Minyan Mailbag: Looking Deeper Into Analyst Ratings
Out in the West Texas town of El Paso...
Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.
Hi John -
I saw and appreciate your comments regarding EP and the subsequent exchange with the reader. I don't disagree with your take that the analyst is tired of looking wrong and would love to ride any further upside in the stock to seem "right."
I have a wrinkle on this particular stock, though, which is that it remains the subject of considerable sell-side skepticism. Even after this upgrade, only 3 of 11 analysts recommend it and there are also 3 Sell ratings (and you know how rare this is). I spoke positively of the stock on TV a couple weeks ago for exactly this reason: Stock strength in the face of Street bearishness is often a bullish combination, if only because it means more folks remain to be convinced of the story. I credit Bernie with reinforcing my belief in this idea.
So, in an odd way, the Lehman analyst is guilty of herding behavior in capitulating to the stock's run, but is in fact straying from the smaller herd of fellow analysts in making this call. In other words, he's early among those who are late in recognizing this move.
This doesn't mean that most of the upside isn't already in the books (the stock has tripled since Feb. '03) - but it also doesn't mean the reservoir of doubters who represent latent buying power is fully exhausted yet.
Short interest on EP peaked in early 2003 at 70 million+ with the shares below $5 and is now at a shade above 20 million shares, so short covering has helped. Yet one can still consider EP to be fairly heavily shorted as the short interest ratio is about 7.00.
EP has been one of those situations on which Wall Street and the short community have consistently agreed in the negative, which always adds to the contrarian appeal.
He may be the first of several to "give in," but he is still a part of the process. The stock could go much higher, I just used it as an example of how that process works and that mainly, these sell-side guys really don't do their homework. If they did, they would have recognized the value at $6 like you and I did.
So I have been selling into this as the stock moves up, taking the "easy" money and not sticking around for the "riskier" money. I am still long however.
My ears perked up when you talked about it and I stayed a little longer for it.
I commented to a guy next to me about your points in your bio about risk. I thought they were perfect about how to look at risk in markets.
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