Analyst Analyzer

After more than 5 months at looking at analyst coverage news, this is the first time that I have seen so many target price reductions. Usually the majority of the coverage updates that I saw were upgrades and price raises. Is this good news?? Probably only to a contrarian. I’m afraid and I might look at reducing my exposure slowly. One of the advantages I have when I’m using a discount brokerage is that it only costs me about $4.95 per trade.

Based on 84 stock trading days this year, the average percentage of target price reductions was less than 10% which means 1 in 10 stocks had an analyst lowering the price target. Today, the percentage was almost 40%.

Here is the list of stocks that are affected:

Ticker / Company Name/ Target Price
NYX NYSE Euronext $34.00
NDAQ NASDAQ $22.00
ETFCD E*TRADE $17.00
TROW T. Rowe Price $60.00
LM Legg Mason $31.00
JNS Janus Capital $12.00
IVZ Invesco $24.00
FII Fed Investors $25.00
CNS Cohen & Steers $25.00
BLK BlackRock $185.00
BEN Franklin Resources $115.00
ART Artio Global Investors $22.00
MS Morgan Stanley $36.00
GS Goldman Sachs $205.00
TLB Talbots $18.00
AXP American Express $49.00
STX Seagate Tech $20.00
ATPG ATP Oil & Gas $10.00

As an investor hoping to cut some of the volatility in my portfolio for more peace of mind, I’ve been looking for safer places to put my money.   I’m not talking about the obvious places where your money basically grows so little that it doesn’t make a difference.  I’ve now focused my attention on dividend paying stocks and of course I am matching these up with analyst recommendations.  Any dividend/distribution paying company will spark my interest because these stocks tend to hold their value better and there is potential for upside.  Dividends are also good from a tax perspective in that they are taxed less.  A lot of brave investors bought the high yielding dividend stocks during the market down turn.  The lower the stock goes, the higher the yield is so you’re getting more bang for your buck.  I don’t want to go into how dividends work as there is enough easily accessible information about this, but do be careful with the companies that you invest in as dividends can be  reduced or canceled.  BP is now under pressure to reduce or cancel their dividend so that uncertainty is an additional problem for their stock.  Sometimes stocks will pay a special dividend to spark some interest to their investors.  Hot Topic is an example of this.

On April 7th, the company announced a one-time cash dividend of $1 to be paid May 3 to shareholders of record as of April 19.  This immediately caused the stock price to raise because suddenly the stock was worth at least $1 more since investors would be getting that back.  Unfortunately, since it was a one-time dividend and a subsequent earnings disappointment, the stock has dropped dramatically from its peak.  The high in April was $9.96, and immediate drop was followed after investors were no longer eligible for the one-time dividend, and now it’s trading at about $5.41.  I had some shares of this company but sold out when things were not looking right which resulted in about a 10% loss.  It definitely could have been worse.

I was looking at the past 2 days to find which stocks were upgraded and from those stocks, which ones have a dividend and here is what I found:

Digital Realty Trust – DLR price target of $64, 3.4% yield, current price $59.80

Werner Enterprises – WERN  – price target of $28, 0.9% dividend yield, current price $22.68

Agnico-Eagle Mines – AEM – price target of $76, 0.3% dividend yield, current price $58.26

Deere – DE – no price target, 2.1% dividend yield.

Renasant Corporation – RNST , no target price 4.7% dividend yield, current price $13.88

Positive recommendation combined with a decent yield or a balance of the 2 make these stocks worth looking at.. Of course you’ll need to do more research for each stock especially in terms of the history of paying out and increasing dividends, whether it is downward or upward trending, financial statements, etc. etc.

I’ve never even heard of Renasant Corporation but apparently it’s a financial company.

http://finance.yahoo.com/q/pr?s=RNST+Profile

I’d also like to talk about chasing dividends for quick gains but I’ll leave it for another post.

I haven’t posted in a while because I was on vacation on I wasn’t able to collect data during that time which threw of some of my numbers.

