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
Forex Insight
20 Aug 14 05:39:58
RT @t3live: Morning Call Express @RedDogT3 & @brittanyumar $EWG $FXI $SPX $AAPL $NFLX $LNKD $FB $TWTR $GLD http://t.co/xCrJX8ZGEZ http://t.…
Winborn Traders
20 Aug 14 05:39:29
Get Your 7-day Free Trial $ES_F Live Trading Room Visit http://t.co/WVACMVOgel $SPY $FB $NQ_F $SPX $YM_F $TSLA $NFLX $TWT $QQQ $DJI
Chasing Stars
20 Aug 14 05:38:04
$PCLN Ask http://t.co/L0ludbblr7 Also See: $TLT $SMH $NFLX $TQQQ ~
Langan Stocks
20 Aug 14 05:37:03
$NFLX Last Trade http://t.co/54WxXTvxMk Also See: $TQQQ $GLD $X $F ~
Emini Scalping
20 Aug 14 05:36:17
Get Your 7-day Free Trial $ES_F Live Trading Room Visit http://t.co/C7XdIaqZS4 $SPY $FB $NQ_F $SPX $YM_F $TSLA $NFLX $TWT $QQQ $DJI
Biz Headlines
20 Aug 14 05:35:35
$NFLX: Netflix, Inc. Reaches 3 Million Subscribers In UK http://t.co/5zerMJQgaT http://t.co/9GAlTUNVmy
EMini Futures
20 Aug 14 05:26:52
Get Your 7-day Free Trial $ES_F Live Trading Room Visit http://t.co/aI6ddWtADO $SPY $FB $NQ_F $SPX $YM_F $TSLA $NFLX $TWT $QQQ $DJI
nasdaqfan
20 Aug 14 05:24:34
$NFLX Company Info http://t.co/BjjCuDA5vZ Also See: $ERX $LNKD $USO $AA ~
Trevor G
20 Aug 14 05:22:22
These damn fed minutes better not mess up my green streak. $MINE $AAPL $LNKD $NFLX $RFMD
Winborn Traders
20 Aug 14 05:21:17
Get Your 7-day Free Trial $ES_F Live Trading Room Visit http://t.co/Z6SZ3Hl1t0 $SPY $FB $NQ_F $SPX $YM_F $TSLA $NFLX $TWT $QQQ $DJI
Investors Hangout
20 Aug 14 05:18:24
$NFLX Open http://t.co/W9s5SZlKtn Also See: $JMEI $UA $SLTD $HGU.TO ~
PolgarStocks
20 Aug 14 05:18:03
$NFLX Current Price http://t.co/daZ4xBSKRD Also See: $YELP $MO $HNU.TO $MTVX ~
Stock Forums
20 Aug 14 04:56:12
$NFLX Day Low http://t.co/0DrW8imiVH Also See: $EBAY $GDXJ $ACHN $MO ~
Chasing Stars
20 Aug 14 04:51:50
$NFLX Ex-Div Date http://t.co/9tlYkH47Be Also See: $GRCU $FR.TO $TZA $C ~
Delta Force Options
20 Aug 14 04:51:19
RT @ThinkingAlpha: Watchlist for today: $NFLX $TSLA $TGT $LOW $AAPL $LOCO $FOLD $GOOGL Share ur watchlist on the forum http://t.co/OpfXXnwb…
Don Fishback
20 Aug 14 04:48:57
Bandwidth Hogs $SPX, $NFLX, $SPXPM, $GOOG.L, $ICPT http://t.co/DR2KG0l1ah
OptionApps
20 Aug 14 04:48:57
Bandwidth Hogs $SPX, $NFLX, $SPXPM, $GOOG.L, $ICPT http://t.co/ghztCckfQU
Market News
20 Aug 14 04:35:34
$NFLX: Netflix is now paying Time Warner Cable for direct access and faster streams http://t.co/pW5vKi5JxQ http://t.co/gotDlJvKRT
ARK Web x.0
20 Aug 14 04:30:42
$NFLX has signed a paid #peering deal with $TWX, now has direct access/faster #streaming with all four major #ISPs http://t.co/EpwDGkwOBF
4-traders.com
20 Aug 14 04:25:02
Netflix : 'Orange is the New Black' Author to Speak http://t.co/AjGuep78dK $NFLX
Thinking Alpha
20 Aug 14 04:15:01
Watchlist for today: $NFLX $TSLA $TGT $LOW $AAPL $LOCO $FOLD $GOOGL Share ur watchlist on the forum http://t.co/OpfXXnwbYb
Investors Hangout
20 Aug 14 04:01:41
$MHR Quotes http://t.co/zyyI8wgnQE Also See: $XONE $NFLX $XLU $VRX ~
Gambler
20 Aug 14 03:22:17
$YOD is the Chinese Netflix $NFLX
12Stocks.com
20 Aug 14 03:02:46
Weekly Nasdaq100 #Stocks Trend $YHOO $BIIB $AVGO $AKAM $FFIV $MU $CTRX $ROST $STX $NFLX $ISRG $ADBE $AAPL $ILMN @ http://t.co/wz4pxpINCJ
Business Updates
20 Aug 14 01:35:37
$NFLX: [video] Is it time to short Netflix? http://t.co/pr4LuL6aFh http://t.co/mZJaPcIxmU
Investors Hangout
20 Aug 14 01:06:03
