Courtesy of Joshua Brown, The Reformed Broker
OK, since we're back to trading and investing in growth stocks again, I'm dusting off an Old School strategy for opening and building growth stock positions in a portfolio. Rookies, don't try this stuff at home without professional supervision or risk capital you're not planning to eat with the next day – because growth stocks are volatile and their higher multiples require some degree of faith…
When stalking a growth stock awaiting better entries or looking for new growth stock ideas, one of the best things you can do is get a hold of Wall Street's Upgrades and Downgrades each morning. TheStreet.com has a good one if I recall as do 24/7 Wall Street and Benzinga. Look for something a bit more in-depth that will give you a sentence or two synopsis of each analyst ratings change. Learn to spot the bullsh*t downgrades over time and start studying how the higher-growth stocks tend to react to them – both initially and over the intermediate term. Typically a fast-growing company will stumble on a specious analyst downgrade and then the accumulation will resume as the institutional fans of the story get over it and come back with buy orders.
What constitutes a bullsh*t downgrade? Anything that can be perceived as having a hidden agenda or that sounds like the analyst is just looking to be a bit more visible or justify his work. This happens all the time. So do bullsh*t upgrades when a big client of a brokerage firm needs someone to drum up enough buyers to make an exit from a particular stock. You can see it in the tape, little buyers cleaning up a big seller.
But I digress…
Some examples of Bullsh*t Downgrades:
1. Valuation – growth stocks don't trade on "valuation", they trade on sentiment and the expectation of future earnings, see the numerous valuation-based downgrades of lululemon and Whole Foods.
2. Dropping Coverage – believe it or not there are institutions who will actually sell on the news that a brokerage firm is dropping or suspending coverage in a name due to an analyst leaving or something.
3. Channel Checks – there is only one thing sell-side analysts suck more at than tackle football and that is "channel checking" – they literally cannot do it in such a way that there are actionable insights to be gleaned from it. Think about how many times you heard about strength in non-Apple tablets (there never really was any) or weakness in the iPhone 2 (also, never really happened). Channel checks are a money-loser in most cases – wait for the actual hard data, forget what people say they'll do or think they'll do.
4. Short-Term Pressures – chances are if you are interested in a growth stock investment, what happens tomorrow or the next day has little to do with anything. For example, I saw an analyst downgrade Buffalo Wild Wings, one of this moment's greatest growth stories, because of a rise in chicken wing costs in early February. And while the analyst was correct in terms of those costs rising, it's really a trivial, short-term matter to anyone who intends to invest in the business. $BWLD is being bought for the massive national footprint they'll be building out for the next ten years, not a penny or two in wing costs. The stock is up like 20 points in the 3 weeks since that downgrade, btw – managers in the growth space simply have to own it.
5. Strategic Direction – some people are meant to run businesses and others are meant to analyze and critique them. When a company announces a new strategic direction or goal, the knee-jerk Wall Street response is to cut it to neutral due to "uncertainty". I have no interest in seeing sell-side analysts vote on the strategic decisions of a company – management often knows more about their market than the eggheads do.
Anyway, these are just a handful, what are examples of the bullsh*t downgrades you've seen out there?
