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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.

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Results for NFLX
Cong Wang
24 Oct 14 22:22:40
@shatil Come on! You own millions of $NFLX!
24 Oct 14 22:16:09
24 Oct 14 22:14:44
cause I went back a day or so looking @ the discussion/tweets ^& saw no-name twitters asking their gurus what they thought about $NFLX LOL
24 Oct 14 22:13:53
well... THAT day was something else .. $NFLX reported & NONE of the brand-name gurus were discussing it & IT WAS THEIR MUPEPTS who BOUGHT
24 Oct 14 22:12:43
& looked also @ $NFLX and saw NONE of the brand-name gurus discussing it - ALL were ON $AAPL & some said 2 their followers - "CALLS" LOLOL
24 Oct 14 22:10:27
recall when $NFLX was trading in the 90s just PRIOR to that eventful earnings day that $AAPL also shared. I tweeted out of my head, as usual
Alpha Maven
24 Oct 14 21:28:42
RT @bespokeinvest: Here's a chart showing Biotech lapping the Internet group recently: http://t.co/E80ipzzdIx $IBB $QQQ $YHOO $GOOGL $NFLX…
Yu Zhu
24 Oct 14 21:20:39
RT @bespokeinvest: Here's a chart showing Biotech lapping the Internet group recently: http://t.co/E80ipzzdIx $IBB $QQQ $YHOO $GOOGL $NFLX…
Wincrease Team
24 Oct 14 21:07:42
The +14 option plays have been loaded. $AAPL $AMZN $FB $GOOGL $NFLX $TSLA - http://t.co/8AM2OQ3NLy
24 Oct 14 21:06:25
RT @ReformedBroker: The Millennial’s have a different Dow Jones Industrial Average than the Boomers. It includes $FB, $CMG, $UA, $TWTR, $NF…
Jaren Glover
24 Oct 14 20:53:20
Picked up some $AMZN today - hate I missed the $NFLX drop - hoping for better #s from $LNKD $TWTR - sold $SPLK -scooped $VMW just a week ago
Brody Antenna
24 Oct 14 20:44:13
Check out our very Latest positions $PCLN $AAPL $SPY $MU $FB $NFLX $TSLA $AMZN $GLD $BAC $XLF $VXX $F
Emory Redd
24 Oct 14 20:19:41
RT @bespokeinvest: Here's a chart showing Biotech lapping the Internet group recently: http://t.co/E80ipzzdIx $IBB $QQQ $YHOO $GOOGL $NFLX…
Hedge Fund of One
24 Oct 14 20:10:45
On 2014-10-17 opened $NFLX 12/20/2014 330-385 strangle long at 21.40. Today, rolled call to 410 strike for 108% profit & reduced risk.
Twiter For Seniors
24 Oct 14 19:44:09
Is @MarkCuban Right About Netflix Stock? $NFLX http://t.co/GajO7rOCWk <--bummed I didn't see his tweet at the time
Bidness Etc
24 Oct 14 19:15:16
Alibaba has made significant inroads in the content business this year ; a cause of concern for Netflix http://t.co/UnhCAetdj2 $BABA $NFLX
24 Oct 14 18:28:17
best ones to trade all next week: $BIDU $LNKD $NFLX
24 Oct 14 18:27:10
Monday day trades: $AAPL $CMG $LNKD $NFLX
24 Oct 14 18:07:04
#BREAKING: Netflix Inc. $NFLX 3Q EPS: $0.96 inline with expectations
24 Oct 14 17:30:03
Carolyn B Miciano
24 Oct 14 17:19:05
Free course on delta neutral trading http://t.co/lsYqHTgQj6 $NFLX $PCLN $LNKD
24 Oct 14 17:10:52
RT @Bidnessetc: Should #Alibaba’s Move Into #Hollywood Concern #netflix ? http://t.co/2Ax7PxIz4Y $BABA $NFLX
24 Oct 14 16:26:22
@wuzupwidat well shorting $NFLX and $GOOG has paid off.
Christopher Paul
24 Oct 14 16:21:37
$NFLX Took oct 31 405 calls at .92 cents, think going for gap fill, we'll see high risk
24 Oct 14 16:09:41
24 Oct 14 16:00:06
$NFLX just like clock work prediction was true made by MsPutOptions just 22 hours ago http://t.co/jaQEsdFLqi
Mason Revelette
24 Oct 14 14:55:32
@Carl_C_Icahn time to put $AAPL balance sheet to work by buying $NFLX or HBO and owning content too?
