The Bandwagon Effect’s Starting to Take Hold

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

The bandwagon effect is beginning to take hold on Wall Street and it’s because of a number of factors that have come together all at the same time. If the stock market’s performance during the financial crisis was spectacular on the downside, the perfect storm that it was is being mirrored on the upside.

Even though the stock market has appreciated significantly from its low during a recession, Wall Street research analysts are now lining up to upgrade stocks. If you follow the daily research upgrades and downgrades from Wall Street, you’ll notice that there’s been and continues to be an enormous push to upgrade ratings on stocks over the last month. In my mind, it’s a real bandwagon with little to distinguish among the participants.

I do see, however, why Street research (which is notoriously inaccurate in its timing) is experiencing renewed enthusiasm. The recession looks to be ending, interest rates are low and we’re coming into the historically strongest season for earnings. Companies are lean, government is spending a lot of money, and the price of oil is relatively low.

I follow a lot of stocks on a daily basis and the folly I see in a lot of Street research is astonishing. Anyone can call up a company, get their earnings estimates for the next few quarters, tweak them, and then issue a research report on the subject. I don’t have a problem with analyst earnings estimates or revenue expectations. The great inaccuracy in Wall Street research seems to be in the timing of their upgrades and downgrades. And, as much as mutual fund companies want you to think that timing the market isn’t a good investment strategy — that’s the only strategy that can make the largest amount of money. Timing is absolutely everything in the equity speculation business.

Speaking of stocks, I follow about two dozen Chinese stocks on a daily basis and, as a group, most of these stocks have done exceedingly well over the last six months. I’ve written about a number of these companies in this column and I think that Wall
Street missed the boat on a lot of these opportunities. Only now are firms upgrading their research ratings on some of these companies to “positive” or “outperform.” Well, thanks a lot. While they were sitting there with a “neutral” rating on a growing company, the stock appreciated exponentially. And now they want us to consider these companies for investment after they’ve gone up four fold?

Like I say, timing is everything in the investment business. It reminds me of the great line by Gordon Gekko in the movie “Wall Street.” As Gekko says, “…their analysts, they don’t know preferred stock from livestock…”