Shares of the world's biggest tire maker, Goodyear (NYSE:GT), dropped nearly 10% after an analyst at Deutsche Bank downgraded the company to a "Sell" rating. The analyst said the stock's remarkable advance over the past year could not be sustained and that it was time for investors to bail.
For me, this is simply another reason why investors ought not consider analyst recommendations when they make their own buy-and-sell decisions.
Over the past three years, Deutsche Bank has run the gamut of ratings on Goodyear: Market Perform, Strong Buy, Buy, Hold, and now Sell. And over that three-year period, they have not been able to correctly call the stock's performance once. One would think they are indeed a contrary indicator.
On Dec. 10, 2001, Goodyear was raised from Market Perform to Strong Buy. It had been riding high and closed out the day at just over $22 a share. By March 20 of the following year, when Deutsche Bank lowered its rating to simply a Buy (I guess you don't click the "buy" link on your broker's website as forcefully when it's rated only a "Buy"), it closed at over $25 a stub. But by Sept.17 that year, the stock cratered some 54% to $11.68, and the bank lowered its rating to Hold. Goodyear was not done yet destroying value and would fall all the way down to about $4 a share, more than 85% below its $30 high. Deutsche Bank would maintain that Hold rating for the next two years, until today, actually, when it issued its Sell rating.
Had you followed the analyst's recommendations on Goodyear, you would have lost about 50% or more of your investment. Rather than respond to every twitch of an analyst, Foolish investors would do well to buy into the business and begin thinking like part owner of the company.
Over the past year, I have taken Goodyear to task for its accounting miscues. It wasn't until I saw that the tire maker had apparently straightened its financial act out that I considered investing in it. By doing so, I missed the exact bottom -- Goodyear's stock had already more than doubled before I bought it. My shares were still up around 60% before the call, though now they traded just below a 50% gain. But to me, that doesn't matter. Now I'm a part owner, so it's the business that's more important, not the gyrations of its price or the calls of analysts.
The Deutsche Bank analyst has pointed to some factors that led to his change of heart: It has high debt and pension costs, fewer job cuts and plant closings than it can make, and margins that will only track the industry. I think this view misses some points.
While debt is indeed high, at more than $5.6 billion, the company has been steadily building its cash position to where it now stands in excess of $1.6 billion. Sure, it's not the firmest of foundations, but it's a lot better than where the company was. And while Goodyear can't easily make job-cut cost savings, that can actually be a benefit, as it will help employee morale. Add in the fact that the company has gone out of its way to repair relations with dealers and has begun raising prices on its tires. That's something Goodyear had not been able to do until recently, and, as a result, it was at a disadvantage in comparison to Cooper Tire & Rubber (NYSE:CTB).
The investment bank also dismissed the ability of the North American operations to continue to churn out profits as it did last quarter. Yet continued high shipments to original equipment manufacturers like the Big Three automakers should continue to push growth, while recovery of its overseas operations ought to continue apace, as well.
Still even if things don't progress as planned, jumping in and out of the stock is a poor substitute for thinking like a business owner. There may be more hiccups: Goodness knows Goodyear could always have another accounting snafu, and its stock may take a hit. Long-term, though, Goodyear is well positioned to make investors proud.
So what should an investor do with analyst recommendations?
My first thought is to throw them out, but analyst research does serve a purpose. While I generally ignore the Buy and Sell recommendations, I do look to their insights into the company and industry for information. The Deutsche Bank analyst brings up some good points about Goodyear's problem debt, which is going to need to be restructured, and the pension plan, like those of many large companies these days, will continue to be a drag. Those are things that need to be watched closely. Yet the section dealing with the game of Buy-Sell-Hold would best be used as bird-cage liner.
For long-term investors in the world's biggest tire manufacturer, today's "news" is really a non-event.
Start down the road to understanding Goodyear's recovery by reading more here:
Fool contributor Rich Duprey has managed to kill only two of the 10 fish he started with and does not like birds as pets. He owns shares in Goodyear but does not own any of the other stocks mentioned in the article. For some good Goodyear discussion among Fools, click here.
