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Buy or Sell: Should Analyst Ratings Still Matter to Investors?

By  +Follow July 1, 2014 9:56PM
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analyst ratings, stock analyst ratings, trust buy ratings stock

Netflix (NFLX) shares raced to all-time highs on Tuesday, soaring 6% to $470 after Heath P. Terry of Goldman Sachs upgraded the stock from neutral to buy, raising his price target from $380 to $590.

The upgrade may seem run of the mill, but actually tells a perturbing story related to analyst ratings.

In two distinct ways, external motives and conflicts of interest increasingly making analyst ratings and price targets unreliable for everyday investors, and in some cases, even rendering them useless. It is crucial that investors understand these inefficiencies and potential ulterior motives when factoring analyst opinions into their research and investment decision making.

Analyst Professionalism vs. Reputation

The timing of the aforementioned Netflix upgrade is curious, as Terry had been neutral on the company for years. Now that the stock has rocketed from $50 in 2012 to almost $470 on Tuesday, an over-800% gain, Terry’s prior analysis on the company has proven less than worthless. His reason for the upgrade was more or less Netflix's “subscriber growth,” a blatant trend that has been obvious since last year.

Thus, it’s debatable whether the upgrade reflected a change in heart or a desperate move to manage his reputation. Terry has been chasing Netflix, periodically raising his price target as the stock rose. Yet, he remained “neutral” on the stock. Another big gain for the stock would have been humiliating, and an analyst’s reputation means everything to his professional value.

Of course, it’s unfair to single out Terry. Reactionary reputation management seems to be the common practice in the industry. Without credibility, his or her research and educated advice is worthless to investors.

The reputation conflict is surely harmful to the average investor, who often has difficulty deciphering what is honest analyst research and what is externally motivated. This conflict is, therefore, an aspect of investment banking and stock analysis. Investors need to acknowledge these potential external motives and understand how they may factor into the analyst’s opinions.

Media Ratings and Outlandish Price Targets

Another inherent conflict of interest lies within the growing popularity of financial media. Despite their status as news sources, most business media outlets exist for one purpose: to make money.

Simply reporting the news is boring and unprofitable, so media sources often encourage analysts to make outlandish predictions and price targets to get people talking. “This guy’s insane” or “that analyst could be on to something” are quickly circulated throughout the Internet and social media. The content then receives more views and the analyst gets more attention — a mutually beneficial arrangement for the analyst and media source.

For example, Ed Zabitsky of ACI Research currently has a $38.57 target on Apple (AAPL). With shares hovering just shy of $95 and with Apple sitting on $25 per share in cash, the estimate is simply insane. Minus cash, Zabitsky’s target would value Apple at three times earnings, making it the cheapest blue chip stock in the history of the stock market by a long shot.

To understand what’s going on here, we must first understand this madman Zabitsky. He runs, by himself, a boutique firm in Toronto called ACI Research. In other words, Zabitsky is a relative nobody compared to analysts at Goldman Sachs, Morgan Stanley, and Bank of America.

So what in the world was Zabitsky doing on CNBC explaining his Apple price target for six whole minutes? How did he get his coverage on Bloomberg, the New York Times, Forbes, and other sources?

The answer is that it is mutually beneficial for Zabitsky and these news sources to create controversy together. Zabitsky garners attention for his small firm, while media generates controversy, views, clicks, and revenue.

This phenomenon is a massive, problematic inefficiency. News sources have the impossible tasks of maximizing revenue and reporting unbiased news. Revenue often trumps truth, especially given that most major news sources are owned by publically traded corporations.

What Investors Should Do

All this being said, investors need to be wary of the potential motives behind analyst ratings and the media content they consume.

Stock analysts have their career to take care of. To protect themselves, they often give safe price targets to avoid a humiliating mistake, rather than formulating a well-researched thesis and sticking to it.

Meanwhile, business media is tied up in a complex relationship between profit-maximization and reporting valuable news. News sources are expected to host well-qualified analysts, rather than nobodies to keep the public informed. This isn’t often the case, because bold predictions generate headlines and maximize revenue.

These conflicts are creating headaches for average investors, who are finding it more and more difficult to obtain beneficial information in the investment world.

