About a month ago, Morgan Stanley and UBS downgraded Monster Beverage (NASDAQ:MNST) stock, sending its shares on a tailspin. But, last night, Coca-Cola (NYSE:KO) announced a 16.7% stake in Monster at a cost of $2.15B in cash. Announcement of the purchase sent Monster shares through the roof, up about 28% in extended hours trading. In short, the analysts making these downgrades totally blew it, and Coke new it. So, what's the take-a-way here?
Many amateur investors place a tremendous amount of trust on analyst ratings, blindly following recommendations on the headline of an upgrade or downgrade from a company that the investor "perceives" as being an authoritative source. But, don't be fooled. Analysts at seemingly respectable companies get it wrong all the time for a variety of reasons, each of which could take its own full blog post to explain.
Do I pay attention to analyst ratings and research reports in my own investing endeavors? Sure. I take note of them. But, I don't act on them. I take note of the overall trend of ratings for a given stock. I'm more interested in a rating given by an analyst with a strong track record, compared to those who are average. I take note of the overall field of analysts covering a stock to see if the ratings are strongly weighted in one direction or another. If all the analysts covering a stock already rate the thing a "strong buy", is there really much more room on the upside?
More so than the ratings themselves, I am interested in the research reports that hopefully come with the ratings. But, even these I take with a monster grain of salt. I use these largely as a way to double check that I didn't miss anything in my own research. And, even if I see a new thought in a research report, I always ask myself if I agree. I read this stuff with an extremely critical mind, rather than taking the words as truth.
I never lose track of the fact that, often, there is a highly paid, highly educated analyst telling me to buy something, while somewhere out there, one of his/her former classmates is telling me to sell. I'll hear both of them out and see where I agree and where I do not. Their words, after all, are referred to as "analyst opinions", not "analyst truths".
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: This post was originally published on the author's personal blog.