I’ve also lost enthusiasm for this market when it started tanking after Goldman Sachs got hit by the SEC.  It has been mostly down, day after day since then.  Billions of dollars of investors’  money has been wiped out and that may well be the catalyst.  It’s interesting how the SEC is supposed to protect investors but by doing so may have triggered the market dip that has no end in sight yet.

One of my stop losses was trigger for Apple stock yesterday when the stock bounced all the way down to $200 from more than $240+.  Normally this would have been a good thing for me if Apple stayed at $200, but since it bounced back up within 20 minutes, I knew there was something wrong and I immediately lost the gains that I had made from purchasing the stock at $192.50 a few months ago.  So far the popular explanation is that someone fat fingered a large sell and then there was domino effect afterwards.  The NASDAQ cancelled a lot of trades between 2:40pm and 3:00pm yesterday due to erratic behavior my trade didn’t count because the stock did not drop more than 60%.  I guess the people who were selling Accenture at 1 cent can breathe a sigh of relief.  Imagine selling all your stock for 1 cent/share when it was worth $44/share  just an hour ago or buying so many shares of Accenture stock that you’d a good percentage of the company.

There is never short of fear mongerers on tv who were trying to blame this blip on Greece.   It was one of the most disappointing days for me as an investor because so many people tried to make sense of it with the gloomy economic issues in Europe but no theory in economics could not make sense of this movement.  There was no declaration of war, no country defaulting, nothing drastic in the news that would have caused the DOW to almost drop 1000 points… yet television always finds someone who thinks he/she knows what happened.

I was also very disappointed that the prudence I had in setting a stop loss ended up costing me money.  My sell price was actually $226/share but by the time it automatically sold, it was $212/share.  That’s probably a few seconds or a split second that the price dropped which is impossibly fast for Apple stock.  Too bad there wasn’t a system that halted trading at the time to avoid this kind of erratic behavior.

What is the strategy going forward?  Take more profits, sell more losses, and keep buying safe dividend paying stocks.  There were a lot of stocks that were safe that barely moved and I will probably be buying more shares of those.  Perhaps stocks that do not belong to big ETFS are safer than those that do, at least safer from fat fingering.  However,  that means there won’t be much volume.  Maybe I’ll purchase some gold, GLD ETF, that seems to be the place where people are going but there is no safe place to go if people start liquidating and holding cash.  Not even gold is safe.

I hope we’re at the bottom now, there has been enough tanking, the correction is over, next week is going to be a better week I’m sure.    This is just me being optimistic.  I have no idea what will happen next week.

On April 12, 2010, JP Morgan upgraded CHRW - C.H. Robinson from Neutral to Overweight. The target price was revised from $24 to $32 but the strange thing was that the previous day’s closing price for CHRW (4/11/2010) was already more than the target price, at $56.45. That’s more than 43% above target price. Now how are investors supposed to interpret this? When JP Morgan says Overweight, it means: “Expects stock to outperform average total return of stocks in analyst’s or analyst’s team’s coverage universe over next 6-12 months.” This is a pretty strong signal to buy and their highest recommendation. However, they’re targeting the stock price at $32, so why would I buy if they are predicting it to drop 43%. This doesn’t make a whole lot of sense. I thought there was something wrong with my data but I double checked it and it was correct. Surely a global company like C.H. Robinson with more than $7 billion market cap and more than 7,000 employees deserves better analyst coverage from JP Morgan. Fortunately, opinions from other analysts were more reasonable and the stock price was not really affected that day and today closed at $57.74.

http://www.finviz.com/quote.ashx?t=CHRW&ty=c&ta=0&p=m

Analysts often upgrade stocks and revise their target prices but I’ve noticed on many occasions this information is too late because the price is already too close to the target for anyone to make significant gains. Investors don’t want old news because more than likely, we’ve missed the boat! In this specific case for JP Morgan, they are so late and so off that the current price is above the target price. After reviewing my data of stocks that were upgraded and had target prices set or raised, I found 866 opinions since 2/24/2010. Out of these, 91 opinions had a target price of 5% or less than previous day’s closing price. That’s 10.5% of the total. What does that tell us? 1 in 10 analysts are updating their opinions when the action is already over. There is little to no benefit for investors because of the timing of this information. I hope they’re not holding back this information for internal use first before releasing it to the public.   The worst performer was Credit Suisse where 14 out of 62 opinions were made when the price was 5% or less than the target price, that’s a whopping 22.6%. Close to 1 out 4 recommendations were worthless. Ok this is as negative as this post is going to get. Here comes the better news. Which analysts are providing us stocks that have more potential? I filtered out any analyst that had less than 10 upgrades/target price raises since 2/24/2010. Then I did an average calculation on all their estimates and filtered out any analyst that had an average target price of less than 25% from the current price of the stock and here is my list of analysts and their average:

