Prior to starting Alacra, I was very involved in the financial markets. I ran a small investment fund and occasionally trading stock index futures, bond futures and options. But I haven’t paid careful attention to markets until recently. Now I’m paying attention, for three reasons. First, like everyone else, I have experienced portfolio devastation. Second, (and I don't know why) I am following Howard Lindzon (@howardlindzon) on Twitter. Finally, and by far most importantly, I’m intimately involved in Street Pulse, the start of our new product line. Watching the flow of research on stocks is fascinating. Take the case of Sun Power (SPWRA), a manufacturer of solar power products with a $2 billion market cap:
On January 27, two days ahead of the fourth quarter earnings announcement, three analysts cut their 2009 earnings forecasts for the company: Mehdi Hosseini of Friedman Billings, Jeff Osborne of Thomas Weisel and Mark Bachman of Pacific Crest. Eric Savitz of Tech Trader Daily had an excellent roundup of the coverage
On January 29, as reported again by Tech Trader Daily, Gordon Johnson of Hapoalim Securities initiated coverage on SPWRA with a sell recommendation and a target price of $15.00. The stock was trading at around $30.00. Savitz remarked, “That’s pretty bold timing, given that the company should report Q4 results today after the close.”
The Company reported after the close that day and rallied; revenue and earnings exceeded the Street’s estimate. They did not give any guidance for the first quarter. So it seems as if the analysts were expecting weak numbers and made their calls prior to the earnings announcement, only to have SPWRA rally in their faces.
Fast forward to March 11. At a Raymond James conference, SPWRA CFO Dennis Ariola reduced first quarter guidance, leading to analysts cutting estimates and stock getting clobbered. The next day JP Morgan analyst Christopher Blansett cut his rating and moved his target price to match Gordon Johnson’s $15.00.
Today Collins Stewart analyst Dan Ries initiated coverage with a sell rating, and a $20.00 price target. The stock closed at $23.95, down 84 cents and almost $6.00 from where the original set of analysts made their sell recommendation.
A couple of observations: First, Johnson’s calling for a 50% drop in a stock’s price on the day of an earnings announcement strikes me as not only “bold” but curious too. But he and the other analysts saw something important pretty much simultaneously. I can’t see what value Johnson's timing had, given the other analysts’ forecast cuts a couple of days earlier. Second, the method by which the Ariola changed guidance was unusual to say the least, as Savitz pointed out in his coverage: "From a Reg FD perspective, this certainly seems like an odd way to adjust guidance." Third, while research directors want their analysts to do their own thing, time and time again you see evidence of a herd mentality. Lastly, Eric Savitz does a terrific job summarizing and analyzing Street research on tech companies.