two analysts raised their ratings from neutral to "buy" after the stock surged more than 20%.  Perhaps the stock will continue to rise, but as the stock had already risen about 20% from its recent low going into the earnings report, the stock is now up about 45% in the last two months, and now it's a good time to buy?

Again, it's a very difficult job to make stock recommendations, and the outcomes are glaring if the recommendations are bad.  But why not admit missing one, rather than scrambling to change the rating on a stock to make it appear that the recommendation was made in time for an investor to act on it?

Steve Lehman

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