I’m not saying that these analysts are correct but I am saying that their information is more valuable when it comes to timing. Some of these target prices could be very long term and some can just be totally wrong but my point is that there is no point in upgrading a stock to BUY, and setting the target price at the same price or very near to the price that it closed at on the previous day. The run up to the price is already over.

I can also see that these numbers might skewed a bit just because the amount of data is less than I would have liked but I do think that there is enough  beneficial info and these numbers that I’ve crunched can set some expectations.

There are a lot of buy and hold investors out there.  I certainly do not consider myself one of them so when I see an analyst downgrade a stock to HOLD or Neutral, this is a signal for me to GET OUT, to SELL as opposed to sticking around and waiting for it to be upgraded back to BUY.   Of course the stock may have already been dumped enough for it to hit my automatic sell price so I won’t have a choice anyway.  To be clear,  the situation is when the stock is DOWNGRADED and the target price was lowered or unchanged.  It’s not the same if the stock is upgraded from SELL to HOLD/Neutral or if the analyst has initiated coverage and started with HOLD/NEUTRAL.  As mentioned in an earlier blog:  Initiating Coverage – Can we take advantage of it?  http://wp.me/pOz5p-v ,  an analyst initiating coverage could be a sign of good news to come.  I looked over analyst opinions that I have been tracking in the last 3 weeks and out of 95 opinions where the stock was downgraded to HOLD/Neutral and the target price was unchanged or lowered, only 19 stocks had their price rise that day and out of those 19, only 6 had a rise of more than 2%.  The remaining 76 opinions resulted in price drops, and 46 of 76 dropped more than 2%.  This confirms that the market is viewing these downgrades negatively.  Investors/institutions are cashing out to buy something with more upside potential. 

Why would you hold the stock if there are no recommendations to buy it?  No buyers means no demand, which means over-supply, which means price drop.   This is especially true if there is no dividend to pay investors while holding the stock.   Having already discussed how seldom analysts recommend selling, going forward a downgrade to HOLD/Neutral to me is as good as a SELL to me.

After Apple announced that more than 300,000 iPads had been sold on the first day, the stock was definitely heading upwards right from the start this morning but it didn’t quite make it to a new high, it teetered between $234.77 and $238.51. I had a chance to look at the iPad on Saturday and I honestly did not find it that much different from my iPhone other than the size of course. It was very easy to use since it behaves the same way as my phone. Personally, I don’t intend on buying one but the store was sold out so there was definitely enough interest in it. I must say that I’m really not a good judge of what a great product is. For example, it took me a while just to be receptive to the iPhone but once I saw enough people using it and very satisfied, I was totally sold and I had to have one. That and the fact that the screen in my old phone completely died. With the stocks I buy, I try to do some on-site research as much as I can. This is especially true and easy for retail stores, I can always walk into the store to get a sense of what I’m investing in.

There were also two analysts that raised the target price for the Apple:

1) Canaccord Adams, $250 to $300
2) Kaufman Bros, $253 to $295

Both of these analysts have followed the stock since late 2008 when it was less than $100 and they’ve been generally bullish, which means they’ve been correct and consistent. 

Hope everyone had a Happy Easter weekend!

