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

By  +Follow July 1, 2014 9:56PM
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. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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Results for NFLX
Jim Whitley
27 Mar 15 09:42:56
$NFLX working hard at avoiding the big gap. None here
27 Mar 15 09:42:53
$NFLX bouncing ! Would be nice to see $420's today 👍
Becky Hiu
27 Mar 15 09:42:51
$NFLX going for that 420? Wow. Would form awesome candle if so.
27 Mar 15 09:40:03
$NFLX $WWE: Weekly Pay-TV Notes: Netflix's New Content Deal, NBCUniversal's ...: http://t.co/15K4R0Sbs3
Common Capital
27 Mar 15 09:39:59
3/3 ...but LT econ of industry are not favourable to $NFLX. Plethora of incoming competition, low switching costs, supplier dependency, etc
Common Capital
27 Mar 15 09:37:54
2/3 $NFLX may bounce at earnings on higher subscribers who were looking to get HoC fix - key ST catalyst to keep in mind ... but
27 Mar 15 09:32:00
$NFLX With MaxPain at 430, will those (greedy, predictable) MMs really take this kind of blow?
Trending STOCKS Now
27 Mar 15 09:23:41
RT @chessNwine: I analyzed $OREX $SNDK $SWKS and much more in my video market recap from earlier: http://t.co/2e1FXU5EqC $NFLX $SPY
27 Mar 15 09:19:21
Weekly Pay-TV Notes: Netflix's New Content Deal, NBCUniversal's Partnership With WWE http://t.co/zCY3Jfmb3m by Trefis Team $NFLX $CMCSA
27 Mar 15 09:17:04
$NFLX OI for maturity 03/27/2015. 417.50 Highest put. 430.00 Highest call. http://t.co/6FIsVAkns2
Stock Hobbit
27 Mar 15 09:06:08
#Markets heading higher or lower? These #traders have some thoughts: http://t.co/ndv5bWOOj4 $NFLX $XOM $CVX http://t.co/n7fjcXpWPa
Trusted Binary
27 Mar 15 09:06:07
ALERT: New Social signal created on $NFLX - Low at 413.8 - Time: 16:06 - Strength: 5. Powered by http://t.co/cNIRQsIbJD
27 Mar 15 09:06:04
RT @TheOptionsNinja: Bought $NFLX $415 calls for $0.60
Tramell Taylor
27 Mar 15 09:03:24
$NFLX seems like people want to try and support at this level something tells me the market slides into the close.
NFLX Quote and News
27 Mar 15 09:02:22
$NFLX stock quote, 11:47am: 413.5001 -4.7599 (-1.1380%).
27 Mar 15 09:01:24
$NFLX Max Pain is 430.00 for maturity 03/27/2015. Price = 413.72. http://t.co/3WvMmroBYd
Becky Hiu
27 Mar 15 08:56:49
410 was the pivot bouncer for $NFLX. @christopherbrecher also informed me of the weekly 420C pounders.But I think we're done with the bounce
Becky Hiu
27 Mar 15 08:55:44
"@OphirGottlieb: $NFLX Has a MASSIVE Gap to Fill If It Can't Hold These Levels http://t.co/gfgGz2Mp96 http://t.co/7MSJs9FC0c" that's right;)
Insider Monkey
27 Mar 15 08:46:12
$NFLX, $AMZN, $TSLA: Arbiter Partners’ Top Picks and Puts http://t.co/y8p5LFCF2L
27 Mar 15 08:45:05
$REGN $NFLX Short these two
Ricardo Espinosa
27 Mar 15 08:41:19
STO $NFLX 410/415 short call spreads at 2.70, expire today.
27 Mar 15 08:38:12
$NFLX:US Netflix Lifted to Buy at Vetr Inc. (NFLX) #NETFLIX INC http://t.co/SsLtCsYGH7 #NASDAQ
27 Mar 15 08:35:54
$nflx next leg down to $395.
