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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
Momobreakout
22 Sep 14 17:05:37
RT @jfahmy: Updated Thoughts on the Recent Price Action: http://t.co/BDnTMSD5D6 $SPY $QQQ $IWM $NFLX $TSLA
Scott Redler
22 Sep 14 16:45:57
Here's a link to today's video recap and look ahead $spy $spx $qqq $iwm $aapl $nflx $tsla $fb $twtr $baba http://t.co/xqFWIiPrEM
Mr X Stocks
22 Sep 14 16:45:42
Bought 5 contracts of $nflx netflix for $1450 at 2:35pm. Sold them at 3:46pm for $2025. Join my… http://t.co/pb1I6ZWv4k
Colin Macleod
22 Sep 14 16:44:17
Netflix, Inc. (NFLX) Stock Chart Technical Analysis for 9-22-14 http://t.co/MsnOtpIrpY $NFLX
pennypicker
22 Sep 14 16:43:14
Will be watching $NFLX and $TSLA tomorrow as well as the $SPX, $QQQ and $RUT
theoptiondon
22 Sep 14 16:40:10
MARKET WRAP 9/22/14 http://t.co/vPIZFbxd4I $AAPL $AMZN $TWTR $PCLN $BIDU $GOOGL $TSLA $FB $NFLX $LNKD $Z $YHOO $NQ $SPY $FEYE $VRTX $BABA
MaryNYC
22 Sep 14 16:40:08
RT @chessNwine: NEW POST: Stock #Market Recap 09/22/14 {Video} http://t.co/djEBq6BpN8 $BABA $HLF $IWM $NFLX $TKMR
arnoldle
22 Sep 14 16:23:45
RT @SunriseTrader: $NFLX break out, support lost, back test, down it goes. Education for followers new traders. http://t.co/J1KdF2kww3
[ Amazon News ]
22 Sep 14 16:20:52
RT @GoInsideNetflix: Adam Sternbergh names Netflix the Miramax of the online TV streaming age. https://t.co/zvAX3amV0o $nflx http://t.co/np…
[ Netflix News ]
22 Sep 14 16:10:34
Adam Sternbergh names Netflix the Miramax of the online TV streaming age. https://t.co/zvAX3amV0o $nflx http://t.co/npIpmEUHk3
[ Netflix News ]
22 Sep 14 15:59:51
@netflix releases a website devoted to spoiling TV shows and movies. https://t.co/JcVxE2FkOT $nflx http://t.co/VWpXdUYRT4
Alex Rasmussen
22 Sep 14 15:10:45
RT @LJKawa: Netflix refuses to submit Canadian customer data to CRTC $NFLX
Carolyn B Miciano
22 Sep 14 15:01:21
A trade that profits when interest rates rise http://t.co/F9kj0OBUEI $NFLX $PCLN $LNKD
Joseph Williams
22 Sep 14 14:54:39
The battle for the hotel television http://t.co/mAQJpE3ZM6 $TWC $CMCSA $GOOG $NFLX #lodging
GotSanctuary
22 Sep 14 14:51:02
Netflix $NFLX refuses to submit confidential & competitively sensitive info 2 CRTC @Netflix_CA @netflix
BUZZ Just-In
22 Sep 14 14:48:51
Tickers trending on TWTR in last 1 hour $NFLX Dow Jones $AAPL $Nasdaq $Yahoo http://t.co/TKCuPwvm7Y
david christoph
22 Sep 14 14:46:58
RT @HCPG: All outside of BB -- $YELP $WDAY $TSLA $SCTY $FSLR $NFLX $YY $DDD $SPWR
Noah Zivitz
22 Sep 14 14:35:20
Here comes the sequel to Friday's showdown in Gatineau. #Netflix refuses to hand over data demanded by #CRTC.@clabrow tweeting details $nflx
Penny Detective
22 Sep 14 14:26:06
http://t.co/od3fqlbMNB ClayTrader: * * $NFLX Video Chart 9-22-14 * *: ClayTrader http://t.co/d8rybbm0ng
On Time Picks
22 Sep 14 14:26:02
http://t.co/ZO8wg1ovu2 ClayTrader: * * $NFLX Video Chart 9-22-14 * *: ClayTrader http://t.co/efncyIET1N http://t.co/ZO8wg1ovu2
AlertPennyStocks.com
22 Sep 14 14:26:01
http://t.co/MHpRaxDgHe ClayTrader: * * $NFLX Video Chart 9-22-14 * *: ClayTrader http://t.co/RWcGS7SVMH http://t.co/MHpRaxDgHe
Cantech Letter
22 Sep 14 14:19:42
RT @LJKawa: Netflix refuses to submit Canadian customer data to CRTC $NFLX
Luke Kawa
22 Sep 14 14:18:33
Netflix refuses to submit Canadian customer data to CRTC $NFLX
Systems Trading Optn
22 Sep 14 14:16:39
Commented on StockTwits: I think ill have to catch liar liar on $NFLX http://t.co/dcYaClsQxk
WALLSTREETWARS
22 Sep 14 14:15:14
$NFLX > the dreaded Rising Wedge strikes yet again,. we killed it today on this one. http://t.co/PqaMYtyALa