$IBB 52Wk High http://t.co/CbS2l3VTjD Also See: $NFLX $MU $SUMR $MINE ~
nasdaqfan
20 Aug 14 01:01:31
$IBM 52Wk Low http://t.co/SYzwEje06a Also See: $USO $DGAZ $FSLR $NFLX ~
Investors Hangout
19 Aug 14 22:57:11
$GOOG Open http://t.co/c7HNVAYkCi Also See: $NFLX $ECAU $RSX $DDD ~
Langan Stocks
19 Aug 14 22:52:14
$GMCR Shares http://t.co/BaKg0qpNgH Also See: $DSCR $VRNG $NFLX $XLY ~
Antonio Costa
19 Aug 14 22:18:05
$NFLX Netflix streaming service hit by partial outage http://t.co/WcNLyM2A12
don herald
19 Aug 14 21:43:42
$NFLX The best is yet to come. ... Hoy coming
Financial Headlines
19 Aug 14 21:35:55
$NFLX: Ultra HD TV could remain a luxury like Coach handbags http://t.co/Y4RJgYL708 http://t.co/yjxZmM0R4h
PredictWallStreet
19 Aug 14 21:00:35
The PWS Poll Results for $nflx, 8/21/2014, are: 53% up. See more at: http://t.co/9jURi0WmkX, @PredictWallSt
PredictWallStreet
19 Aug 14 21:00:33
The PWS Poll Results for $nflx, 8/21/2014, are: 50% up. See more at: http://t.co/9jURi0WmkX, @Stock_Sentiment
Mohamud
19 Aug 14 20:59:17
$NFLX - $NFLX Seems to print its last upside leg (We doubt it will last) - https://t.co/WKxLy126Cw
TV_Trading Ideas
19 Aug 14 20:59:04
$NFLX Seems to print its last upside leg (We doubt it will last) $NFLX http://t.co/W4VlBVrH62
Langan Stocks
19 Aug 14 20:58:25
$FFIV Quotes http://t.co/tWusPqvZTb Also See: $MDY $EVSV $NFLX $PAM ~
Christian Tharp, CMT
19 Aug 14 20:51:08
RT @PaulCiana: $TSLA made a new high first, today $AAPL...I'm only guessing that $NFLX is next! #stocks #newhighs http://t.co/6f2jOcO6oE
Gustavo Villa V.A.
19 Aug 14 20:48:54
@bennyrv me encantan esas acciones de empresas que cambian sus mercados, la manera de pensar, hacer y ver las cosas, como $Nflx o $Tsla
@Abel_says
19 Aug 14 20:42:17
"@RedDogT3: Here Is a link to today's video recap and look ahead $spy $qqq $aapl $googl $nflx $fb $lnkd ... http://t.co/vC64R0F6kf
@Abel_says
19 Aug 14 20:41:10
"@RedDogT3: Here Is a link to today's video recap and look ahead $spy $qqq $aapl $googl $nflx $fb $lnkd ... http://t.co/wBuO8hOJD7
TradablePatterns
19 Aug 14 20:37:57
http://t.co/4TiYiBtg9Y Today's multiple timeframe analysis on $TSLA, $CT_F, $ZC_F, $KC_F, $ZW_F, $VIX_F, $ES_F, $NQ_F, $GC_F, $NFLX, $NG_F
Market Updater
19 Aug 14 20:35:34
$NFLX: Netflix: Updates ISP Speed Rankings http://t.co/kL1bFVIm5E http://t.co/BInlt43FYr
Anni_V
19 Aug 14 20:32:04
$NFLX winner from $423 past 3 weeks, near testing the high. p/b potential 450, b/o to 485-490 http://t.co/J5ZJxfglEs
Jae
19 Aug 14 20:29:55
RT @JohnEarlBurnett: @netflix If your the premium streaming service, why is every "A" list movie that I want to watch only available via DV…
TradingWins.com
19 Aug 14 19:56:25
Our Favorite Trade Setup of 2014 http://t.co/YHARUb5ZFD $BIDU $BIIB $FFIV $FB $GMCR $JAZZ $PCLN $MA $NFLX $PCYC $QIHU $REGN $SINA $UTX $V
Gustavo Villa V.A.
19 Aug 14 19:52:51
Que buenas series House of cards, Homeland, breaking bad...esto me provoca un sesgo positivo hacia la acción hay que reconocerlo $NFLX
Dan
19 Aug 14 18:38:13
$NFLX high open interest range is 460.00 to 475.00 for option expiration 08/22/2014. http://t.co/T89572kqtd
Langan Stocks
19 Aug 14 18:35:58
$DIS Summary http://t.co/FexlnboMHL Also See: $KMI $GRUB $KNDI $NFLX ~
Bulls vs Bears
19 Aug 14 18:35:36
$NFLX: [video] Should HBO trade under own symbol? http://t.co/NjT3l29dUX http://t.co/Vd43ZM8GJN
				
				
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.