Never Listen to an Analyst!

July 2012: Apple [AAPL:NSD] is still a well-run machine without Steve Jobs. Shares have recovered from a spring correction and momentum is building. Analysts make the claim that the drop was a buying opportunity. With the release of new products like the iPhone 5 and a new iPad, money flowing into the company from consumers and investors would be endless. It could be the first company worth a trillion dollars. Microsoft of the 1990's was the closest, but its shares collapsed at the turn of the century and never recovered. But Apple is different. It has wider margins, more growth potential, and the largest cash balance in history.

September 2012: Apple is just weeks away from the iPhone 5 release and shares have pushed into all-time high ranges. Every down day is followed by a larger up day. The stock has now doubled in less than two years. The company became the most valuable company ever in history and reaches $705 a share. Analysts predict that Apple will still rise, reach $1,000, and still believe it to be the first ever trillion dollar business in market capitalization. No company can compete with a large company like this. Nearly all analysts make the call to buy the shares and investors did.

February 2013: Apple has released two earnings reports and has shown slowing growth. The engine that could has run out of steam. The company's shares have fallen from $705 to a still respectable $460. Five months after the correction, analysts finally cut their price targets on Apple. The words "trillion dollar" are once again heard only in conversations about the US debt. Analysts admit they were wrong on $1,000 targets and lower it to $800.

The above was an example of why individuals should never listen to an analyst, no matter how good that one may be. It is not because they are liars or cheats or thieves. No, because analysts are human. Therefore, they make judgement calls as a human. Analysts should not be viewed as prophets with a crystal ball. Although their predictions may be well-educated in nature, these predictions are solely on fundamentals and are formed through the same schools of thought as counterparts anywhere.

They fall victim to public sentiment. In 2008, there was widespread belief that the American economy was headed for a double-dip recession, so analysts were pessimistic. They felt the sentiment of consumers and investors. Their targets were low, yet shares outperformed and had one of the strongest showings in years. Today, we see analysts with big buy ratings on every company even though earnings are showing lackluster growth.

Some believe analyst ratings are a trailing indicator. They react too late, as seen in the Apple example above. By providing a sell rating nearly six months after shares fell almost 40 per cent is redundant. Historically, analysts over estimate earnings during times of good and under estimate earnings during times of recovery. Below, we see a chart of EPS estimates by analysts and the real EPS.


Analysts projected big earnings for the market during stable economic times. The chart shows lofty predictions during the 1990's but companies disappointed. Then, the recession hit in 2001 and analysts gave pessimistic views only to be proven wrong year after year. It took 6 years for estimates to be overly optimistic and then the financial crisis hit.

Where are we now? 5 years after the financial crisis hit and approximately 90 to 95 per cent of stocks have a buy rating on them. Have we reached another cycle of extreme optimism? If so, it may be a signal to sell. After all, to say at random your stock will earn you money 9 times out of ten seems a little too easy. And when global markets are trading at or near all-time highs again, it may be time to finally ignore the analysts and figure it out on your own. I certainly have.