Is there a point when there are too many analysts covering a single company? YES and.. NO. First YES:
Why do we need so many people pouring through the company’s papers to analyze a company especially if everyone feels the same way about the company.   I don’t see any value in one analyst saying the stock will go up to $100, while another analysts says the stock will go up to $101. Stocks that have a lot of coverage usually don’t have many surprises unless the companies are able to keep their secrets safe. Yesterday the Wall Street Journal reported that Apple was developing the a CDMA phone for Verizon, and there has already been news of a new iPhone 4G being released this year. This news resulted in a 1% to 2% pop today. If the secrets can’t be kept safe, you can be more sure that the stock trades “efficiently”, meaning that all the news should about the company are included in the stock price. With that in mind, that also means that the stock has been valued correctly and any chance of picking up the stock when it is undervalued is slimmer. These analysts are competing for readers just like the author of a new book. They want to cover companies that are hot.  

And now NO:

A lot of coverage can also be a good thing because it can create more buzz for buying. The more investors  interested in purchasing the stock, the higher the price will go. That’s just basic supply and demand. Here is an article that I read about how stocks with a lot of coverage but where opinions/prices vary have more potential for gains. I think that’s very reasonable because if everyone agreed on the target price of the stock, then that’s where the stock would be selling at but when analysts disagree, then the stock could be discounted a bit.

http://online.barrons.com/article/SB126663091517648855.html

Here is a good article where analyst estimates are reviewed for AAPL.  There are more than 45 analysts covering AAPL.  I’m particularly interested in AAPL these days because I own the stock and I want to see one of the new iPADs! 

http://brainstormtech.blogs.fortune.cnn.com/2010/01/26/apples-earnings-the-streets-big-miss/

One of the indicators that investors use to gauge the health of the markets is the # of advances versus the # of declines.  This makes a lot of sense because it gives us an absolute number in terms of how many stocks have gone up, and how many have declined.  When looking at the Dow/Nasdaq/S&P500 indices, sometimes they are thrown off or skewed by several companies that have made major moves.  Although the Dow is used very often, it only represents 30 companies.  That is not really a good representation of the market.  That being said, the advances/declines ratio has its own limitations.  Investors can’t use it to determine how much the stocks have gone  up/down or how much the market went up/down.   For example, if there are 2 advances to have 1 decline, 2:1 ratio, one would not be able to interpret that the market went up by 1% today.

Here is a good place to start understanding how using the advance/decline indicators give you an idea of the “breadth” of the market. 

http://www.investopedia.com/university/marketbreadth/marketbreadth3.asp

Where do we find the number of advances and declines?  I personally using Yahoo Finance.  Starting from here:  http://finance.yahoo.com/advances  , you would click on ”View more indices” on the left hand side and then on the left hand side in the Market Stats, click on “Advances & Declines”, you’ll see something like this:

Or you can also just click on this:  http://finance.yahoo.com/advances

I started to wonder whether using the # of  upgrades versus downgrades or the # of analysts raising price targets versus the # of analysts lowering price targets provides similar information.   That answers is absolutely NO.  Each day I look at all the price changes and upgrades and there are an overwhelming large number of stocks being raised/upgraded compared to stocks being lowered/downgraded despite whether the market has gone up or down for the day.   Based on what I have been seeing, the analysts are overwhelmingly positive.  This may tell me that we’re in for some new highs in 2010 or it could also be a untrustworthy indicator.   With all this positive sentiment, you can’t help but think that investors must be pouring all their money back into the market and at the very least the individual stocks should be getting a temporary pop for the day.  However, the market overall has still been a bit of a rollercoaster, it hasn’t been just going up non-stop.  Fortunately, there have been more Ups than Downs in the last couple of months but there have definitely been days where the market has barely moved or has moved down and yet these analysts are still overwhelmingly positive for the stocks that they cover.  Therein might lie the problem.  The coverage of the stocks generally are for the well-known companies or companies with potential to make some money from.  Why would an analyst cover stocks that never move and never will?  To be fair, I’d only want to look at a company that I might be able to make some money in too.  If there was daily unbiased coverage for every company or at least a good representation of companies, then we could use analyst sentiment to decide on the health of the market.

1)  Making profits from short selling or buying puts
2)  Trying to get into the market at a lower price
3)  Trying to increase the positive outlook for another competitor
4)  Paid to  by another company who stands to gain from bad news.

