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Category: Articles » Finance » Investing » Article » Article Code

The Sinister Side Of Investment Firms

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" ... read more

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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!

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