Investing

Dire Warnings About Analyst Calls During Bear Markets and Broad Sell-Offs

Most analysts maintain Buy and Outperform ratings more than any other rating. That of course depends on what stage of the market you are in, but the reality is that many Wall Street firms just do not like to issue Sell, Underperform and Underweight ratings on individual stocks. Some analysts worry it makes them even look like they are doomsday callers, and some analysts worry that they will lose access to a company if they formally tell their clients to sell a company’s stock.

Even during the bear market trading patterns that have emerged twice in 2018, analysts often officially maintained positive ratings but lowered their price targets. This has been seen of late has been in Facebook, Apple and others. It’s simply the inverse of when an analyst reiterates a Buy or Outperform rating and raises their price target every few months during bull markets.

Investors need to understand that when analysts issue price targets they generally are looking out in a six-month to 12-month horizon. Could you imagine if an analyst said, “I am issuing a 10-year Buy rating and am calling for this stock to rise 2,000% over the next decade”? That could have been the case for Apple, Google (sorry, Alphabet), Amazon, Microsoft and any other mega-cap stocks that came public in the 1980s, 1990s and more recently.

In some instances, analysts effectively do a “pile-on” effort when there is bad news. Many great companies can still keep growing, but if that growth starts slowing they just will not give it the same upside valuation. And look out below when a bull market darling sees its growth peter out or contract. These are times we call the “analyst downgrade brigade.” This was seen in shares of General Electric, IBM, PG&E, Newell and many other companies.

The analysts do not issue their calls in the same 24-hour or 48-hour period unless there are earnings reports, analyst/investor day presentations, or other random positive and negative news about the company or about the sector. That’s when you can see the instances where news about downgrades spread out over a period of days or weeks, often with the same rationale as the prior competing analyst call a day or two earlier. Hence, the term “analyst downgrade brigade.”

One reason you simply do not see analysts downgrading the ratings of many popular stocks, even when they are obviously trading in bear market patterns, is the unpopularity and scrutiny it can bring. Analysts who have “Sell” and “Underperform” ratings are mocked daily during bull markets or when a stock is performing well. After all, it’s just not popular to tell investors to sell great companies like Apple, Alphabet, Netflix and so on when the prices have risen and risen over the years. That is just one more reason you see analysts maintaining a positive rating and lowering their price targets on multiple occasions. Analysts often feel that they look bad when they issue Sell or Underperform ratings and the market or the underlying stock rises 10% to 20% in a short time.

There is another instance where investors have to be very careful in looking at analyst reports. There is a point that analysts simply become too comfortable with their Buy or Outperform ratings. After all, imagine being the analyst who has said to sell Netflix at each reiteration after earnings while the stock has climbed up and up over the years. Ditto for Apple, Alphabet, Amazon, Microsoft and so on. Always keep in mind that nothing lasts forever. Not good economies, not bull markets and not even bear markets.