Investing

When Analysts Matter Too Much (OPEN, GOOG, YELP, GRPN, P, FB)

Source: Jon Ogg
How much should a Wall Street analyst call be worth?  Pointing out a buyout rumor or a large contract win before anyone, well that can add massive value to a stock.  But what about pointing out higher or lower growth rates when many conflicting and supporting calls already say the same or disagree with a call?  We are seeing two key moves today after some other key moves which are impacting shares drastically if you just consider that this is from research calls without earth-shattering news.

OpenTable, Inc. (NASDAQ: OPEN) is leading the wave of the worst performing stocks on a Monday when trading volumes are excessively light due to so many traders and investors taking the week off for the Fourth of July.  The news is an analyst downgrade and frankly this is one of those situations that just look excessive.

If you were just looking at the tape you would assume that Google Inc. (NASDAQ: GOOG) managed to kill the company with a souped-up Zagat service or that Yelp Inc. (NYSE: YELP) went into the live reservation business in the exact same manner as OpenTable.  Or maybe Groupon Inc. (NASDAQ: GRPN) got its full-time reservation and deals market together rather than having customers who say that the Groupon discount does not build loyalty among customers.  Instead, this is from Barclays downgrading the stock.  OpenTable’s rating was cut to Equal-weight from Overweight this morning and the new share price target is $43 on the stock rather than $50 as it had seen before.

So, one analyst downgrade is worth a 10.6% drop to $40.20 against a 52-week range of $31.54 to $90.89.  The trading volume is also about 740,000 versus an average volume of 1 million shares.

The downgrade was based on a noticeable slowing of its online reservation growth in the quarter.  If you have been following this company, it growth has already been slowing.  In fact, Barclays thought that the slowing growth was reaching a value-level a few months ago when it had raised the rating to Overweight.  Today was the admission that things have not really picked up.

Speaking of analysts having too much power…. Susquehanna reportedly lowered its target to $12 on Groupon and maintained its neutral ratings due to higher marketing costs and higher splits being shared with merchants. Groupon shares are down almost 8% at $9.79 on more than 6.6 million shares when average volume is 5.8 million shares.

And what about when an analyst is totally discounted?  Is that fair?  Pandora Media, Inc. (NYSE: P) was raised to Buy at Raymond James as the firm is positive about its mobile thrust and thinks it has a stronger lead over peers.  That is good news, right?  Well then why are Pandora shares down 1.4% at $10.72.  Maybe the Raymond James team did not factor in that most investors just assume as Pandora grows its revenues and songs played that its expenses rise at the exact same rate.

Is it fair to make any comment about analysts and power without discussing Facebook, Inc. (NASDAQ: FB)?  No way.  The analyst quiet period ended last week and we gave a full synopsis top to bottom of the targets.  It turned out that the analyst group as a whole is just not overly optimistic and the key market making underwriter of Morgan Stanley (NYSE: MS) only gave a meager $38.00 price target.  Yep, the firm’s analyst valued the company exactly where the IPO was priced.  That is no coincidence and investors have to wonder just how big that Chinese Wall is between the underwriters and the analysts who cover the companies.  Facebook shares are down about 6% from the close before the quiet period ended.  Yep, the brokerage firms killed Facebook again and with absolutely no new revelations.

Sometimes analysts have too much power, and other times they are just irrelevant.  Maybe they are no better than this cat trying to read a stock table.

JON C. OGG

Source: Jon Ogg