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


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Results for NFLX
Jack
23 Nov 14 02:31:36
RT @bored2tears: Netflix takes Tina Fey-created "Unbreakable Kimmy Schmidt" off comedy-challenged NBC's hands. http://t.co/1Ef6YH5M9G $NFLX…
HotKeyTrading
23 Nov 14 02:30:03
Trending High On Social Media: $FOSL $RCPT $CYBR $MELI $NCMI $ROST $EOG $MSG $SHLD $WSM $ATHL $ADSK $NFLX $BWLD $LOW $PETM $DLTR $KBH $NI
Eilene Jenkins
23 Nov 14 01:28:03
Answer to high cost of cable http://t.co/1MOxE11YeG via @daily_finance $NFLX $AMZN $CMCSA
Maleah
23 Nov 14 01:14:08
http://t.co/w1vmmZEm8L <-- 40$ sale on DVDs on profitly pretty sweet perhaps pick up TandemTrader? $NFLX $VA $GMCR $CLF $CRM $EYES
yogkr
22 Nov 14 23:52:10
The Trickle of TV Streaming Services Will Soon Be a Deluge http://t.co/O0nhyIkGTt via @daily_finance $NFLX $AMZN $CMCSA
HotKeyTrading
22 Nov 14 23:30:06
Unusual Options Activity: Puts: $TIF $GPS $VIPS $NKE $URBN $EMC $UPL $XLY $WSM $NFLX $JMEI $LOCO $POT $COV $FOLD http://t.co/Vv2VEnpBuv
Investors Hangout
22 Nov 14 23:13:12
lookn4wins: NFLX 360.28 Stock Charts $NFLX Netflix Inc. http://t.co/XHnuHxxuSw
Investors Hangout
22 Nov 14 23:13:12
lookn4wins: NFLX 360.28 Stock Charts $NFLX Netflix Inc. http://t.co/u1tGTfE3AA
lookn4wins
22 Nov 14 23:05:40
NFLX 360.28 Stock Charts $NFLX Netflix Inc. (NASDAQ) Any opinions on NFLX? Please reply to this post. Last Upd http://t.co/khOfzhSROv
Matt
22 Nov 14 21:19:24
Slightly above it's 52-week low, what is $NFLX telling us? http://t.co/vpXtn7IwK0
LionEyeCapitalGroup
22 Nov 14 21:18:48
Keep an eye on $NFLX. Was looking for a breakout. This ones a battleground right now between the bulls and the bears. Who will win?
Trevor G
22 Nov 14 20:41:55
@Hacktheripper1 @PipsToDollars bull is way more fun, though I have been having fun being a $NFLX 🐻
Ravi Romo
22 Nov 14 19:55:12
Who could buy Netflix? via @FortuneMagazine http://t.co/zSwk7p8zLR $NFLX $AAPL $AMZN $BABA $GOOGL $FB
Stock Dog
22 Nov 14 19:23:58
@Toms_119 damn that is sweet, now anything on $nflx
Becky Hiu
22 Nov 14 19:03:42
"@chessNwine: $NFLX Daily. Short setup with weakness last week. See notes on chart. http://t.co/GsbyIuYARU" agree 100%!
Jablonski
22 Nov 14 18:53:46
RT @seeitmarket: Great post this week: "Is Netflix Stock About To Explode?" http://t.co/Uw2NZUpPGV by @OptiontradinIQ | $NFLX
Stock Dog
22 Nov 14 18:30:57
Does anyone have any articles of what they were saying about $appl or $nflx back in 2003 ?
Mike
22 Nov 14 18:13:05
$NFLX chart: Bearish MACD cross over. http://t.co/RmQjAdXMzD
TV_Trading Ideas
22 Nov 14 18:13:05
Bearish MACD cross over $NFLX http://t.co/5ZakeHuH01
Dan
22 Nov 14 17:45:42
$NFLX OI for maturity 11/22/2014. 360.00 Highest put. 400.00 Highest call. http://t.co/aP6qQRCm01
Woll Street
22 Nov 14 17:42:21
https://t.co/ZoysJnvoKy $NFLX said repeatedly this was a good short at 395. Below red line may retest post earnings lows. 355 key test.
paul bratby
22 Nov 14 17:40:17
2 #Swing #trades on $NFLX on 2 time frames in 2 months with 2 wins! Trade Diaries Here http://t.co/U5kOqKhl3O & Here http://t.co/tvH12Ld6bc
Dan
22 Nov 14 17:34:06
$NFLX Max Pain is 380.00 for maturity 11/22/2014. Price = 360.28. http://t.co/J2gh79V5o1
HotKeyTrading
22 Nov 14 17:30:04
Trending High On Social Media: $FOSL $RCPT $CYBR $MELI $NCMI $ROST $EOG $WSM $MSG $SHLD $ATHL $ADSK $NFLX $BWLD $LOW $PETM $DLTR $PANW $S
Maleah
22 Nov 14 16:43:47
http://t.co/w1vmmZEm8L <-- 40$ sale on DVDs on profitly pretty sweet perhaps pick up TandemTrader? $NFLX $VA $GMCR $CLF $CRM $EYES
FinSentS NASDAQ
22 Nov 14 15:25:27
