Wall Street Ratings - Don't Leave Home Without One
Jamie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A funny thing happened on the way to the Forum…Wall Street analysts are actually beginning to make sense.
Oh, it pains me to say that.
For those in the know – Wall Street ratings have been historically horrendous advice to follow if you are an individual investor. They seem to be late to the game and a dollar short.
The most notable example of the lameness of Wall Street ratings came during the dot com boom after analysts lowered stock ratings, but long after the bubble burst and share prices plunged to nearly zero.
Cynics might go further and say the whole system is rigged against the little guy. Typically Wall Street research is geared to the big institutional clients leaving a perception of manipulation or worse. No wonder few individual investors trust Wall Street today.
That resounding lack of confidence might just be the signal that the time has come for the little guy to listen to Wall Street and pay attention to rating changes on stocks. There actually could be money to be made by following their advice.
In the past week or so there have been some notable rating changes that might be worth listening to.
Perhaps Facebook is getting it right
I’ll admit, I loathe Facebook (NASDAQ: FB) and its social networking site on many levels. I’ve liked the stock even less. So, what then do I make of the rating change by Bernstein Research?
The fairly conservative analyst was not a fan of the stock at the initial public offering, but now has a market outperform rating on the stock. Shares jumped more than 8% on the news and they are still moving higher.
Citing enthusiasm for mobile advertising and the potential of new business – Facebook Gifts, Bernstein lifted its target for Facebook to $32 per share.
Is that target realistic?
At the moment analysts have the company growing profits by 25% in 2013. At current prices shares trade for 42 times 2013 estimated earnings. That’s a steep price to pay for sure.
What if analysts have it wrong on the estimates? Perhaps they are indeed being too conservative. Given the scale of the company, successful execution in mobile advertising could result in a huge jump in profits.
If a formerly skeptical analyst is changing his tune on mobile, things might indeed be brighter for Facebook. There is still big risk for sure, but something is brewing here and it might be a good time to get in on what some say is the stock story of the 21st Century.
Death of the personal computer premature
Wall Street analysts are nicknamed penguins. They follow each other in herds. It is rare that one will break from the heard. That fact might be frustrating if your investment approach tends to take a contrarian view.
This week’s Goldman Sachs change in rating on Dell (NASDAQ: DELL) might be a breath of fresh air for those that like to do the opposite of the herd.
No stock has been more out of favor than Dell. The personal computer maker is caught in the midst of a dynamic change in the industry. Some including me might call it the death of an industry.
Apple is taking over world with its smartphone and tablet devices. Is anyone buying a personal computer any longer?
Sure they are, and that’s the thesis for Goldman.
In 2010, before it was clear that a sea change was taking place Goldman rated Dell a Sell. Shares dropped 30% since that declaration. Now with the negativity at a peak the analyst is changing his tune giving Dell a Buy rating.
The company has a strong balance sheet and for good measure Goldman noted the company might make for a good leveraged buy-out candidate.
Analysts expect profits to dip slightly in the coming fiscal year ending January 31, 2014. At current prices the stock trades for only 6 times current fiscal year estimated earnings.
Is that a value trap or an opportunity? I’m inclined to go with the Goldman view here and take the contrarian position. There will be more personal computer sales than investors currently realize.
Optimism returns to Research in Motion
Talk about a stock that is out of favor. Blackberry maker Research in Motion (NASDAQ: BBRY) has been under attack as the smartphone market passed it by. This was a promising technology innovator that might be completely irrelevant if current trends continue.
Its stock price sunk below $7 per share in late September, but they have been recovering nicely on speculative hope for the Blackberry 10 device to be released in early 2013. Jumping on that hope bandwagon was Goldman Sachs who last week changed its rating on the stock to a Buy.
The rating change is purely speculative. To the extent the new device is successful, RIMM might actually return to profitability. The new phones are pricier and have broad based support from multiple carriers. There appears to be a rooting interest in Blackberry if for no other reason than to expand the market beyond Apple and Google operating systems.
I’m not so sure I can make that jump. While I like the contrarian nature of this call, I don’t see it being a success in the market. More importantly the margin for error is minimal.
With RIMM losing so much money a failure with this product will be the end of the line. I’d ignore this upgrade and watch the drama from the sidelines.
Wall Street is making more sense
I don’t agree with Goldman and other Wall Street firms on Research in Motion, I do like the current line of thinking. Some stocks being so oversold as to make for a buying opportunity. It sure beats the old buy the stock with a nosebleed valuation that we used to see from Wall Street.
I for one am looking more closely at Wall Street rating changes as part of my stock analysis process. You might consider doing the same.
jamdlu has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!