logo  
Sign in or Register

Already a member?

Sign in

Or sign in with your account on:

Not a member yet?

Register
    

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

By  +Follow July 1, 2014 9:56PM
Share:
Tickers Mentioned:

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.


Signup for our daily newsletter and get our best articles emailed right to you!

Results for NFLX
913
26 Nov 14 04:39:26
$hpq $spy $aapl $nflx when we correct and we will HARD #cnbc will line up the guests saying buy buy buy. cramer will be on the today show !
913
26 Nov 14 04:37:19
$HPQ $ctrp $sdrl $aapl about to roll over. $de Guide down $ibm guide down $nflx broken yes $spy holds. we will make a major reversal down
IVolatility
26 Nov 14 04:34:01
Stocks with implied volatility below IV index mean; Netflix $NFLX 30, Qualcomm $QCOM 15
Kurt Grela
26 Nov 14 04:33:26
RT @jannarone: This may be the last thing saving DVDs from Apple - my story on the fate of the Redbox kiosk http://t.co/7ZIS4Un1od $OUTR $A…
Tran Vanburen
26 Nov 14 04:32:32
Looking for the next $EA $TROW $NFLX $YOD #liquidity http://t.co/hXDKJp3BWk
Financial Iceberg
26 Nov 14 04:29:27
Fibonacci Technical Levels $LNKD, $MSFT, $NFLX, $TSLA ​#lnkd #msft #nflx #tsla http://t.co/21hqe3QyAU
Leighton Darby
26 Nov 14 04:27:46
Should you buy, sell or hold $EQIX $NFLX $EL $YOD View now http://t.co/32P861k7H2
TradeTheMBI
26 Nov 14 04:19:42
Commented on StockTwits: $NFLX daily is still a sell as are the intraday time frames, next dip looks more e attra... http://t.co/cdB7V3MEGL
Carolyn B Miciano
26 Nov 14 04:09:23
Why its important to simulate Options trades http://t.co/kahUGBoVzz $NFLX $PCLN $TSLA
Roger
26 Nov 14 04:06:54
RT @theflynews: On The Fly: Closing Wrap $HRL $NFLX $PANW $DSKY $FRED $NBR $CJES: Full Story http://t.co/iqKM6P2x1K
TalkMarkets
26 Nov 14 03:50:51
T2108 Update – Scratching At Overbought Levels As #CurrencyMarkets Fire A Warning Shot $NFLX $SPY $VIX $SSO http://t.co/VJinld2tBj
Carolyn B Miciano
26 Nov 14 03:47:29
Guerilla tactics for Options trading http://t.co/MgoQ95pAaU $NFLX $PCLN $LNKD
Maja
26 Nov 14 03:46:29
RT @GoogleFacts: From 9PM to 12AM, Netflix accounts for 33% of all bandwidth in North America. $NFLX
MarketWatch $NFLX
26 Nov 14 03:26:37
A Thanksgiving for the Uber rich and a call to stay clear of Herbalife, glamours http://t.co/HB1teB4cNC $NFLX
kowaiyoukai
26 Nov 14 03:21:36
RT @GoogleFacts: From 9PM to 12AM, Netflix accounts for 33% of all bandwidth in North America. $NFLX
Lita Akers
26 Nov 14 03:15:59
Bearish or Bullish on these #stocks $NI $NFLX $PNC $CI View now http://t.co/B6qu9H4BvT
Rivka Sepulveda
26 Nov 14 03:14:11
$NFLX #Stock Watchlist. Dont be left behind $ECL $PLCM $LIVE I suggest http://t.co/IhAKohq9ss
Jesusa Gonzalez
26 Nov 14 03:08:10
$CSX Bearish or Bullish on these #stocks $TROW $NFLX $BWP #liquidity http://t.co/XzqTX36j62
Saxo Bank
26 Nov 14 03:02:02
#Netflix fluctuates between a darling and a dud among analysts. $NFLX #NASDAQWeek #trading https://t.co/BzO4CFjk51 http://t.co/2xSPobei3X
Renay Allen
26 Nov 14 02:55:03
Latest Earnings info on $NFLX $HXL $TK $GAIN #financialnews http://t.co/9L6JPxOOd9
MarketWatch $NFLX
26 Nov 14 02:52:10
S&P 500, Dow skid to a halt, over oil, falling confidence http://t.co/oS16ZBwIDw $NFLX
Ryan Arsneau
26 Nov 14 02:51:07
RT @GoogleFacts: Blockbusters declined several offers to acquire Netflix for a mere $50 million. Netflix revenue for 2012 was $3.97 billion…
Perfor Mance
26 Nov 14 02:46:38
Option Millionaires: nlightn: $NFLX,...Netflix sues Yahoo CIO Mike Kail for alleged kickbacks http://t.co/xJc4Zy2r99
Carolyn B Miciano
26 Nov 14 02:45:23
Watch this webinar if you trade weeklies http://t.co/gtZSrqEINx $NFLX $PCLN $LNKD
Russell Barbour
26 Nov 14 02:39:03
/goo.gl/R4sQuQ <-- How To Make Millions Presale 70% Off! ALL proceeds DONATED TO CHARITY! Sykes gives back. $NFLX $VA $GMCR $CLF
Thuy Espinal
26 Nov 14 02:32:35
Are you looking for more winners like $NUAN $NFLX $BWA $ISRG #wallstreet http://t.co/BogTkgC8xw
HotKeyTrading
26 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 $NI
Maleah