27 Mar 15 08:31:19
Bought $NFLX $415 calls for $0.60
a. quant
27 Mar 15 08:30:56
4/5 advertising $ this model could demand/generate and accordingly represent to Media giants $CMCSA and... $NFLX $AMZN $GOOG $FB ( $GLUU)
Falcon Global LLC
27 Mar 15 08:30:29
3/27/2015 Today’s Day Trade Daily Price Guide Posted $AAPL $AMZN $GOOGL $NFLX http://t.co/Eb4A5cZ6hX http://t.co/GmS3GHVdE8
things for free
27 Mar 15 08:29:45
RT ☐ Free guide to stop and trail stops http://t.co/Lr5igJBlcR $NFLX $PCLN $TSLA http://t.co/Lr5igJBlcR
27 Mar 15 08:29:07
$nflx just barely managed to get a full position at $114.70 avg entry
FinSentS SP500
27 Mar 15 08:21:44
$NFLX:US Netflix Lifted to Buy at Vetr Inc. (NFLX) #NETFLIX INC http://t.co/Mnp6vEJ9Ff #SP500
Lauren Holmes
27 Mar 15 08:21:13
$NFLX very volatile but great for trading. We track winners that hedge funds are buying http://t.co/huaLsH8iDZ
27 Mar 15 08:20:21
$nflx okay avg into puts from $114.50 on ward
Breaking News
27 Mar 15 08:20:02
$NFLX: Netflix, Inc. (NASDAQ:NFLX), http://t.co/Y5EvhpRfcT, Inc. (NASDAQ:AMZN ...: http://t.co/5O55nDk6rK
27 Mar 15 08:17:10
Sold $NFLX $415 calls for $1.20. (+100%).
Carolyn B Miciano
27 Mar 15 08:11:38
Free guide to stop and trail stops http://t.co/NSFlRwyXuk $NFLX $PCLN $TSLA
NFLX Quote and News
27 Mar 15 08:02:33
$NFLX stock quote, 10:47am: 411.54 -6.72 (-1.61%).
Alpha Maven Alerts
27 Mar 15 08:02:06
$NFLX active, relative volume: 5.0, 1H, 11:00 AM, #nasdaq $NDX $SPY
Tramell Taylor
27 Mar 15 08:01:45
$NFLX somebody's trying to pay less for their puts.
Common Capital
27 Mar 15 07:58:19
$NFLX to sub-$380 ahead of earnings
27 Mar 15 07:53:00
RT: http://t.co/Umd43QDMdW #webinar don't forget, we'll be cov'ing $SPY, $PCLN, $NFLX, $AAPL & More in a Free WE… http://t.co/lmgvNdjt5J
27 Mar 15 07:52:14
$NFLX in talks with UEFA to stream Champions League games next year $SPY $QQQ
Frank R / ClueLess8
27 Mar 15 07:52:00
don't forget, we'll be cov'ing $SPY, $PCLN, $NFLX, $AAPL & More in a Free WEBINAR on Sunday! Signup @ http://t.co/IYcjXXdWHg
Wolfgang Pfleghar
27 Mar 15 07:51:27
@RedDogT3 What do you think of $NFLX here? It's so oversold, it's not even funny!
27 Mar 15 07:51:25
$nflx its gets below $400 and it becomes the dream trade so not likely first attemp
Perfor Mance
27 Mar 15 07:48:34
Option Millionaires: therealliontamer: Thanks! $NFLX as posted on the puts...got the http://t.co/lLCMggd5cQ
Perfor Mance
27 Mar 15 07:48:34
Option Millionaires: ChubbyChaser: $NFLX Weekly PSAR @ 407.90- I'm thinking they http://t.co/50f0p3uLqo
Breaking News Now
27 Mar 15 07:45:02
$NFLX: Netflix Inc. (NASDAQ:NFLX) a Hold: Barclays: http://t.co/OONRsydLhx
George Hart
27 Mar 15 07:44:45
When you look at where many of the high visibility liquid glamour leaders are heading it's not a positive picture $TSLA $NFLX
27 Mar 15 07:38:46
$nflx..I'm not playing it, but there is an unrelenting buyer of the weekly 420 calls
27 Mar 15 07:38:38
RT @TheOptionsNinja: Bought $NFLX $415 calls for $0.60. Small lotto play.
Common King
27 Mar 15 07:37:04
Pretty amazing that $QQQ is flat and $AAPL -0.5%, $PCLN -0.75%, $NFLX -1.75%, $GOOGL -1.0%, $MSFT -0.5%
By  +Follow July 1, 2014 9:56PM



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