Betting Against Vulnerable Wall St Analysts

JC Parets
February 10, 2021

Forget the hedge funds. You want to crush the suits?

Well, they still make sell side analysts wear suits and come into the office.

It's wild, I know.

Sell side analysts have worse herd behavior habits than your average investor. They have their cushy jobs (a few of them still do anyway). They get to tell their friends and family that they work on wall street, because some people still think that's "cool".

But the truth is, it's our job to take advantage of them. It's a lonely and dying business and they're not having any fun. In fact, they're finding it really difficult to run their antiquated valuation models on today's business. It's hilarious to watch them try.

Now, making fun of the situation doesn't get us paid. BUT, taking advantage of their conflicts of interest certainly can, if done correctly.

You see, they have families, kids in private school, expensive mortgages and used to nice vacations. It's a lifestyle. Their wives don't work and it's up to daddy to make sure the big check comes home every month, regardless of the cost.

To be clear, this is not 'every' sell side analyst. But for the purposes of this strategy, this is how we want to view them as a group. It helps understand their flaws and motivations.

They're not going to have their jobs for much longer. That business is dead. BUT, in the meantime, we can take advantage. They say you shouldn't kick someone when they're down, but that's actually the best time to kick someone, when they're already down.

The herd behavior on the sell side is off the charts. Because, for example, if 20 other analysts cover a stock and they all have buy recommendations on it, for you to give it a sell rating, YOU BETTER BE RIGHT!

If the stock rips and you're the only loser with a sell on it, you'll be looking for a new job soon. It's not worth it for you to go out on the limb, no matter how confident you might be.

"Should I put a sell on this one, because I really think it's a zero? Or, do I just agree with the rest of the analysts so that if I'm wrong, so was everyone else? That way little Chad can start 7th grade in the same expensive private school with all his friends."

Family > Doing My Job Correctly.

There are many other conflicts of interest going on at the sell side level. We can talk about the Chinese Wall, or lack thereof. All sorts of funky stuff goes on back there. That's probably why it barely exists anymore and anyone who is any good at this has gone independent or works directly for the buy side shops. Laws have also changed and MiFID II was really the nail in the coffin. But the truth is, this had been a dying business before all that anyway.

You may not like the way it is. This sort of thing may bother you. But that's not really my problem. Our only job in this market is to try to profit. This is one way to take advantage of weak hands with ulterior motivations driving their decision making.

It's only human nature. It's hard to even blame them. You can blame "the system" if you want.

But for me, I don't care about any of that. I just want to profit from their vulnerability and help you guys do the same.

For me, this is all common sense. I've had a front row seat to this for almost 2 decades. But I understand this is not common knowledge among all investors.

Well, maybe it will be for you before it's too late!

Introducing: Fade The Street

The scan leverages data from sell-side analysts, including their buy/sell ratings and price targets, to identify stocks with the potential to become the market’s next big winners.

How do we do this? Simple . . . We scan for top-performing stocks that happen to be some of the most-hated and out-of-favor names on the street. Basically, we’re looking for names that analysts have gotten wrong – or at the very least, are trending against their respective ratings.

There is a natural tailwind behind names appearing on this scan. When the sell-side shops and banks eventually take action and chase these stocks higher, investors will, too. The idea is that we’ll already own the strongest names and simply enjoy the ride. As analysts are forced to come out with upgrades and price hikes, they will act as catalysts for even higher prices.

Premium Members can check out our full report here, along with our hand selected trade ideas.

Let us know what you think!

JC

 

 

Filed Under