FEB
28
2012

Identifying Questionable Downgrades on Stocks

(TheReformedBroker) “When stalking a growth stock awaiting better entries or looking for new growth stock ideas, one of the best things you can do is get a hold of Wall Street’s Upgrades and Downgrades each morning.  .. Typically a fast-growing company will stumble on a specious analyst downgrade and then the accumulation will resume as the institutional fans of the story get over it and come back with buy orders.”

Examples of B.S. downgrades:

Valuation - growth stocks don’t trade on ‘valuation’, they trade on sentiment and the expectation of future earnings, see the numerous valuation-based downgrades of lululemon and Whole Foods.

Dropping Coverage - believe it or not there are institutions who will actually sell on the news that a brokerage firm is dropping or suspending coverage in a name due to an analyst leaving or something.

Channel Checks - there is only one thing sell-side analysts suck more at than tackle football and that is ‘channel checking’ – they literally cannot do it in such a way that there are actionable insights to be gleaned from it.  Think about how many times you heard about strength in non-Apple tablets (there never really was any) or weakness in the iPhone 2 (also, never really happened).  Channel checks are a money-loser in most cases – wait for the actual hard data, forget what people say they’ll do or think they’ll do.

Short-Term Pressures - chances are if you are interested in a growth stock investment, what happens tomorrow or the next day has little to do with anything.  For example, I saw an analyst downgrade Buffalo Wild Wings, one of this moment’s greatest growth stories, because of a rise in chicken wing costs in early February.  And while the analyst was correct in terms of those costs rising, it’s really a trivial, short-term matter to anyone who intends to invest in the business.

Strategic Direction - some people are meant to run businesses and others are meant to analyze and critique them. When a company announces a new strategic direction or goal, the knee-jerk Wall Street response is to cut it to neutral due to ‘uncertainty’.  I have no interest in seeing sell-side analysts vote on the strategic decisions of a company – management often knows more about their market than the eggheads do.”

Full Story: Growth Stock Strategy: Buy Bullsh*t Downgrades (TheReformedBroker)

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by on Feb 28, 2012, 4:32pm Share
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