$NFLX:US Netflix : Planned Tina Fey series heads to Netflix #NETFLIX INC http://t.co/Vl5mCihDqZ #NASDAQ
FinSentS SP500
22 Nov 14 15:05:41
$NFLX:US Netflix : Planned Tina Fey series heads to Netflix #NETFLIX INC http://t.co/DVmKZNNcl1 #SP500
lizwaite
22 Nov 14 14:44:16
RT @MockTrade: $NFLX $TSLA $GOOGL $FB $TWTR all def not in rally mode & grinding lower but indexes & $APPL will still do usual Fri ramp
HotKeyTrading
22 Nov 14 14:30:04
Trending High On Social Media: $FOSL $RCPT $CYBR $MELI $NCMI $ROST $EOG $MSG $SHLD $WSM $ATHL $ADSK $NFLX $BWLD $LOW $PETM $DLTR $KBH $NI
Professional Muppet
22 Nov 14 13:44:00
RT @seeitmarket: Great post this week: "Is Netflix Stock About To Explode?" http://t.co/Uw2NZUpPGV by @OptiontradinIQ | $NFLX
28
22 Nov 14 11:57:14
@traderstewie even better! Wasn't sure it was already but knew it belonged there. Compelling has the characteristics of an early $tsla $nflx
paul bratby
22 Nov 14 11:30:34
2 #Swing #trades on $NFLX on 2 time frames in 2 months with 2 wins! Trade Diaries Here http://t.co/wVu8FDfYoZ & Here http://t.co/XsE53O51oz
HotKeyTrading
22 Nov 14 11:30:05
Unusual Options Activity: Puts: $TIF $GPS $VIPS $NKE $URBN $EMC $UPL $XLY $WSM $NFLX $JMEI $LOCO $POT $COV $FOLD http://t.co/TRx9EnjwT5
David Jackson
22 Nov 14 11:19:43
Amazon reportedly working on ad-supported streaming service $AMZN $NFLX http://t.co/3qVx5oMFxi
28
22 Nov 14 11:17:11
@SunriseTrader $CYBR recent IPO is very compelling both technically, fundamentally, and had all the characteristics of a early $tsla $nflx
Maleah
22 Nov 14 09:49:41
http://t.co/w1vmmZEm8L <-- 40$ sale on DVDs on profitly pretty sweet perhaps pick up TandemTrader? $NFLX $VA $GMCR $CLF $CRM $EYES
Patriot Trading
22 Nov 14 09:27:27
Samsung 50" 4K Smart TV for $798 @ Adorama - $NTEK $NFLX $AMZN
Dan
22 Nov 14 09:20:15
$NFLX OI for maturity 11/22/2014. 360.00 Highest put. 400.00 Highest call. http://t.co/aP6qQRCm01
David Jackson
22 Nov 14 09:10:20
RT @MarketCurrents: Netflix lands rights to Tina Fey show http://t.co/Ybb9JmO8Xv $NFLX
Dan
22 Nov 14 09:08:59
$NFLX Max Pain is 380.00 for maturity 11/22/2014. Price = 360.28. http://t.co/J2gh79V5o1
Neal
22 Nov 14 08:42:54
RT @seeitmarket: Great post this week: "Is Netflix Stock About To Explode?" http://t.co/Uw2NZUpPGV by @OptiontradinIQ | $NFLX
Bruce J Moschella
22 Nov 14 08:31:42
$NFLX and $LNKD have been replaced.
Syncubate
22 Nov 14 08:27:49
$FB has had consecutive closes below its 100 DMA for the first time since May. $NFLX unable to reclaim the $400 mark: http://t.co/nKF7G4NxMF
Allen McCarty
22 Nov 14 08:22:30
$NFLX Looking for a re-test of low after earnings. 50 SMA moved below 200 SMA #deathcross http://t.co/ykyNciyaqK
MarketGuru.com
22 Nov 14 08:19:18
Good read - who will buy #netflix http://t.co/4BVNm7YSNP $NFLX $BABA $AAPL $CMCSA $TWX
Stuart A. Brown
22 Nov 14 07:55:25
RT @chessNwine: $NFLX Daily. Short setup with weakness last week. See notes on chart. http://t.co/B7qqSGCqOU
Maleah
22 Nov 14 07:51:26
http://t.co/w1vmmZEm8L <-- 40$ sale on DVDs on profitly pretty sweet perhaps pick up TandemTrader? $NFLX $VA $GMCR $CLF $CRM $EYES
FinSentS NASDAQ
22 Nov 14 07:37:20
$NFLX:US Netflix : Planned Tina Fey series heads to Netflix #NETFLIX INC http://t.co/KqBFHJwGtZ #NASDAQ
Chess
22 Nov 14 07:25:59
$NFLX Daily. Short setup with weakness last week. See notes on chart. http://t.co/B7qqSGCqOU
Paul W. Mahon
22 Nov 14 07:25:56
RT @sallyshin: Nielsen will begin measuring Netflix, Amazon streaming viewership next month. #shiftinnegociatingpower #licenses #whowins $N…
				
				
By  +Follow July 1, 2014 9:56PM
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