Analyst Upgrades And Downgrades
Hello traders. Welcome to the stock trading course and the fourth module: short to medium stock trading.
In this lesson we’re going talk about analysts’ upgrades and downgrades, and we’re going to start by defining what an upgrade and downgrade on a stock is and then we’re going to go to a webpage where I’m going to show you where you can follow the latest upgrades and downgrades or the latest recommendations by analysts. And then we’re going to go the charts and compare the recommendations to the price action that day.
But first we’re going to define what this is. What are upgrades and downgrades? An upgrade is a positive change in the rating of a stock, and it’s usually triggered by a steady improvement in the fundamentals and financials of the company. A downgrade is a negative change in the rating of the stock, and this happens when analysts feel that the fundamentals of the company have weakened from the original recommendation. This means that a stock could have been on a buy recommendation and then when analysts feel that the company, or the company’s fundamentals have moved from its original recommendations, they are going to downgrade the stock and recommend a sell. A downgrade is usually triggered by a fundamental change in the company’s operations and future outlook.
Upgrades and downgrades on stocks are issued by equity analysts at brokerage houses and investment banks. These are not traders. The job of these people is to analyze the stock and give a recommendation based on their fundamentals, so this is why they are closely followed and very trusted throughout the investment world. Analysts place these recommendations to give investors a general idea on the expected performance of that particular stock.
So what is the play with the recommendations or the upgrades and the downgrades? And even though these recommendations are for medium to long-term investments, we are going to look for buy opportunities on an upgrade and sell opportunities on a downgrade. And the reason is that when companies or, well, when investment banks’ and brokerage houses’ analysts change their recommendation of the stock, this will bring immediate bull or bear pressure to the market or to that particular stock. And we are going to take advantage of that positive or negative volume.
Now, I’m going to show you the webpage where you are going to be following these recommendations. Okay, so the webpage where we are going to be looking for the analysts’ upgrade and downgrades is Benzinga, and you can go to www.benzinga.com/analysts-ratings. And this will bring you to this page right here. The first thing you’re going to notice is the breaking news on the analysts’ side. For example, “Barclays Thinks PTC Therapeutics Has 234% Upside.” I’m betting that this is going to bring a lot of buyers into the market today.
And we have a few other breaking news or breaking headlines: “Citi, Morgan Stanley At Odds Over Garmin.” Let’s find another important headline. Well, “10 Netflix Analysts React To Company’s Controversial Earnings Release.” If you don’t follow stocks, I’m going to show you what they’re talking about.
Here is the Netflix chart for the past five days of trading…well, I’m sorry, two days of trading, and as you can see, right here they had a massive drop from a high of $112 per share to a low of $93.55 per share on a miss on earnings, so this particular headline is talking about the reaction of analysts towards that particular earnings release.
But let’s go and let’s view how we are going to be reading the ratings calendar. And to view the ratings calendars, you are going to are going to click on this blue button right here. This is going to bring today’s daily calendar and, as you can see, we have an upgrade on BAM. We have a downgrade on DISCA, an upgrade on Lululemon, and a downgrade on Spirit Airlines by Morgan Stanley.
Now, I’m going to show you yesterday’s ratings calendar because I’m going to make the comparison between the analysts’ upgrades and downgrades and what happened on yesterday’s price action on each stock. All right, so I have filtered out everything but yesterday’s and today’s ratings calendar. Now, let’s look at what happened yesterday, and you can see that, well, right here we have the first downgrade on AWK. Okay? I really don’t know what the stock is, but if you do want to know what a company does, you can click on the ticker right here.
But the important thing is that they are downgrading the stock from a buy, so they are telling us that before this downgrade, the recommendation on the stock by this investment bank was a buy. So let’s go and find out what happened with AWK, well, yesterday. Okay, so this is the important part of the chart that we are going to be looking at. Now, you can see that the recommendation of the stock was right here and then we closed the prior day at around the $57.50 level. There was no trading during the pre-market and then a huge gap to the downside, okay? The stock opened at $56.26, made a low of $56.03 before starting a rally to these highs.
Now, let’s go back to the ratings calendar because, even though this is a downgrade, it’s not such a great example because of the volume of the stock. You can see that, well, the average volume on this stock is 14,000 shares, and even though volumes spiked to 21,000 shares, I feel this is too much illiquid. But this is a reaction to a ratings change.
So let’s go back and let’s look at the other downgrade on BAS. So, Cohen & Company downgraded this stock from an outperform to a market perform. And let’s go and see what happened with this stock.
The ticker is B-A-S, so let’s type it here. B-A-S. And as you can see, the previous recommendation was market perform and to an outperform, this is a downgrade, and you can see that from yesterday’s high at $4.45, this is a penny stock, well, a small cap or a micro cap, but still it’s a downgrade. You can see that we have a huge gap to the downside, and it’s a 45 cent move on a $4 stock, which is huge.
Now, let’s go back and let’s see what happens on BOFI, okay? Now, this is the third recommendation change that goes from a neutral to a buy by D.A. Davidson, so this is an upgrade, and we are going to look at the chart, all right?
Okay, so here we go. This is the chart of BOFI. You can see that, well, this flush or this sell-off is not due to a recommendation of buy, but this sell-off is due because this company was sued in federal court in San Diego, and the news of that litigation hit the wires on the pre-market the day before. Then, you can see right here on the pre-market from yesterday, when the recommendation from a neutral to a buy hit, this stock moved from a low of $97.55 immediately to a high of $111.09. So that’s a $14 dollar move in the pre-market, and as you can see, we made a high of $120 once the market opened.
So this is where we are going to be taking advantage of. I mean if you are skilled enough or if you have traded very volatile environments in the past, you can actually start buying on the pre-market to take advantage of these huge moves.
Now, let’s go through one last downgrade, and it’s a downgrade from an underweight to an equal weight by Morgan Stanley on Cinemark. So we go to the Cinemark chart, which is C-N-K, and the recommendation went from an underweight to an equal weight, so it’s a downgrade and you can see the reaction of the stock. Okay, it made a pre-market of $34.93, but then it flushed…well, it opened at $34.47 and immediately flushed to $33.40, which is a very nice move to the downside for about a dollar per share.
So if you were trading 100 shares of Cinemark, you would have made $100 from the opening to the low of this move. Of course, if you feel comfortable holding through retracements, you could have made even more money by holding to the $33.18 levels, okay?
Now, this lesson is just for you to see what analysts’ upgrades and downgrades do to a stock, so you have to look at the ratings calendar for the day before the open, and you have to choose the more liquid stocks because if you look at this volume, I mean, this volume is…