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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
Hedge.Bz
29 Jan 15 19:52:28
Even Netflix Knows Popcorn Time Is 'Netflix For Pirates' $NFLX | http://t.co/iEsAO9Nsch http://t.co/yNmojkROOW
HLy
29 Jan 15 19:52:27
Even Netflix Knows Popcorn Time Is 'Netflix For Pirates' $NFLX | http://t.co/AZFA4Byajd http://t.co/bVPlW1qJIX
Edward Graham
29 Jan 15 19:16:09
@iancassel ok but $CMG $NFLX $GMCR and $KORS are all very very liquid and are up between 300 - 1000% in 2 years. Not bad
iHangout
29 Jan 15 18:37:12
chartguy89: 2015 Trending Stocks: NFLX +0.30% Stock Charts $NFLX Netflix Inc. http://t.co/mlB7SHQ40E
Dan
29 Jan 15 18:37:12
video going out . talking Teflon mkt , $AAPL $NFLX and bios. hope everyone doing well http://t.co/k0EPaTRAtc
chartguy89
29 Jan 15 18:33:13
NFLX +0.30% Stock Charts $NFLX Netflix Inc. (NASDAQ) Last Updated: 01/29/2015 20:33:12 NFLX Stock Chart - 1 Mo http://t.co/KGZNcm4gi4
Kristin
29 Jan 15 18:29:54
@Carl_C_Icahn If you will try $AMZN Prime,im sure you will ditch $NFLX in a hurry & longed Amzn instead. Have your Mngr do DD Mr. Schechter.
DeidreZune
29 Jan 15 18:25:53
Binge-Watching TV Linked to Depression, Loneliness http://t.co/fBWy5E6U1q via @Variety So $NFLX should be required to carry #FDA Warnings?
whiteteeshirtrading
29 Jan 15 18:16:22
$NFLX new dumbest post i've ever seen, again, only on stocktwits http://t.co/ymdfTKsvsZ
Greg Thomas
29 Jan 15 17:47:41
Strong earnings from $NFLX $AAPL and $AMZN. Hoping for another strong performance from $GILD next week.
Drew Killah
29 Jan 15 17:02:01
β€œ@traderstewie: $AMZN could do what $NFLX did and run for several days in a row” wow! Just saw it closed at $350 in AH too!! πŸ˜‚πŸ”«
Guru Algo Trading
29 Jan 15 17:02:01
RT $AMZN Algos triggered BUY in SIGMA-X, CROSSFINDER, ATS, LX @ 19:51 P/T 370 #Quant $GOOG $BABA $FB $NFLX $BIDU $GPRO $TSLA $AAPL $QQQ #HFT
Dan
29 Jan 15 16:45:52
$NFLX high open interest range is 435.00 to 460.00 for option expiration 01/30/2015. http://t.co/5oFJcL1lW7
Drew Killah
29 Jan 15 16:45:28
β€œ@traderstewie: $AMZN could do what $NFLX did and run for several days in a row” ugh, and I was eyeing the Feb $350s calls for a lotto play!
TakingStock614
29 Jan 15 16:41:30
RT @traderstewie: $AMZN could do what $NFLX did and run for several days in a row
Someguy
29 Jan 15 16:32:39
$nflx calls below held until recently http://t.co/xKBjoHOr9o
Someguy
29 Jan 15 16:31:28
hit $amzn will play a lot differently tomm, PMs on notice now. Will buy 4 tranches of calls and hold ... My $nflx was up 2000%
Dan
29 Jan 15 16:31:26
$NFLX Max Pain = 437.50. Maturity = 01/30/2015. Previous close = 445.59. http://t.co/Z0xTub7LM7
Someguy
29 Jan 15 16:27:49
RT @traderstewie: $AMZN could do what $NFLX did and run for several days in a row
Tri B growthinvestor
29 Jan 15 16:17:58
Commented on StockTwits: $AMZN will break all resistance and be like $NFLX to new highs around $350. Buyers will ... http://t.co/FsUCHE4Z8y
Day Traders Group
29 Jan 15 16:16:37
Unusual Put volume scan http://t.co/qSDW2ImHpJ $DECK $SWY $EWG $FB $NFLX $SPY $CHKP $DD $HOG $WLT & More
BP
29 Jan 15 16:15:21
@RedDogT3 even in very confusing initial 1 hour, RDR worked perfectly. amazing $orcl $nke $adbe $ma $nflx - could have 1K easy buying RDR
webinara
29 Jan 15 16:09:04
RT: http://t.co/Gr0oeg35PU #webinar Get the most from weeklies http://t.co/HjAiMncX17 $NFLX $PCLN $TSLA
Carolyn B Miciano
29 Jan 15 16:07:35
Get the most from weeklies http://t.co/gtZSrqEINx $NFLX $PCLN $TSLA
Andrew Rocco
29 Jan 15 16:01:51
RT @traderstewie: $AMZN could do what $NFLX did and run for several days in a row
mytakeonoptions
29 Jan 15 15:59:52
@jimcramer If it does open $40, we have 2 well #LetItGo and buy more $NFLX long dated call options on pull back...πŸ˜€
traderstewie
29 Jan 15 15:59:34
$AMZN could do what $NFLX did and run for several days in a row
Steve #JThink
29 Jan 15 15:55:02
Know When To Walk Away Earnings Bet Complete Thanks to $msft $aapl $fb $ibm $nflx $amzn for Playing http://t.co/erdemtcNjR
ProTradersNews
29 Jan 15 15:51:07
$FB $TSLA $NFLX $AMZN $CLX $PFE $BABA $MMM $HAR: Cramer: What lurks behind these market selloffs: http://t.co/TBXaapFtfa
fazo
29 Jan 15 15:50:57
Craziest trading week of my life. Fuck. Almost got curb stomped to death. $fb $nflx $amzn saved me. Live and learn. 2-3 earning play- not 20
Steve #JThink
29 Jan 15 15:50:42
@SteveMahoney_ 7-0 on $nflx All #JMix Research and #SWOT with Beta Tools on $twtr http://t.co/xUPrm7XisW
Osmar Morales
29 Jan 15 15:47:34
I'm so happy $BABA crashed today. It was distracting traders from other better names $AAPL $FB $AMZN $NFLX.