Bidness Etc
24 Oct 14 14:46:28
Should #Alibaba’s Move Into #Hollywood Concern #netflix ? http://t.co/2Ax7PxIz4Y $BABA $NFLX
24 Oct 14 14:45:08
$NFLX OI for maturity 10/24/2014. 350.00 Highest put. 370.00 Highest call. http://t.co/YQ4XnCWaNs
Carolyn B Miciano
24 Oct 14 14:33:23
Intro course to Call options http://t.co/qpxNEWAu2d $NFLX $PCLN $LNKD
24 Oct 14 14:30:26
$NFLX Max Pain is 365.00 for maturity 10/24/2014. Last close = 385.02. http://t.co/bhsAbLAk49
24 Oct 14 14:30:03
Kim Bangash
24 Oct 14 13:59:53
TV Is Disrupting Internet (not othr way round) http://t.co/vjFopYnmKz $NFLX model rejects cnvntns of web NOT: -UGC -social -bite size -free
Kim Bangash
24 Oct 14 13:57:12
TV Is Disrupting Internet (not othr way around) http://t.co/vjFopYnmKz $NFLX breaks frm web & reverts 2 pay TV -fees -licenses -pays talent
Rotten Al
24 Oct 14 13:42:31
Momo Divergence Update YTD: $TSLA keeps beasting, $NFLX comes down, $AMZN continues to lag http://t.co/4CDXRRA4gX
24 Oct 14 13:37:37
RT @BuckarooTrades: $NFLX sold remaining for 100%. $CELG sold remaining for 700%, best trade for me in a long time. $AMZN was a 100% loss o…
MarketWatch $NFLX
24 Oct 14 13:35:20
Roku said to be working on IPO plan http://t.co/tTOdL7DRnX $NFLX
NFLX Quote and News
24 Oct 14 13:32:27
$NFLX stock quote, Oct 24: 385.02 +1.98 (+0.52%).
Leilani Pips
24 Oct 14 13:26:44
Carolyn B Miciano
24 Oct 14 13:21:00
Methodical approach to Options mastery http://t.co/n6J42WkyRH $NFLX $PCLN $TSLA
Timmy! Boutillier
24 Oct 14 13:18:44
$NFLX Put me down for some December 385 Puts @ the close
Momentum Stocks
24 Oct 14 13:14:45
Commented on StockTwits: $SPY might gap up on Monday. I sold puts on $BIDU $SPX $NFLX; worked out great. http://t.co/odD41CmC0M
Juan Doe
24 Oct 14 13:08:07
"Breaking Bad" via $NFLX, cold beer and some popcorn. Have a nice weekend! #Friday
24 Oct 14 13:06:24
$NFLX sold remaining for 100%. $CELG sold remaining for 700%, best trade for me in a long time. $AMZN was a 100% loss on the 300 weeklys.
24 Oct 14 13:03:09
$SODA is he the same Whitney Tilson who pumped $CALL ( $NFLX of VOIP ) and then dumped ? pump and dump continues well orchestrated
Investors Hangout
24 Oct 14 13:02:59
$EWZ Ideas Click Here: http://t.co/LiEi18AWdx Also See: $WNTR $SWC $EXMT $NFLX ~
Woll Street
24 Oct 14 13:02:31
Also bought back $NFLX 170 bottom of put spread for $1.95 for +2.75. See if the 180 puts pays next week.
Igor Tsukerman
24 Oct 14 12:58:01
Is NeuLion The Netflix Of #Sports? A Deep Analysis ($NEUL, $NFLX) | Seeking Alpha http://t.co/a9TafkUyvn #video #content #SmCap #investing
Momentum Stocks
24 Oct 14 12:51:58
$NFLX sold half at $385.03 from $358.84 for +$26 a share
24 Oct 14 12:40:28
RT @themotleyfool: As investors fled Netflix, sending shares down 21%, billionaire Mark Cuban eagerly bought in. Here's why: http://t.co/p8…
By  +Follow July 1, 2014 9:56PM



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