Dear ladies and gentlemen of the jury: I would like to formally petition the court to throw dumbass Wall Street “analysts” in jail, without parole, and throw away the key.
Anyone who follows the market should be painfully aware of how one-time growth poster child Green Mountain Coffee Roasters (NASDAQ:GMCR) saw its momentum screech to a halt today. GMCR was brutalized after reporting earnings Wednesday afternoon and opened down more than 40% today. Shares literally went from $50 to $30 overnight.
But get a load of this: This morning, “expert” advisory firm Piper Jaffray finally took it upon itself to downgrade Green Mountain Coffee Roasters from “overweight” to “neutral.” That means as of the closing bell Wednesday, Piper Jaffray thought you still should be happily buying GMCR. Only today did it lower its price target from $65 to $40.
Piper wasn’t the only one. As of 8 a.m. this morning, SunTrust also belatedly downgraded GMCR from “buy” to “neutral.” Way to be ahead of the curve, guys.
Sometimes harmful events are unavoidable or come out of nowhere, like the tsunami that unexpectedly disrupted Japanese manufacturing or the Deepwater Horizon disaster that brutalized oil giant BP (NYSE:BP). Even the shrewdest analysts can’t predict the future or the likelihood of events like that.
GMCR and its earnings miss don’t fall into that category, however. Many experts have warned that the Keurig has reached critical mass. Some technology is going to no longer be proprietary as Green Mountains’ K-Cups are coming off patent. And then there’s Starbucks (NASDAQ:SBUX) looking to eat Green Mountain’s lunch with its own single-serve brewing machine called Verismo.
Obvious risks, no? Too bad the “smart money” couldn’t put 2 and 2 together before earnings and protect the investors they ostensibly represent.
Josh Brown, advisor at Fusion Analytics and author of TheReformedBroker.com blog, lays out the case in even more detail here for those who want to know just how badly The Street missed the boat this time.
But GMCR is the symptom of a greater crime being perpetuated on individual investors: The lie that experts know what they are talking about.
This has happened before. And I’d like to present Exhibit B to Josh’s Exhibit A with GMCR – the case of Netflix (NASDAQ:NFLX) and its meltdown in summer 2011.
You probably are quite familiar with this meltdown, honorable men and women of the jury, but allow the prosecution some leeway to make its case in detail.
Yes, the Qwikster debacle and Reed Hastings’ hubris were a bit out of left field. But you know what wasn’t? The clear fact that Netflix was going to change its pricing model, strategically focus on streaming and emerging markets and shake up the structure of the company to find new ways to grow. That had clear risks, and had resulted in some investor pessimism (here’s a July 13, 2011, article by Tom Taulli on InvestorPlace outlining the risks of NFLX) as Netflix soared to almost $300 per share last summer.
But that didn’t stop analysts from being crazy bullish.
On June 1, 2011, Barclays Capital starts NFLX at “overweight” with a $315 price target. (Funny note — the same report also set a target of $19 for Yahoo! (NASDAQ:YHOO), which hasn’t hit that level since before Lehman went under. It’s now at $15.70 or so)
On July 19, Oppenheimer raised its rating to “outperform,” sending its target soaring from $280 to $360 per share!
You get the picture. And hopefully, your remember what happened next.
The company warned of a price shift that some experts claimed could cause subscriber losses of up to 2.5 million. Social networks like Twitter were rife with consumer outrage. Netflix beat earnings in late July and reaffirmed its guidance, but the plans started to worry folks a little. Shares had briefly hit $221 in early August … but crept back up to $246 per share several trading days later. No biggie, right?
Then the slide continued and gained steam. By early September, NFLX was in the $200 range — after it lost Starz content for its streaming library.
But have no fear! Our boys at Oppenheimer still were bullish. They moved their target down slightly to $270 a share, but NFLX still was rated “outperform.” Barclays also reduced its target, to $260 from $285, but still had Netflix at “overweight.”
By the way, at this point Netflix was valued between $170 and $200 in rather volatile trading, so these were not exactly conservative calls.
Then, on the glorious day of Sept. 19, 2011, all hell broke loose. Reed Hastings offered up a half-assed apology after pricing changes drove 1 million subscribers away — and used this ill-advised medium to announce Qwikster, a wholly separate DVD delivery service complete with its own website and billing infrastructure.
By October, Netflix stock was bouncing around in the $115 range.
I could go on with other asinine calls by “experts” on Wall Street. And it extends beyond simply equities — credit rating agencies giving kinky mortgage-backed securities perfect marks is perhaps the most galling miss of all.
But I won’t insult the intelligence of the jury with more didactic tales of stupid price targets, missed warning signs and general incompetence by the “smart money” on Wall Street.
I urge you all to put these so-called experts in a dungeon somewhere and ignore their frantic cries of “Buy, buy, buy!” It is the only logical thing to do.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.