FinSentS NASDAQ
29 Jan 15 15:42:40
$NFLX:US Netflix Deals With Broadband Providers Said to Get FCC Oversight #NETFLIX INC http://t.co/jYuqWFw2w6 #NASDAQ
Hugh Jr.
29 Jan 15 15:41:37
$NFLX is good for long term as well. Ever since they upgraded their streaming service they have been a top pick
jonas quinn
29 Jan 15 15:36:13
the four horsemen: $aapl $nflx $amzn $fb
Osmar Morales
29 Jan 15 15:31:33
Momo names for this quarter $AAPL $NFLX $AMZN $FB. Get them all!!!!!
Carolyn B Miciano
29 Jan 15 15:28:35
Any of these mistakes can be costly in Options http://t.co/vJaEdoEDmm $NFLX $PCLN $LNKD
StockNewsWires
29 Jan 15 15:26:03
$FB $TSLA $NFLX $AMZN $CLX $PFE $BABA $MMM $HAR: What's really causing these market selloffs: http://t.co/VOVb2s5Nno
Guru Algo Trading
29 Jan 15 15:08:45
RT $AMZN Algos triggered SELL in SIGMA-X, CROSSFINDER, ATS, LX @ 18:04 #Quant $GOOG $BABA $FB $NFLX $BIDU $GPRO $TSLA $AAPL $QQQ #HFT
Mike
29 Jan 15 15:00:52
$AAPL makes all companies look bad $GOOGL $GOOG $AMZN actually make $BABA look good. $NFLX is Q to Q
YourPersonalTrader
29 Jan 15 14:52:25
OH MOMO'! At today's trough nearly 100% retrace of the 100% retrace http://t.co/BkSvDDiYHq $AMZN $AAPL $NFLX $SPY http://t.co/DGEw953hFM
Stock Hobbit
29 Jan 15 14:52:06
#Markets heading higher or lower? These #traders have some thoughts: http://t.co/v1eaRRes2Y $NFLX $XOM $CVX http://t.co/maXKb0TIWF
Kyle Bazzy
29 Jan 15 14:40:54
RT @vader7x: Internets: $AAPL, $NFLX, $AMZN, $FB, $GOOG ... Should trickle to secondary names
Carolyn B Miciano
29 Jan 15 14:36:00
A simple way to learn the basics of Options http://t.co/qpxNEWS5ah $NFLX $PCLN $TSLA
W C Hsueh
29 Jan 15 14:34:20
$AMZN blows the shorts out with big earnings beat aka $NFLX style
Ian Nelson
29 Jan 15 14:31:27
@CNBCoptions So your chart guy hated $NFLX $FB $GOOGL and $AMZN...looks like a swing and a miss on all 4!!!! not @RiskReversal the other guy
Bradley
29 Jan 15 14:28:06
Great FREE #tutorial here for #traders http://t.co/LEJZ0Oqxci $NFLX $BAC $AMZN $MSFT $AAPL $GOOG $GOOGL $FEYE http://t.co/TsmCIrzzsB
Carolyn B Miciano
29 Jan 15 14:26:07
Get all the details of US Indexes http://t.co/nE0PeuC0WO $NFLX $PCLN $TSLA
IMG FUNDING
29 Jan 15 14:15:01
You Can Easily Save Hundreds by Sharing Your Accounts http://t.co/YSdXOVnfMH via @daily_finance $NFLX $AMZN $TMUS
Ed
29 Jan 15 14:06:21
@JonErlichman @hblodget It shows. $AMZN prime videos are comparable to $NFLX now.
				
				
By  +Follow July 1, 2014 9:56PM
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