Granted, getting a stock tip from an analyst is better than getting one from your uncle, or your coworker, unless you work on Wall Street. Even so, you should but skeptical and critical about tips on the best stocks to buy now from analysts that you see on TV, hear on the radio or read on financial websites.
There are a lot of good reasons to be suspicious. That doesn’t mean you throw the baby out with the bathwater. Often, they can provide a lot of insights that you wouldn’t be able to get from anywhere else. You just have to know where to place it.
Analysts have biases because the same companies they rate are the ones that end up signing their paycheck at the end of the day. Most of these experts work for investment banks.
These banks depend on publicly traded companies for that side of the business. It’s a huge revenue generating business and they don’t want to piss off their clients or their potential clients.
Morgan Stanley and Facebook
The most recent example would be with the Facebook IPO. Recent reports are coming out that while they were touting a $100 billion valuation for the stock, there were analysts in the background that believed it was over hyped.
The problem is that reportedly, they only notified their largest clients of this fact. But to the rest of the world, they were telling them what a great stock buy this was. Even large investment companies like Citadel were duped into buying stock in Facebook for their clients and it turned out to be a huge mistake.
When a company that has earnings multiples in excess of 100 has bad news, the stock price really takes a hit. That is because they have nothing else to really go on except hype. They don’t have the earnings to back up their valuation. They only have hope and speculation. That is what is going on with Facebook and depending on who you talked to at Morgan Stanley, you would have received very different recommendations.
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