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Top 10 Reasons Analyst Ratings Don’t Matter

Posted on May 15th, 2013. Posted by

Top 10 Reasons Analyst Ratings Don’t Matter

Management teams and IR professionals tend to take stock rating downgrades personally.  While a downgrade may sting on the day of, in the long run all stocks’ ratings are subject to fluctuations – both up and down.  To get a better feel for how the buy-side reacts to ratings downgrades, we reached out to both buy-side analysts and portfolio managers to get some real-time feedback.  The conclusion? In general, the buy-side really doesn’t care about the rating on a particular stock.  The representatives we spoke to clearly are more interested in learning as much as possible about a company and are less interested in a stock’s label.

Following are ten direct quotes about this topic that speak to why analyst ratings really don’t matter:

  1. “I don’t care about analyst ratings. I do my own research and try not to let the sell-side influence me.”
  2. “I love analyst downgrades because it gives me an opportunity to buy the stock.”
  3. “Most of the time I don’t even know what their ratings are, I just talk to the analysts that know the company the best.”
  4.  “I’ve done this for long enough to know that more than half of them are wrong on their ratings.”
  5. “Sometimes ratings are based on momentum and not fundamentals.  I invest in fundamentals.”
  6.  “A downgrade may impact the stock for a few days or a week but longer-term ratings really don’t matter…the fundamentals drive the stock price regardless of the rating.”
  7.  “The sell side follows the herd.  Money is made on Wall Street by not following the herd.”
  8. “Most analysts are so young and junior that they have not spend enough time in the industry to learn how to properly evaluate companies.”
  9.  “I’m measured against an index, while they are looking at absolute return.”
  10.  “Institutional investors really don’t pay attention to ratings. We just assume that the stock ratings are there to guide retail investors.”

Clearly, it’s important for executives and investor relations professionals to push through the sting of a stock downgrade and to focus on the big picture.  As you meet with investors, ask them how they feel about ratings….I bet you will hear similar comments.

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Bob East

Bob East co-founded Westwicke is 2006. Since then, Bob has managed the firm’s strategic direction and led Westwicke's healthcare services and HCIT practice. He has worked with companies representing all aspects of the healthcare services spectrum. Bob received a BA in finance from Loyola College in Baltimore.

View full bio   |   Other posts by Bob East

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