HealthStream, Inc. (NASDAQ:HSTM) is currently trading with gains of 4% after Avondale Partners raised its price target to $31 from $25. The problem is that Avondale Partners did not issue any public notes with the upgrade (bad upgrade). Also, the stock rallied 4% without any new catalyst being mentioned (making it ugly).
When a stock overreacts to an upgrade or downgrade that provides no public insight or opinion, it can create a trap for retail investors. A lot of retail investors are attracted to stocks that have wide coverage – but if that coverage lacks substance then it could be a stock that’s inflated due to the analyst calls alone. This means that it wasn’t channel checks, industry quizzes, or exceptional due diligence that created the rally – but rather the call alone.
I have often discussed that investors can find value from analyst upgrades/downgrades. When a stock rises because of a good call it’s due to something that was unknown in the past. These calls can present an opportunity for the investor – and should aid in your research of a company.
Personally, I don’t like Select Comfort Corp. (NASDAQ:SCSS). I think the business is too fragile and I have witnessed as both it and competitor Tempur-Pedic have lost value in excess of 40% during a single day. With that said, investors must still acknowledge that Piper Jaffray made a well-researched call.
Regardless of whether or not that call leads to future fundamental gains is unknown – but the key is to learn how to identify the difference between calls, and know that only those that are good should be used as guidance.
The article The Good, Bad, & Ugly of Analyst Upgrades originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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