Ahead of the Market

The Zacks Method for Spotting Stocks Early -- In Any Economy

Mitch Zacks

• Publisher: HarperCollins e-books
• Year: 2009
• ISBN:
  9780061738791
• Topic: Persönliche Entwicklung
• Subtopic: Private Finanzen

Beat the Pros at Their Own Game

All too often, you learn about good stocks far too late to profit from the information. By the time you actually buy a stock, professional investors have already been there, bought the stock, driven up the price, and are just waiting to unload it at an inflated price.

All That's About to Change....

In Ahead of the Market, Mitch Zacks shows investors how they can spot stocks that are poised to take off long before the rest of the crowd learns about them. How? By unlocking the gems of priceless information buried in Wall Street's often self-serving research.

Ahead of the Market is the first book, ever, that enables you to profitably use the analyst stock research for which Wall Street firms pay more than one billion dollars annually. Many investors have rightly felt misled in the past by analysts who continued to hype stocks as prices plummeted. You may have even concluded that Wall Street research is totally worthless. But it's not.

In Ahead of the Market, Mitch Zacks shows that analysts actually provide a wealth of market-moving information that can generate exceptional returns if interpreted correctly.The key is to use the research produced by Wall Street analysts the same way the professional money managers do.

Pioneered by the firm Zacks Investment Research and based on more than twenty years of intensive analysis, the investment strategies revealed in this book are indeed the same ones used by successful professional investors everywhere.

In these pages you will learn how to form an investment plan by locating stocks that are poised for price appreciation and avoiding stocks heading for a fall. Zacks shows how you could have prevented being burned when the recent bubble burst, if you had known how to use analyst research correctly and teaches you the rules of the research game so you will not fall victim the next time around. In sum, this book is your guide to picking the right stock at the right time.

Mitch Zacks's groundbreaking research provides new insights and new strategies to:

• Use revisions to analysts' earnings estimates to predict the rise and fall of stock prices
• Interpret the real meaning behind analysts' stock recommendations
• Employ the "cockroach" phenomenon and other methodologies to predict earnings surprises before they occur
• Determine how to react when a company reports earnings and how to profit from "post-earnings announcement drift"
• Understand and profit from "analyst creep"—the reason that earnings estimate revisions occur incrementally over time
• Avoid being duped by the games that companies play with their earnings reportsWhether the economy is healthy or stalled, whether the market is up or down, by focusing on the strategies contained in this book you will always come out ahead. Well-picked individual stocks will always carry the day. Now with Ahead of the Market, you will finally have the same tools institutional investors have and will be able to find great stocks in any market environment.

Chapter One

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The Main Themes

What’s ahead in this chapter?

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Meet the Analyst and His Research Report

Analysts and Sell Recommendations

Analysts and Buy Recommendations

Analysts and Earnings Estimates

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THIS BOOK IS DESIGNED TO TEACH YOU how to implement several investment strategies that enable you to use the research produced by Wall Street stock analysts profitably.

These investment strategies will provide you with independent, time-tested advice and are currently used extensively by professional investors. The strategies are based on over twenty years of research by Zacks into how an investor can most effectively use analyst research.

If used correctly, these strategies will generate market-beating returns in both bull and bear markets.

The purpose of this first chapter is simple. I want to present you with a basic introduction on how to use analyst research, which became publicly available over the Internet for the first time in the mid-1990s.

Meet the Analyst and His Research Report

To begin our journey, we must first understand the enigmatic and recently much maligned Wall Street analyst. Yes, analysts suffer from entrenched problems due to the system that they operate in, and yes, analysts are lousy stock pickers; but analysts and the research that they produce can be incredibly useful—you just need to know how to correctly interpret analysts’ research reports and the data that is generated from them.

Wall Street brokerage firms collectively employ over 3,000 analysts. These analysts are paid to tell the brokerage firms’ customers which stocks to buy and sell. Analysts serve two types of customers: large institutional clients such as mutual funds, pension funds, and hedge funds, and individuals ranging from people saving for their children’s education or their personal retirement, to wealthy individuals with several million dollars to invest.

Analysts are collectively paid well over $1 billion a year to write research reports explaining their opinions on particular stocks or groups of stocks to the clients of their brokerage firms.

These research reports contain a tremendous amount of data, but the two most important components in the research reports are the analysts’ recommendations and their earnings estimates.

The recommendation refers to whether an analyst thinks you should buy or sell a stock while the earnings estimate is the analyst’s prediction of what he thinks a company is going to earn, on a per-share basis, in the next couple of quarters and the next few fiscal years.

Up until the mid-1990s, the research reports produced by analysts and the data created from the analysts’ reports were, for the most part, not available unless you were a professional investor or had a very large account at a full-service brokerage firm.

Today, all the information produced by brokerage firm analysts—their earnings estimates, their recommendations, and even their research reports—is available to almost any investor.

Unfortunately, most investors are using this newly available information incorrectly and their portfolios are suffering as a result.

It Pays to Focus on Earnings Estimates

Individual investors seem to be fixated on the most biased parts of analyst research—the recommendations—while ignoring the unbiased information that professional investors have been using for years, which is contained in the earnings estimates.

