Most investors are aware of the impact that investment analysts or hedge funds can have on a stock. Whenever an analyst at Goldman Sachs upgrades a stock, some investors will automatically buy, likely causing that stock to rally at least temporarily. If it’s a highly shorted stock with a lot of bearish sentiment, the upgrade could potentially cause a short squeeze, causing a lot of short pain. Similarly, whenever an elite fund, say Soros Fund, discloses a major position in a stock, that stock will likely go up, again at least temporarily from piggy-back buying.
The opposite is also often true. If Goldman downgrades a stock, some investors might sell, causing the stock to go down. Likewise, if news breaks that Carl Icahn completely sold out of a stock, some investors might follow Icahn’s lead and divest as well, again pressuring the stock lower.
Hedge Funds and Investment Bank Analysts Have the Smarts and Reputation
It’s not surprising that the market often prices the stocks that have been upgraded by Goldman higher immediately after the news breaks. The analysts at Goldman Sachs went to the best schools and earned the best grades. They have good connections to the people in the know and the analysts are almost always the smartest people in a room. Likewise, many portfolio managers or analysts at Soros Fund or other hedge funds also went to the best schools and got the best grades. Due to their reputation and track record, many in the investment community are willing to piggy back on the wisdom of Goldman Sachs or Soros Fund, even if it means paying a few percent more when buying a stock.
Not all Analysts Have an Investor’s Best Interest At Heart at All Times
While analysts may be super smart, not all analysts at investment banks have an investor’s best interest at heart. Some analysts could just be upgrading stocks to help his firm win underwriting business, etc. Some elite funds may disclose holding a position in a stock, but could also be hedged with undisclosed short or option positions. Hedge fund disclosures are also often made days or weeks after the actual transaction, leading to some lag time that might affect the validity of a buy or sell signal.
Internet Blogs Can be Just as Influential as Analysts
Given that analysts don’t necessarily have an investor’s interest at heart, some blogs online have filled in the hole and tried to provide both sides of the investment thesis – both the long side and the short side. Blogs such as Seeking Alpha, for example, often publish both bullish and bearish articles on stocks by allowing anyone in the crowd to write an article — just as long as the article is strong enough.
If an article’s thesis is particularly compelling, bearish articles can send stocks down just as much as Investment bank analysts. If the thesis is compelling in the opposite direction, bullish articles can also send stocks up (although this happens more often in micro-cap or nano-cap stocks). The bullish articles can also cause short squeezes.
As with investment bank analysts however, an investor should do his/her own research on a stock and make his/her own opinion and not trust a blog’s thesis blindly. Anyone can have an ulterior motive, whether disclosed or not, and very few people know the future 100% of the time.
Ultimately investment bank analysts and internet blogs are really only good for one thing – information. That’s pretty much it.
Disclosure: no position