Last week, shares of Rule Breakers pick PDL BioPharma (Nasdaq: PDLI) were down nearly 7% after a Wachovia analyst downgraded the company from "outperform" to "market perform." Also feeling the sting was Motley Fool Hidden Gems pick Buffalo Wild Wings, whose shares fell more than 4% after another analyst downgraded it on the same day.
Praise the downgrade
Investors sometimes get annoyed about the share price declines that can accompany these changes in analyst opinions, but downgrades like these often present a tempting opportunity for longer-term investors to pick up shares of their favorite stocks on the cheap.
Let's take a look at the Fool's CAPS database and see how Wachovia's last six underperform calls have moved since the bank made its opinion on the stock known.
| Company | Underperform Date | Performance Since |
|---|
CompuCredit (Nasdaq: CCRT) | 5/9/07 | (0.30%) |
Hiland Holdings (Nasdaq: HPGP) | 4/26/07 | 5.70% |
Wendy's (NYSE: WEN) | 4/18/07 | 24.70% |
Countrywide Financial (NYSE: CFC) | 3/12/07 | 8.50% |
Highwoods Properties (NYSE: HIW) | 2/20/07 | (11.90%) |
IdaCorp (NYSE: IDA) | 2/16/07 | (9.50%) |
Less than a year is almost never enough time to judge a stock's performance, but that said, Wachovia's predictive abilities on the stocks that it ranks "underperform" have been mixed at best.
For all of 2007, seven of Wachovia's 15 underperform picks have ended up higher than when the call was made. For instance, investors who bought shares of Wendy's or Lear after the Wachovia downgrade have been treated to double-digit percentage-point gains since then. This exercise isn't to pick on Wachovia, but rather to show that analyst downgrades aren't necessarily something to worry about.
To be fair, despite this varied performance on stocks that it's bearish on, Wachovia has one of the highest CAPS ratings of all the Wall Street analysts that CAPS covers, so its outperform picks have done quite well.
Foolish final thoughts
If the fundamentals of the stocks you're looking at haven't changed, and the only material thing moving the share price is an analyst's downgrade, then consider the reduced price on the stock you're looking at as a sales opportunity.
Unless you hold shares in a money-losing development-stage tech stock (for example), in which analyst downgrades can make accessing capital markets more expensive, you should be happy about the share-price declines that often accompany these downgrades, since they give you a chance to pick up your favorite stocks at a discount.
Come sign up for CAPS! It's free, and it's a great way to find new investment ideas. Just one warning: Tracking the progress of your picks against other players is highly addictive.
Fool contributor Brian Lawler does not own shares of any company mentioned in this article. CompuCredit is a Stock Advisor recommendation. The Fool has a disclosure policy.
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