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The Analysts Analyzed: Part 2

Back in August 2005 we wrote a commentary called The Analyst Analyzed'. It is located in the resource section in the Commentary Index and also in the Topic Index.  Tonight we bring up some more key points about analysts you need to know. For lack of a better title we will call it Part 2 of The Analysts Analyzed. 

We do not follow any analyst recommendations at STHQ because we know what the average investors have not yet figured out.  We do not follow them because we know their number one priority is to the firm they work for and that their work is a conflict on interest when it comes to serving the average investor.  As a result we chose not to believe in their recommendations unlike the rest of the unsuspecting inexperienced dumboberries who chase the analysts every upgrade and gets scared out of every downgrade. 

Nevertheless even though we do not believe what they say we still need to be aware of what they say.  Why It is because sometimes we can profit from the reaction of the crowd following these crooks.  The discussion tonight covers some important points that I have learned through years of experience.  Like most beginning investors when I first started out I fell for all these tricks as well.  We all have at one point.  If you are new to trading this commentary is to help you not be fooled by the analysts anymore.  

First and Most Important Rule
If you are interested in following the analysts then I suggest following only one.  Each industry has its best and most influential analysts. Get to know who they are and give their reports more weight when you make your decisions. For example if you want to buy GOOG and want to know what the analysts are saying about the company you would find out who the most influential internet analyst in the industry is.  This in my opinion is Anthony Noto of Goldman Sachs.  He is the only one I need to listen to if I want an analyst's opinion on GOOG.  If he is the most influential then he is all you need.  It does not matter what the lesser analysts are saying. 

Earnings Numbers
Typically what an analyst does with the earnings number is more important than changes to a rating. Pay a lot more attention to the changes in estimates than the changes in rating.  For example the analyst might say We are lowering our estimates but reiterating our buy rating because we feel the market has already discounted the news. Don't believe it.  If the estimates are coming down that says a lot more than the positive commentary or the fact that the rating has not changed.  Why Because they have a tendency to use the rating to put a positive spin on the report but they are less likely to mess with the estimates for spin control.  If they change the earnings estimates that is a red flag. If you are long you should sell or sell short quickly because analyst do not change estimates unless something is really wrong. 

However just because the rating changes it does not mean trouble. The rating is the tool they use to manipulate stock prices for the firm's benefit.  They will not use earnings estimate changes to manipulate the stock but they will use rating changes to do so. 

Similarly if estimates have been going up and suddenly there is a downgrade in a rating but no change in the earnings numbers the sell off that follows can be a super buying opportunity.  This is especially true if the downgrade was for valuation meaning the analyst thinks the stock is getting ahead of itself. 

Once the affect of the downgrade wears off in two or three days enthusiasm for the stock returns and it usually surpasses its recent high (before the downgrade was issued).  Remember give the stock a few days to settle before you jump in.  Sometimes they do not revise the earnings estimates until a couple days after the downgrade.  If you rush in you could pay a hefty price as the stock will not climb back if those earnings estimates are adjusted down.  If earnings estimates go down but the rating does not be very suspicious. That is a sign the analyst does not want to go into a negative mode and we see this all the time.  They say this quarter is less than expected but we are keeping our longterm buy rating.  Don't fall for this either.  When have you ever seen just one bad quarter If this quarter is bad chances are the company will not be able to turn things around in the three short months before the next earnings report.  If you want to take a chance that is up to you. But for me the odds favor not being long the stock until they have an upside surprise and are back on track.

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