I’ve often tweeted and sometimes mentioned on here that only the greenest of novices or someone who just doesn’t care listens to Wall Street analyst Buy-Hold-Sell ratings.
Yesterday, the universe handed us a practical example.
I’m actually laughing out loud at this one. I first bought stocks in Tesla in 2012. Since then I’ve ridden it up and down, sold out, bought back in and sold half again and now I have a $0 cost Basis on the stocks I hold (I sold enough to recover my investment). Since 2013, Goldman Sachs’s lead analyst for Tesla, Patrick Archambault had a negative and then neutral rating on Tesla’s stock. He thought it was a bad idea to buy it but if you already did, you can just hold on to it instead of selling. That’s basically what his rating was.
Take a look of Tesla’s stock movement since 2013
It’s not completely clear from the graph but from May 2013 to May 2016 the stock has returned over 136% or about 33.2% annually. This was post Roadster days, so in those years, Tesla has given us the Model S, smashed Consumer Reports ratings, gave us PowerWall, Model X, delivered close to 100,000 vehicles, started building the Gigafactory and announced the Model 3.
Now that Tesla is off the government subsidy plan, the rebates on its vehicles are close to expiring and its cash burn is at ferocious rates and it’s stock having hit the stratosphere in terms of valuation , causing me to recommend new investors NOT buying the stocks at current levels due to high risk and overvaluation, that is when Mr. Archambault of Goldman Sachs suddenly upgraded the stock to a Buy and slapped a $250 price target on it. I howled.
It’s not that he’s wrong or right. It’s that that consideration is not even the agenda. I’ll tell you this today, Wall Street analyst ratings are a marketing product. Period. It reflects and reacts to the incentives of the investment bank division’s business. Which is fine by me as long as we are upfront about it.
That is why I was not surprised when barely 24 hours after this surprise upgrade (which lifted Tesla’s stock by almost 5% yesterday) the company announced that it’s raising $2 billion in new capital, led by Morgan Stanley and, you guessed it, Goldman Sachs.
Yeah investment banks make a big deal about their Chinese Wall which separates divisions like investment banking and research exactly due to issues like this but big deal, we’ve known for a time that leaks happen and again analyst recommendations are marketing. Tesla was very vocal about intending to hit the market soon, and any research analyst would’ve known when they started shopping for dealers and caught some of the buzz once of course would be aware that saying something nice about Tesla would result in nice things for their firm.
Only people who think analysts buy-hold-sell ratings actually means Buy, Hold or Sell are newbie retail investors or the SEC. The rest of you should take one thing from this story: the game is the game. Know it, play it and don’t ever let an analyst on Wall Street tell you anything about a stock to buy.