Regardless of what the reasons might be, we have to watch the motivations behind what we see or read. Most people believe in negative opinions on the market more than positive. They are less trusting of analysts that issue positive opinions but unfortunately negative opinions can be just as harmful. What’s more is that usually there is supposed to be disclosure if a stock is owned by the individual or the firm. When an individual or firm plans on short selling, they do not own the stock so they do not have to disclose anything.  This is how they can be elusive and they’ll never get into trouble.

I personally do not do any short selling but I am looking into Options trading and I can see myself buying Puts since the risk is limited compared to short selling. For now, I reduce risk by buying less or selling. I’ve tried some of the bear ETFs, even some of the 2x/3x type of ETFs but I’m not a fan because of the fees involved and it hasn’t been profitable being a bear lately! I definitely need to have a better strategy to make money when the market or a particular company is heading downwards.

I did an analysis for the month of February.  I grouped all the opinions by whether they were positive, negative or neutral.  I also counted the number of upgrades and downgrades.  If the opinion was upgraded or the target price was raised, then it  counted as an upgrade.  The opposite is true for counting downgrades.  I found a couple things that stood out:

1) For the majority of analysts, there were more upgrades than downgrades.
2) There was a huge difference between positive opinions and negative opinions. There were a lot more positive opinions than negative for each analyst although the neutral opinions almost balanced out the positive opinions.
3) Some analysts did not have any negative opinions. Everything they covered was positive or neutral.
These analysts must think that everything is fine and dandy with the companies that they are covering. I’ll need to take a closer look at what sector or what companies these analysts are covering. (Next Posting)

Here’s the chart for the analysts in 3) : If you’re interested in the results for the other analysts, please let me know and I can send it to you:

Analysis of Upgrades/Downgrades, Positive/Negative/Neutral Opinions

Follow Up:  After reviewing the companies that Needham covers, it looks like all the well known tech companies. 

I also reviewed companies that Jeffries covers and found a more wider range of well known companies in tech, healthcare, retail, etc.  The vast majority are big names.

Whether you are researching your own stock to set a Target price, or going off an analyst opinion, you should always have an expected target or gain in mind.  Some investors are looking for that 8% to 10% gain per year, and some are looking for more than that or are maybe even satisfied with less. 
Prior to working on this post, I had not defined my exact calculations but usually what I did was factor in commissions first, and then find out how much the stock has to go up to hit 10%, 20%, 30%.  Then I try to figure out if these expectations are reasonable. 

Has the stock ever been that high? How recently was it close to my target? Is the stock trending upwards? 
What is my risk?   This should be at or close to my Sell stop price and my sell stop price is based on a previous
bounce/inflection in the market. 

Now I’m trying to refine my stock choosing strategy, it’s always just been in my head.  Sometimes I would not go through all the checkpoints before buying a stock either because I didn’t have time or I was acting on impulse.  Trading isn’t a game, you can have fun with it but it should be more systematic to be successful.  In addtion, I like to use stock screening tools to help me.
 
Here is my first draft:

• Stock must have a reasonable expectation of a 20% gain within 6 months to a year.  This isn’t being greedy.  Bigger gains offset unexpected losses.
• Stocks with higher dividends are more favorable if the expected gain is lower.  These are places where I may park my money until something better comes up.
• Stock must be trending upwards.  It’s hard to win by buying a stock that is tumbling.  It’s like catching a falling knife although there are times when you can catch them at the right time.  I think this should be done only if the entire market is going down for the day or week or whatever, because we know that there might be some discounts to take advantage of. 
• Finding a Sell stop should be easy by using a recent(within  6 months) price.
• Reward to Risk ratio should be 3 to 1.  For every $100 that I may lose, I’m expecting to gain $300.  For example, if a stock is priced at $100, and the expected target is $130, and sell stop is $90.  That’s $30/$10 = 3
• Positve analyst opinion and price target is favorable.
• Stocks have to pass favorable screening from www.finviz.com and www.stockscores.com
• Average volume should be high enough for me to buy and sell easily.
• Abnormal volume during the day, this would be a major plus if I could not find out what all the buzz was about since it may indicate that only certain people know about a new upside.  But if it’s due to something that all investors have been informed about, then it would be less valuable.

I’m sure I missed some key points here, please feel free to comment or email me with advice.