Stock Recommendations – Popular is Not Often Profitable
You would think that the financial media, even the reputable ones, have your best interest in mind when they publish their stock recommendations. You would be excused for believing that they actually do some research before they publish their analysis. If you do, you are giving them too much credit.
All they are concerned with is getting eyeballs on the story so they can sell more ads.
Take for example the following story that appeared on TheStreet.com
“TII Network Technologies Inc. Stock Upgraded (TIII)”
The “upgrade” was posted on May 30, 2012. TIII stock that day traded between $2.06 and $2.08/share and closed the day at $2.08/share. TheStreet.com upgraded the stock from a “SELL” to a “HOLD”.
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Go on, read it. I will wait.
Now for the funny part
TheStreet.com’s analysis does not give any indication that the analyst is even aware that TIII was purchased by Kelta Inc in an acquisition that was announced on May 14, 2012 for a purchase price of $2.15/share. The acquisition was announced a whole 2 and a half weeks earlier, so it was not like these two pieces of news crossed the wires at the same time.
Yes, it is nice to look at the growth rate, and return on equity, and all the other good stuff, but what is the point when the stock will cease to trade in a quarter or two? And why the upgrade? The cynic in me thinks that they upgraded to a HOLD because they know there is zero chance of the stock price actually declining, given the acquisition at a price higher than the market price that day.
Does this rating serve the investor well?
3 weeks prior to the upgrade, the stock was trading at $1.45/share, or 30% lower. TheStreet’s rating then was a SELL. The only piece of earnings news that came out between then and Street’s upgrade was lowering of their revenue guidance and profits for the year.
And of course, this acquisition.
So either TheStreet.com did not know about the acquisition (bad analysis) or they did know and took pains to not mention it (deception).
Take your pick.
For the record, we owned TIII in VSG portfolio and sold out after the acquisition news hit for a nice 74% gain. Of course, this was before we knew we were actually supposed to hold for another $.07 in the next 3 months
Then, there is Motley Fool. They have a knack for publishing multiple analysis for the same stock, both pro and against. Of course, one of them will be right, and the readers will read and remember the piece that supports their own hypothesis. So everyone is happy and no net value has been created for the investors.
Your turn. Which financial site or publication you swear by and has always given you good advice?
Photo courtesy: sxc.hu