In order to use analyst research in the right way you must learn exactly what information produced by analysts you should be focusing on and what information you should be ignoring. The answer is to focus on revisions to analysts’ earnings estimates as well as earnings surprises.

Let’s start by examining the buy/hold/sell recommendations and the earnings per share (EPS) estimates, both of which are contained in an analyst’s research report.

The Recommendation

At the top of every analyst’s research report the recommendation is prominently displayed. Recommendations come in a variety of flavors. Each brokerage firm has its own classification of recommendations that its analysts can issue. Some firms have had, at one time, as many as twenty-four possible recommendations that can be issued while other firms have only five possible recommendations that their analysts can issue: “Strong Buy,” “Buy,” “Hold,” “Sell,” or “Strong Sell.”

Beginning in late 2001, many large brokerage firms started to simplify their recommendation classifications in response to the public outcry regarding the lack of sell recommendations industrywide.

As a result of these recent changes, most major brokerage firms seem to be migrating toward specifically using “Over-Weight,” “Equal-Weight,” and “Under-Weight.”

Most of the major brokerage firms, in addition to issuing a recommendation on a stock, also provide a recommendation on the stock’s industry. For instance, Microsoft might receive an “Over-Weight” recommendation and in the same research report, Microsoft’s industry of “Computer Software” might receive an “Equal-Weight” recommendation. With three possible recommendations on the stock, and three possible recommendations on the stock’s industry, most brokerage firms are moving toward nine possible recommendations available to an analyst.

An analyst’s recommendation is supposed to boil all his research down into one simple actionable piece of advice, the answer to the question, “Nice ten-page report, but what should I do about the stock?”

Not surprisingly, the recommendation is probably the most widely used piece of information contained in the analysts’ research reports simply because it is, at face value, easy to understand and appears to be straight-forward. Do not be fooled. An analyst’s recommendation is a wolf in sheep’s clothing.

It is simple.

It is straightforward.

And invariably it is wrong.

In fact, if you had bought those stocks that were the most highly recommended by analysts over the two-and-a-half-year period from April 2000 to September 2002, you would have lost a phenomenal 47%.

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KEY POINT Following analysts’ recommendations will lead to poor investment performance. Although the recommendation is the most widely used component of the analyst’s research report, it should not be—it is misleading to investors.

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Analysts and Sell Recommendations

One big problem with listening to analysts’ recommendations is that analysts have historically been very reluctant to issue sell recommendations. This has been the case since Zacks began tracking analysts’ recommendations in the mid-1980s. Today sell recommendations are still uncommon, and this will likely be true in the future even if the various reforms currently being discussed are enacted. Why? Because, as we shall see in the next chapter, the reasons for analysts not issuing sell recommendations are endemic to the system.

For now, just accept this: Currently, analysts are collectively over ten times more likely to issue a buy or hold recommendation than a sell recommendation.

If you have been following the news, the collective reluctance of analysts to issue sell recommendations should not surprise you. Eliot Spitzer, the attorney general of New York, led an investigation which ended in December of 2002 that brought the dearth of sell recommendations to the public’s attention. Since the summer of 2001, analysts have been publicly eviscerated. Jack Grubman has been blamed for the woes of WorldCom, and Henry Blodget was made the fall guy for the Internet bubble. Analysts as a group have been blamed for the “loss of investor confidence” that afflicted the market following the meltdown of technology stocks that began in the first quarter of 2000.

The reluctance of analysts to issue sell recommendations has been offered as one reason why individual investors lost a tremendous amount of money. You may have seen pundits and politicians parading themselves on the nightly news indicating that the nefarious analysts are responsible for the infectious greed that brought on the bear market like a fulfillment of biblical prophecy.

The Reluctance to Issue Sell Recommendations Is Nothing New

Yes, analysts are reluctant to issue sell recommendations, but this is nothing new to the institutional investors who have used analyst research since the dawn of Wall Street. And the whole tech fiasco was not caused by individuals trading stocks online; large institutions bear far more of the blame. The problem is not that analysts are biased; the problem is that no one let individuals in on the secret or told them how to effectively ignore the hype contained in analyst recommendations.

Compounding the problem, the Internet gave individuals access to analysts’ recommendations and research without the requisite education on how to use the data, so they understandably took analysts’ recommendations at face value.

When an analyst says “hold,” most individuals unfortunately still do not realize that this means “sell,” simply because analysts almost never issue negative recommendations.

As Spitzer’s investigation showed there is an inherent conflict between a brokerage firm’s research and its investment banking division. This influences what an analyst is willing to publish in his research reports. Obviously...

Table of contents

• Cover
• Title Page
• Dedication
• Contents
• Disclaimer
• Introduction
• Chapter One
• Chapter Two
• Chapter Three
• Chapter Four
• Chapter Five
• Chapter Six
• Chapter Seven
• Chapter Eight
• Chapter Nine
• Chapter Ten
• Chapter Eleven
• Chapter Twelve
• Conclusion
• Appendix I
• Appendix II
• Appendix III
• Appendix IV
• Index
• Acknowledgements
• About the Author
• Credits
• Copyright
• About the Publisher