You can't be everywhere all at once -- it just isn't humanly possible. So, you have to allocate time and energy where it is most needed. Sometimes, that might mean paying less attention to your investment portfolio than you might otherwise want.
Wall Street analysts are paid to spend all their working hours covering stocks, and you can use that to your benefit. Here's how.
Take that analysis with a giant grain of salt
With no intention of insulting analysts, you shouldn't just do whatever they say. They are human, just like you, and can, and do, make mistakes. Perhaps even more importantly, they don't know you personally, so they can't speak to your investment needs and desires. For example, your focus might be long-term, while theirs is more likely to be short-term. In fact, if you wanted, you could live your entire investing life without paying any attention at all to Wall Street analysts.
Image source: Getty Images.
But these stock "experts" can provide you with an interesting source of additional information -- information that you may not have or that you might miss because of other obligations (like taking the kids to a school event or visiting your parents to check up on them). So, if you see an analyst upgrade (or downgrade), you know that it could be time to pay some attention to what's going on with a company you own.
You might end up dismissing it very quickly if the analyst opinion doesn't do anything to change your investment thesis. But you might be left with some food for thought, too. It would be a shame to miss out on that just because you didn't read a couple sentences (or maybe paragraphs) of text.
An example might help
Take a recent analyst shift on e.l.f. Beauty (ELF 2.04%) as an example. This roughly $5 billion market cap cosmetics company was recently upgraded by the investment firm Jefferies, taking the stock from "hold" to "buy." While nothing particular seems to have changed at the company operationally, the stock price fell dramatically, dropping over 25% in the last month.
For starters, the analyst expects difficult earnings comparisons in fiscal year 2025. That makes sense, given that fiscal first quarter 2024 sales advanced 76% year over year, with the company gaining 2.4 percentage points of market share. In fact, the company increased its full-year 2024 earnings guidance, which will just make comparisons even harder in the next fiscal year.
Yet, that strong demand provides a solid business underpinning that should be bolstered by acquisitions like the recent deal to buy Naturium and geographic expansion. In other words, the current pullback could, indeed, be an overreaction among investors to broader market weakness. It could be worth looking into.
ELF PS Ratio data by YCharts.
That said, e.l.f. Beauty is not a cheap stock even after the sharp pullback, as the price-to-sales (P/S) ratio chart above highlights. Indeed, the P/S ratio of roughly 8.2 is down from an eyewatering 11-plus, but still more than twice the 3.9 five-year average for the company. But there's value in this fact, as well.
It's entirely possible that you enjoyed the ride up without fully considering the effect on the company's valuation. Seeing the analyst highlight valuation might bring this important topic back to the front of your mind. And it might lead you to rethink your commitment to the stock, perhaps locking any gains you have achieved.
Not all analyst calls are upgrades
On the same day that e.l.f. Beauty got an upgrade, AutoZone (AZO 0.03%) got a downgrade from the Oppenheimer investment firm. The analyst, basically, tempered his or her view of the auto parts sector. That's not shocking, given the difficulties that peer Advance Auto Parts (AAP 0.58%) is experiencing today, including falling same-store sales, a downward revision to earnings guidance, turnover in the C-suite, and a strategic business review.
To be fair, AutoZone doesn't appear to be feeling the same kind of pain. Indeed, same-store sales were up a healthy 4.6% over the trailing 52 weeks, and the company's earnings increased 13% in fiscal year 2023. But the stock is just 6% or so below its all-time highs and, thus, is pricing in a lot of good news.
Even though AutoZone is still executing well, this downgrade suggests that it might be worth stepping back and looking at the company from a broader, industrywide lens. It might, perhaps, be time to consider taking some profits.
You don't have to do anything, but you might
Perhaps you think e.l.f. Beauty deserves a high multiple, which is fine. Or maybe you think there's more room to fall before the stock is reasonably valued again. You could be somewhere in between. You might think fears about Autozone are overblown or, perhaps, justified. It doesn't actually matter. What's important is that a few lines of text from a Wall Street upgrade or downgrade alerted you to a change that's taking shape with a stock or industry segment. That could perhaps give you the nudge to examine a company in a new light.
