How to Invest Around Analyst Upgrades and Downgrades
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🔍 Sarge's keen insights into Analyst Ratings
Sarge highlighted that analyst ratings can be distilled into three main categories: buy, hold, and sell. He noted that a 'hold' rating can sometimes act as a covert 'sell'. If an analyst who was previously bullish shifts to neutral, it may signal that the stock’s outlook is no longer favorable. 'Sell' ratings are rare due to potential conflicts of interest, as they could harm relationships with the companies being analyzed. However, when a 'sell' rating is issued, it usually indicates significant internal issues within the company.
Sarge clarified that financial institutions with vested interests in influencing analyst ratings frequently include research firms and investment banks. For initial public offerings (IPOs), lead underwriters could give excessively favorable ratings to preserve business ties. He counseled investors to wait for third-party evaluations and to view these preliminary ratings with caution.
Sarge highlighted how analyst ratings can significantly impact market reactions, especially due to algorithmic trading that reacts instantly to rating changes, potentially causing dramatic price movements. For instance, a shift from 'hold' to 'buy' can trigger a buying frenzy in sectors like biotech and tech stocks, where a $3 stock might jump to $5. This creates significant price volatility. In options trading, a positive rating might justify buying calls, while a downgrade could prompt buying puts or selling covered calls. To navigate this, Sarge discussed verifying analyst ratings through track records and using services that rank analysts by accuracy and reliability to manage post-announcement volatility.
✎ Disagree with a Sell: If a stock he believes in receives a 'sell' rating he disagrees with, he views the resulting price drop as a buying opportunity.
✎ Evaluate on Upgrades: Conversely, if a stock he owns is upgraded and reaches his target price, he might sell to lock in profits. Even if positive news drives a stock higher and he agrees with the upgrade, he might sell some shares if he feels it's overheated.
✎ Overall Discipline: He sets strict entry and exit points, diversifies investments, and continuously monitors market conditions to adjust strategies as needed. This overall discipline allows him to navigate market fluctuations with more confidence.
✎ The Three-Day Rule: Sarge advocated for his 'three-day rule,' which means no trading for three days after a rating announcement. This allows the market to absorb the information and stabilize, mitigating knee-jerk reactions. This disciplined approach usually leads to a better assessment of the rating's impact and helps avoid impulsive decisions.
✎ Don't Downgrade Automatically, Read Analyst Notes: Some investors tend to downgrade every analyst rating by one level, interpreting 'buy' as 'hold' and 'hold' as 'sell'. Sarge advised against this blanket approach. Instead, he recommended reading analysts' detailed notes to understand the rationale behind their ratings. This approach offers deeper insights and helps avoid the pitfalls of a one-size-fits-all adjustment.
✨ Sarge's insights on mooers' questions
@puddy1 inquired about the factors influencing analyst ratings: "What factors do analysts consider when making upgrades and downgrades, and do market conditions like bullish or bearish situations affect their ratings?" Sarge noted that market conditions, especially within specific sectors, could significantly influence ratings. Terms like "outperform" or "underperform" indicate relative performance within a sector. Analysts are definitely impacted by macroeconomic factors, which can lead to mass upgrades or downgrades in response to market-wide trends. ➡️
💼 Mission accomplished, mooers! Remember, the market battlefield is unpredictable; even the most seasoned traders can't win them all. But with Sarge's strategies in your arsenal, you might earn your stripes needed to keep up.
Don't miss out on the full replay of the live stream to catch all the details and Sarge's keen insights. Remember, knowledge is power, and in the world of investing, it's better to stay vigilant.
Disclaimer:
Options trading entails significant risk and is not appropriate for all customers. It is important that investors read Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount. Supporting documentation for any claims, if applicable, will be furnished upon request.
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10baggerbamm : typically the major Wall Street wire houses they're upgrades and downgrades are completely wrong. they're late to the game consistently so for example last year and the first few months of this year we watch Tesla decline significantly. we watched Apple decline as well and the week that these stocks were in the bottoming mode several wire houses the big major Wall Street firms downgraded the stock from a buy to a hold. what good are you at advise and clients when you had to buy the whole time the stock was declining and now that it has bottomed and actually significantly reversed for both Apple setting new highs as well as Tesla regaining almost 25%. if your clients followed your advice they would have sold at the bottom. so when it comes to upgrades and downgrades understand the majority of time these brokerage firms and these wire houses are wrong..
10baggerbamm 10baggerbamm : let me add a caveat. when you have Dan Ives bless your company or when you have Tom Lee make positive comments on the future in 6 to 12 months of your company where the industry is going specifically AI related right now that's when you go all in because they command such a following they're accuracy has been spot on despite being ridiculed and criticized daily by many of these bobbleheads on TV. so when you get positive affirmation from Tom Lee or Dan Ives on your company buy more back the truck up just look at their opinions of Tesla of Apple Nvidia and the list goes on with meta Microsoft so while others are saying cell take profit it's a bubble they stand steadfast and they've been right so what it comes down to is just because you have an upgrade or a downgrade it really means nothing it's the person it's the level of consistency of their opinions that matter and the best of the best I just mentioned here Tom Lee Dan Ives
smoothshoe : Analysts' coverage is important because it does make stocks move. Their price targets are mainly reactive, so if you rely on them too much, you'll miss out on opportunities.