4 Reasons You Should Ignore Wall Street Analysts

Posted On July 10, 2018 3:35 pm

In addition to 12 hours per day I spend researching and writing about: dividend investing, personal finance, investing strategies, and the state of the economy, I also spend about two hours per day reading online articles. This is to keep abreast of various: economic, industry, and geopolitical trends that might be important to my readers, and effect our portfolios.

So I frequently come across articles touting the latest bold prediction from one analyst or another. Yesterday I read about how, Michael Wilson, Morgan Stanley’s chief US equity strategist, is advising investors to sell tech. He argues that “These stocks have rarely, if ever, been so over-loved and over-owned…The risk of a proper rain storm in this zip code increases significantly because of escalating trade tensions that could hurt corporate profits.” Wilson went so far as to say that we’re in a “rolling bear market” in which various sectors might fall as much as 20% from all time highs despite the market trading flat or even rising higher.

While there’s certainly some truth to this analysis, especially that some high flying tech stocks are likely grossly overvalued, I generally consider such warnings to be overly broad and potentially dangerous. That’s especially true for the “rolling bear market” comment which I consider to border on scare mongering. I very rarely come across a sell side analyst report (what these kinds of buy/sell recommendations are called) that’s worth acting upon. Let’s take a look four reasons why I think acting on such Wall Street recommendations can be a big mistake for most investors. In fact, taking such calls to heart might end up costing you a fortune in the long-term, and potentially sink your long-term financial dreams.

Sector (Or Market) Wide Calls Are Too Broad

There are two important things to realize about these kinds of analyst reports, that also apply to most of the broader financial media. The first is that these are short-term forecasts, with most buy/sell calls being based on 12 month projected prices. The other is that these reports, and financial media in general, is meant to grab attention rather than make you money. In other words, most of these calls are short-term guesstimates about something that is utterly unknowable (short-term share prices), and there is no accountability to them. In addition, most of these reports require you to pay to see the actual research that goes into them. Their conclusions (mostly buy/sell recommendations and price targets) are released, but the actual rationale behind them is often hidden from investors who often make short-term and foolish decisions based on too little information.

Source: Noveinvestor.com

    Annualized Sector Performance 2007-H1 2018

Source: novelinvestor.com

As for the idea that we’re in a “rolling bear market”? Well as you can see sectors do go in and out of favor over time. For example in the last decade no sector has had two years in a row of top performance. And only rarely, such as during the financial crisis or worst oil crash in over 50 years, is a single sector the worst performing two years in a row. Now it is true that some tech stocks have done well. Heck as a sector information technology is the second best performer in 2018, and that’s coming off a fantastic 2017. However such sector wide calls paint with a very broad brush.

I know of numerous quality dividend paying tech stocks which are currently attractively priced and make good investments. For example:

  • Microsoft (MSFT): 17% undervalued
  • Skyworks Solutions (SWKS): 11% undervalued
  • Broadcom (AVG): 18% undervalued
  • Qualcomm (QCOM): 29% undervalued

And those are just some of the larger ones I can think off the top of my head. My master watchlist has dozens of good undervalued tech stocks, including plenty of less well known small and mid caps that are highly undervalued and likely to massive outperform over the coming years. Listening to such overly general advice, that doesn’t take into account your individual needs, goals, and assumes a short-term time horizon, can end up costing you a lot of money. Either in actual losses, or missed opportunities.

Which brings us to my second big problem with most analyst calls.

These Reports Are Too Short-Term Focused

Don’t get me wrong, I’m not opposed to the use of sector wide, or even market wide calls as a matter of principle. I know that plenty of investors like to use sector or market wide index funds to invest. In fact one of my best friends has most of his portfolio in an S&P 500 ETF and won’t invest in most individual stocks but prefers to buy sector ETFs when they are highly undervalued. If you don’t have the interest, time, or skill to pick individual stocks then certainly buying low cost sector ETFs, in a contrarian manner (when they are most unloved) can be a profitable endeavor.

But it’s important to remember that these sector calls are often too short-term to be of any use. Over a period of one year or less stock prices are not so much driven by fundamentals as market sentiment. Or to put another way in any given month, quarter or year, share prices are mostly the result of animal spirits rather than fundamental changes in business models and long-term growth potential.

This is why, while I sometimes will read an analyst note to see the rationale behind an upgrade or downgrade, I NEVER pay attention to the price target. For one thing it’s almost certain to be wrong. Second it has no bearing on my long-term investment strategy and doesn’t coincide with my goals, which are safe and rapidly growing dividend income. In fact this is probably the most important thing to realize about any financial analysis or advice. Never make a change to your portfolio unless you know what the analyst’s overall approach is, and that their time horizon and goals match your own.

For example, I assume that anyone reading articles on this site is looking for long-term analysis and has a penchant for undervalued dividend growth stocks. If you are looking for day trading advice, based on something like technical analysis on penny stocks or non dividend paying growth stocks, well than you wouldn’t be here. The same goes for long-term investors reading articles or watching analysts appearing on CNBC or Bloomberg. Those are short-term focused calls that don’t apply to long-term investing. In fact following such advice can be devastating to your overall long-term returns.

About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

Related Articles

Leave a reply

Your email address will not be published. Required fields are marked *