AMDcapital4
22 Sep 14 14:10:18
RT @t3live: Daily Recap http://t.co/vLCdK1akxQ $SPX $QQQ $IWM $TSLA $NFLX $AAPL $FB $TWTR $GPRO $BABA $MBLY $BAC @RedDogT3
janet gale
22 Sep 14 14:08:16
$NFLX - TECH STOCKS: IPhone 6 Sales Help Apple Sidestep Broad Tech Losses http://t.co/qdUR2tBzS0
Pzaa...Guy
22 Sep 14 14:07:52
$NFLX - TECH STOCKS: IPhone 6 Sales Help Apple Sidestep Broad Tech Losses http://t.co/s0unMuMpOB
The Cardiac Kid
22 Sep 14 14:07:36
$NFLX - TECH STOCKS: IPhone 6 Sales Help Apple Sidestep Broad Tech Losses http://t.co/MZRTNTr3UA
kenr0966
22 Sep 14 14:07:34
RT @RedDogT3: Here's a link to today's video recap and look ahead $spy $nflx $tsla $fb $twtr $bac $gpro $baba $mbly $qqq http://t.co/xqFWI…
wallstreetstock
22 Sep 14 14:07:26
$NFLX - TECH STOCKS: IPhone 6 Sales Help Apple Sidestep Broad Tech Losses http://t.co/akiERnMCfq
Solo traders
22 Sep 14 14:07:19
$NFLX - TECH STOCKS: IPhone 6 Sales Help Apple Sidestep Broad Tech Losses http://t.co/EM5quUnPxJ
Scott Redler
22 Sep 14 14:06:11
RT @t3live: Daily Recap http://t.co/vLCdK1akxQ $SPX $QQQ $IWM $TSLA $NFLX $AAPL $FB $TWTR $GPRO $BABA $MBLY $BAC @RedDogT3
Scott Redler
22 Sep 14 14:05:19
Here's a link to today's video recap and look ahead $spy $nflx $tsla $fb $twtr $bac $gpro $baba $mbly $qqq http://t.co/xqFWIiPrEM
ClayTrader
22 Sep 14 14:04:26
$NFLX Stock Chart Analysis_ 9-22-14 - watch here: http://t.co/FKMyGmjNkw #stock #stocks #stocktrading
Squawk on the Street
22 Sep 14 14:03:52
RT @SquawkAlley: REALLY?! Netflix spoils its users with addicting website http://t.co/cEvGyg6sQo • $NFLX
Squawk Alley
22 Sep 14 14:03:43
REALLY?! Netflix spoils its users with addicting website http://t.co/cEvGyg6sQo • $NFLX
KAVEH ILKHANIPOUR
22 Sep 14 14:03:14
RT @jfahmy: Updated Thoughts on the Recent Price Action: http://t.co/BDnTMSD5D6 $SPY $QQQ $IWM $NFLX $TSLA
Don Looney
22 Sep 14 13:57:31
RT @chessNwine: NEW POST: Stock #Market Recap 09/22/14 {Video} http://t.co/djEBq6BpN8 $BABA $HLF $IWM $NFLX $TKMR
Ian Vandaelle
22 Sep 14 13:53:52
Ticktock, ticktock: Netflix has ~6 minutes to report subscriber information to the CRTC. $NFLX
Watchhimtrade.com
22 Sep 14 13:51:44
Of course not talking about THE top... but $NFLX says we're setting up for $QQQ $97's this week. Short biased < $445
B-SALE
22 Sep 14 13:50:37
RT @chessNwine: NEW POST: Stock #Market Recap 09/22/14 {Video} http://t.co/djEBq6BpN8 $BABA $HLF $IWM $NFLX $TKMR
Watchhimtrade.com
22 Sep 14 13:50:27
$NFLX is a leader... signaled $QQQ top in March, signaled bottom in April... she might have just signaled another $QQQ top today #becareful
Angelle
22 Sep 14 13:48:48
RT @OphirGottlieb: EOD: * News * Stock/Option Movers $SPX * Top Laboratory Story $NFLX $MSFT * Open Interest * Biotech Update http://…
Chess
22 Sep 14 13:43:35
NEW POST: Stock #Market Recap 09/22/14 {Video} http://t.co/djEBq6BpN8 $BABA $HLF $IWM $NFLX $TKMR
Carolyn B Miciano
22 Sep 14 13:38:48
Myths about risks in Options http://t.co/fRtuZrMDX5 $NFLX $PCLN $TSLA
Ophir Gottlieb
22 Sep 14 13:34:46
EOD: * News * Stock/Option Movers $SPX * Top Laboratory Story $NFLX $MSFT * Open Interest * Biotech Update http://t.co/MVsUfeRfBf
D-Ray
22 Sep 14 13:33:59
RT @GIR_STOCKS: $NFLX Good example of what clients get on the Private stream. These charts are good road maps we have research to confirm t…
D-Ray
22 Sep 14 13:33:55
RT @GIR_STOCKS: $NFLX Chart 3 http://t.co/cGCAoTg750
D-Ray
22 Sep 14 13:33:53
RT @GIR_STOCKS: $NFLX Chart 2 http://t.co/VZ2ZcnRoQ6
				
				
By  +Follow July 1, 2014 9:56PM
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