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The Sinister Side Of Investment Firms
By Larry Potter
Major investment firms like Merril Lynch, Goldman Sachs, etc.. each have
their own "ratings guide" usually going from a low of "sell" through hold,
then accumulate, long term accumulate, trading buy, near term buy, long term
buy, buy, and strong buy. But there are others who use terms like "top pick"
or "outperform". So each outfit is different but with the same basic
meaning. A near term buy from one is someone elses buy. A top pick at one
is someone elses "strong buy". The terminology isn't nearly as important as
the "size" of the move. For instance a move from a "hold" to a strong buy
means some analyst just realized "Hey! this company that we had very little
interest in could be dynamite!" and now wants to tell the world about his
discovery. Another thing that you will find is that around earnings season
you see tons of upgrades issued especially to companies reporting good
earnings and growth. We find some of that a bit humorous as these are the
guys who make a million dollars a year tracking companies and then they get
"surprised" when one beats their earnings. (isn't that why they analyze them
in the first place?)
Now the other side of the coin is the "sinister" part and the reason that
we don't get along well with most analysts. They have the power to move
stocks when and to what level they want. This is trouble folks. Let's look
at some basics here. Investment houses make money basically in two ways.
They actually do investments themselves and the other mainstay to their
income is commission charges to buy and sell the respective stocks they are
upgrading or downgrading. This is where sometimes a change in a stocks
ratings becomes a game of "why?". For instance you can trade online with a
number of internet brokerages and pay about 8-25 dollars for doing it. Most
of the older established investment houses still charge their clients
200-400 dollars for a trade. So you can imagine how much money they make
when they "council" their customers to sell XYZ because of this or that, or
buy ABC because of this or that. It amounts to millions of dollars of
income for them.
Another dark side of the upgrade downgrade game is that if a major house
wants to buy into XYZ but doesn't like the price, it is very simple to
downgrade it for some nonesense...watch it fall like a rock...then buy into
it a week later at a much reduced price. This happens a lot and although no
one will admit to it, it happens more than you would expect. Another nasty
game is when a house has a lot of stock they want to get out of they will
reverse the game. It works like this.. when you or I buy our 1K shares of
XYZ the transaction is quick and easy. There is always a buyer. But if
you are a fund and you want to dump a block of 50K shares it sometimes takes
an upward move in the stock to create the "liquidity" necessary to unload
that much. What better way to dump a holding than to upgrade the stock and
sell out into the strength? It stinks and it happens every day. So as
you can see, upgrades and downgrades can have a lot of different meanings
and they carry a lot of unknowns with them. Unfortunately we don't know
exactly the motives behind every move, so you have to exercise caution when
playing with upgrades. Usually it is best to see how the street reacts
before jumping in. For instance, on the day of an upgrade the stock usually
soars. But rarely does it last and it pulls back after the initial run.
The test of whether the company is one that you should buy into is to watch
it for a while and see if a few days later it indeed starts to move up
again. If it does, then others have decided that the stock is worthy of the
upgrade and are buying it up. If it doesn't, you have to do some research
to find if you think its still a good company or if the upgrade was
"suspect". This game is as old as the market itself and takes some time to
figure out. So we hope that you understand why although we put the upgrades in
the letter, we don't automatically recommend buying any of them. It is wiser
to let Street tell us if the upgrade was sound!
About the Author
Larry Potter is a recognized authority on the subject of trading
and has been publishing his newsletter, Stocks2Watch®, since January of 1998. Each
evening, his newsletter contains picks for the next day and always includes a free trading tip.
For a FREE report on HOW TO TRADE FAST and a free trial to Stocks2Watch®, click here
http://clik.to/stocks2watch
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