26 Nov 14 02:29:55
http://t.co/w1vmmZEm8L <-- 40$ sale on DVDs on profitly pretty sweet perhaps pick up TandemTrader? $NFLX $VA $GMCR $CLF $CRM $EYES
Erwin Mosby
26 Nov 14 02:20:15
$FIS Todays Stocks you should Watch $MTD $NFLX $CHTP Check out http://t.co/kMcYj4NIbX
Carolyn B Miciano
26 Nov 14 02:10:51
How to use Probability in trading http://t.co/cw2eQHTFhf $NFLX $PCLN $TSLA
Carolyn B Miciano
26 Nov 14 02:04:55
Learn about RSI and PercentR free course http://t.co/7RSXgoYmUB $NFLX $PCLN $TSLA
Dr. Duru
26 Nov 14 02:03:12
%stocks>40DMA=69%. Scratching At Overbought Levels As #Forex Fires A Warning Shot. http://t.co/zNnoxC5Yr6 $SPY $AUDJPY $NFLX #T2108
Anton
26 Nov 14 02:02:42
RT @theflynews: On The Fly: Closing Wrap $HRL $NFLX $PANW $DSKY $FRED $NBR $CJES: Full Story http://t.co/iqKM6P2x1K
Consestimate
26 Nov 14 01:56:06
Former Netflix (And Current Yahoo) Exec Accused Of Collecting Kickbacks. $NFLX, $AMZN. http://t.co/oSp7wh7Ki5 http://t.co/3NXTf7uMWz
Matt finston
26 Nov 14 01:54:38
RT @MarketCurrents: Netflix sues Yahoo CIO Mike Kail for alleged kickbacks http://t.co/I0uPMMyXk5 $NFLX $YHOO
Quantpost Service
26 Nov 14 01:53:10
$NFLX News: "Netflix sues Yahoo CIO Mike Kail for alleged kickbacks $NFLX …" http://t.co/OoEhrwzwNH Board view: https://t.co/FMId2yAu51
MarketCurrents
26 Nov 14 01:53:08
Netflix sues Yahoo CIO Mike Kail for alleged kickbacks http://t.co/I0uPMMyXk5 $NFLX $YHOO
Carina Mata
26 Nov 14 01:47:25
$NFLX Are you thinking of selling $AGNC $DFS $QLYS Visit http://t.co/3OOKc7Vs1u
Suzi Harter
26 Nov 14 01:09:19
Whats going on with $NFLX $RKT $UNP $CSIQ Give it a try http://t.co/5KmtiAYmlS
msputoptions
26 Nov 14 01:00:05
Have you seen the targets for $AAPL $AMZN $NFLX? http://t.co/GoDVydB1Ka yes and $BABA too
Leighton Darby
26 Nov 14 00:59:28
Are you considering selling $AMG $ODFL $NFLX $QLYS #money http://t.co/nebpAp0FVY
lu
26 Nov 14 00:25:56
RT @GoogleFacts: Blockbusters declined several offers to acquire Netflix for a mere $50 million. Netflix revenue for 2012 was $3.97 billion…
Ruby
26 Nov 14 00:22:42
RT @GoogleFacts: From 9PM to 12AM, Netflix accounts for 33% of all bandwidth in North America. $NFLX
This is the Short GH
26 Nov 14 00:19:37
RT @GoogleFacts: From 9PM to 12AM, Netflix accounts for 33% of all bandwidth in North America. $NFLX
This is the Short GH
26 Nov 14 00:19:26
RT @GoogleFacts: Blockbusters declined several offers to acquire Netflix for a mere $50 million. Netflix revenue for 2012 was $3.97 billion…
Russell Barbour
26 Nov 14 00:15:57
/goo.gl/R4sQuQ <-- How To Make Millions Presale 70% Off! ALL proceeds DONATED TO CHARITY! Sykes gives back. $NFLX $VA $GMCR $CLF
Tressie Clayworth
26 Nov 14 00:02:17
Looking for research on $FCS $NFLX $BOH $YOD Worth a look http://t.co/9viFddsXeu
Astrid Link
25 Nov 14 23:43:09
Should you hold or add to $HTA $NFLX $TKR $CI Must have http://t.co/spaBcIIhId
lookn4wins
25 Nov 14 23:19:05
NFLX -2.10% Stock Charts $NFLX Netflix Inc. (NASDAQ) Any opinions on NFLX? Please reply to this post. Last Upd http://t.co/RxefgDPziY
Tony
25 Nov 14 23:18:26
Watchlist Down: $HPQ, $AIG, $CLF, $COP, $CVX, $GMCR, $GS, $HAL, $HD, $MON, $NFLX, $SLB, $SWKS, $WFC, $WYNN, $NUAN
				
				
By  +Follow July 1, 2014 9:56PM
Share:

Comments

 

blog comments powered by Disqus

About us

Equities.com is the most advanced interactive online social ecosystem for the financial industry, serving as a resource center and next-generation communication platform that connects self-directed investors with public issuers, market experts, and professional service providers and vendors. Registered members can leverage our exclusive proprietary research tools such as the Small-Cap Stars, which outperformed 90% of all small-cap mutual funds, and robust do-it-yourself E.V.A. research reports. The Equities.com Issuer Dashboard is the ideal tool to communicate and manage investor awareness campaigns to the investment community, as well as to access valuable resources to help your company grow.

Market Data powered by QuoteMedia.
Copyright © QuoteMedia. Data delayed 15 minutes unless otherwise indicated. Terms of Use.