At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Do what I say, because I say it
If I told you to go out and buy shares of Merck because I think it will benefit from strong sales of Viagra, would you do so on my say-so? Would you be so carried away with enthusiasm that you bid the shares up 18%?
If you did, you'd be a fool (with a small "f") for two reasons: First, I am not an expert about drug companies. You won't find a single one listed in my CAPS portfolio. And second, in evidence of my near-total lack of knowledge of the industry, Merck doesn't even make Viagra. (Pfizer does.)
The power of persuasion
And yet, for better or for worse, analysts hold a lot of power to sway the market. When an analyst shouts "buy," investors' first instinct is to follow orders -- on the assumption that others will follow suit, moving the price up. Witness what happened yesterday, when Kaufman Bros., a stock shop previously lacking a reputation in alternative energy, initiated coverage on a raft of solar energy stocks:
According to Kaufman, you should buy each of the first four stocks, and hold the last two. Investors dutifully obeyed. Kaufman had the highest praise for Akeena (calling its solar panels "more visually attractive" and "quicker to install" than competitors'), and its shares rose 18% on the day. The other firms complimented by Kaufman received smaller bumps -- 6% for Evergreen, 2% for MEMC, and less than 1% for SunPower.
Now don't get me wrong. I'm not saying Kaufman's a bad analyst. To the contrary, this banker bats more than .500 on CAPS, where it ranks among the top 20% of investors. Perhaps more importantly, seeing how it predicts that Akeena will almost double in value over the next 12 months, Kaufman has picked not one, not two, but four doubles over the past two years. (Including aQuantive, which Kaufman recommended just a few months before Microsoft
What I am saying, though, is that as good an analyst as Kaufman is, you should take its advice with a grain of salt. After all, the analyst only initiated coverage on these stocks yesterday. Meaning it didn't cover them before, and seems to have no particular record of performance on the industry.
You shouldn't buy Merck because I tell you it will sell a lot of Viagra. And you shouldn't buy Akeena on Kaufman's say-so, either.
However, you could check out what the folks in the Motley Fool CAPS community are saying about the company. We've got at least one player there who's already racked up 120% worth of market outperformance on Akeena. To find out what he (or she) thinks about Akeena, click here.