Today being All Saints Day, perhaps it's time to defend a group among the least venerated and lately most criticized on Wall Street:
Specifically sell side analysts. The ones who don't have to put their money where their research is. Just like journalists, actually.
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Almost a decade has passed since the publication of Peter Lynch's One Up on Wall Street. The Motley Fool for years has been promoting tenets of investor self-reliance.
I agree with the concept. If you have half a brain and lots of time, you should research, understand and control your own financial future.
But proponents of Thoreauist investing lately have given over to bouts of scornful criticism for Wall Street's traditional arms of advice. Online brokerage ads bombard CNBC viewers with the same message: you are smarter than your broker. You can Beat The Street. You can outdo the analysts.
Chatrooms and message boards now light up with dismissiveness whenever an analyst issues a report about a popular stock. Merrill Lynch's Henry Blodget, probably one of the three most widely-known Internet analysts today, last week encountered a maelstorm of criticism after downgrading one of his long-time favorites, Amazon.com (Nasdaq: AMZN).
But you know something? If you cut through all the analyst hot air endemic to brokerage reports, Blodget consistently has been correct about Amazon. Here are the Amazon.com ratings issued by Blodget over the past year:
- Oct. 14, 1998 -- Buy
- Mar. 10 -- Long-term buy/Near-term accumulate
- Aug 18 -- Upgrade to near-term buy
- Oct 28 -- Downgrade to Near-term accumulate
To this day, Blodget's overall view of Amazon hasn't changed -- he thinks it's a keeper for the long haul. So far, he's been right: since he started covering the stock for CIBC Oppenheimer, Amazon shares are up 262 percent on a split-adjusted basis.
Now consider Blodget's only short term switch on Amazon.com prior to last Thursday. On Aug. 17, just before his upgrade, Amazon.com closed at 54 5/8. Between then and Oct. 27, the stock gained 30 percent. For a nine-week span that's a fine gain, or even terrific performance compared to broad indices: the S&P 500 is up 1.4 percent over the same period, the Nasdaq Composite Index up 11 percent.
You'll see the same trend if you compare Amazon's performance with consensus sentiments. On the Zack's Investment Research scale for average broker recommendation, where 1 equates to a "Strong Buy" and 1.1 to 2 a "Moderate Buy", Amazon went from 1.7 to 1.6 to 1.6 to 1.8 over the last three months; in other words, the overall analyst community became more positive in August right about the time that Amazon emerged from a mid-summer slump. Maybe these analyst calls are self-fulling, but it doesn't matter; if they're right, they're right.
Yet somewhere along the way, the market started paying as much, sometimes more, attention to research tidbits instead of the overall rating picture. It's reading The Great Gatsby and obsessing over whether F. Scott Fitxgerald meant to write "orgastic" or "orgiastic" in the last paragraph. Why worry about it? Just enjoy the story.
Take the same attitude with analyst research. The pieces might be fascinating in their own, but the only thing that matters is the broad recommendation. Charts and price targets get thrown in because institutional investors like to see them. Earnings estimates are low ball forecasts whose only real purpose is to provide a rough benchmark for operational performance.
People -- and I'm as guilty as anyone else -- expect analysts to constantly come up with something fresh and new. Unfortunately, they don't; most of what they produce can be ignored.
So pay attention to the ratings, especially when they change. Everything else is too fluffy to be worth criticism.