American Superconductor: Listen to the Stock, Not Analysts

Wednesday’s post reminded me of another voice people often trust, but really shouldn’t: Wall Street analysts.

A funny thing happened to one of the stocks in the Cabot Green Investor portfolio last month.

The stock is American Superconductor (AMSC), a designer of wind turbines that also sells the electrical components for its designs. American Superconductor also makes highly conductive electrical wire for utilities.

In late September, an analyst at Kaufman Brothers cut the stock from a rating of Buy to Hold. That sparked a wave of selling that pushed the stock from 37 to 30 in just four days. It also sparked a number of worried emails from subscribers, who are free to email me with questions anytime, wondering whether we should take profits (we bought shares in May at 25).

I told them to hold tight, since our technical analysis predicted AMSC shares would hold fast at $30. I was confident too given the fact that AMSC has been executing superbly of late: It posted its first profitable quarters ever earlier this year, the company just signed a $100 million deal to supply China’s largest wind turbine maker with designs and components for 3 megawatt turbines, and over the summer, Korean utilities inked deals to use over 60 miles of its superconductive wire.

Shares held support as our analysis predicted. Then remarkably, just six days after the downgrade, that same analyst shifted the rating on AMSC back to Buy.

I don’t want to take the specific analyst too hard to task (because, for one, I haven’t analyzed the reports), but it’s a reminder that individual investors who follow brokerage recommendations are playing catch up in a complex game being played by institutions.

Brokerage recommendations usually get to institutional clients and in-house trading desks first, sometimes contradicting the publicly known rating (we learned last month this has been done with apparent regularity by Goldman Sachs). Even the rating itself can be meant to deceive.

As an informative book by a former Merrill Lynch analyst Stephen T. McClellan titled “Full of Bull” says: “Analysts use lower-level ratings, such as Accumulate, Above Average, Hold, Neutral and sometimes even Buy (if the firm has a superior Strong Buy in its system), as rubrics to convey a negative stance to their key client base, institutional investors. They avoid the more pessimistic classification levels such as Below Average, Underweight, Underperform or Sell, in order to dodge the flak of corporate executives and institutional investors who own big positions in the stock.”

What’s more, as McClellan points out and as I learned as a reporter at Forbes, ratings are often formed by other considerations, too.

Perhaps the brokerage hopes to gain underwriting business from the subject companies so they push analysts to give better ratings. Or perhaps the brokerage lost out on business and so it wants the company to pay a price.

And maybe, as we saw during the dotcom boom, analysts realize being bullish, even if they don’t believe it, gets rewarded with massive bonuses. Regardless of the motivations, the last person those ratings are meant to help is you, the individual investor.

As for AMSC, I still believe the stock is a buy over 30. Fundamentally the company is performing without a misstep, while a massive percentage of short sales in the float has set the stage for an explosive short-covering rally.

Plus, the overall alternative energy sector is in full bull market mode according to our indicators, and it’s hard for bears to swim against the tide of bullishness that we see.

The Cabot Green Investor portfolio has a 25% profit in AMSC to date, placing it in the middle of the pack return-wise of the seven stocks we now hold–all are profitable–led by Maxwell Technologies (MXWL), which we enjoy an 80% return on since May. That’s still a buy, too.

Disclosure: long.

Comments

[against eco...:]

BRENDAN;
YOU ARE RIGHT! THESE "ANAL-LYSTS" SUCK!
I HAVE "AMSC" SHARES AND I WILL STICK WITH THEM, BECAUSE
I AM SURE IT WILL BE GREAT IN THE NEAR FUTURE!
THESE "ANAL-LYSTS" DONT HAVE A MINIMUM CLUE OF WHAT THEY SAY! NOT ONLY ABOUT STOCK MARKET, BUT IN THE ECONOMY IN GENERAL!
EXAMPLE: THEY PREDICT LAY-OFFS WILL BE 270,000 FOR THE WEEK "EYZ", AND THEN COMES THE "OFFICIAL REPORT" SAYING THAT WE LOST 240,000 JOBS!!
WELL THEY "ONLY" MISSED BY 30,000 JOBS, ITS NOTHING!!!!
IT IS ALMOST 13% MISTAKE, A BIG, HUGE MISTAKE!!!
IF THEY WERE WORKING IN A "REAL" JOB, MANAGING A COMPANY LIKE I DID FOR 35 YEARS, A 13% MISTAKE CAN PUT YOUR COMPANY IN JEOPARDY!!!!!!!
IF YOU LOOK DAILY TO THE "ANAL-LYST" PREDICTIONS, LOOKS LIKE YOU ARE SEEING YOUR "HORROR-SCOPE",
I MEAN, NOTHING IS RIGHT!

LUIS SANTOS
FORT LAUDERDALE,FL

Oct 16 10:47 AM

[tc1:]

Thank you, Brendan, not only for the stock tip on American Semiconductor, but also for the low-down on how so many analysts behave to the detriment of individual investors.

Oct 17 02:02 PM

[tc1:]

Ooops, American SUPERconductor, not American SEMIconductor.

Oct 17 02:07 PM

[wind4me:]

I like APWR alot more than AMSC and have alot more APWR than AMSC due to P/e and PEG's of both stocks

Vestas , AMSC, and APWR all down 3% today, great buying OPP today! Obama headed to China, the implications will be HUGE for Wind after next week!


On Oct 17 02:07 PM tc1 wrote:

> Ooops, American SUPERconductor, not American SEMIconductor.

Nov 12 12:35 PM