Analyst Rating Randomness
Vertiv $VRT illustrates the mostly dysfunctional practice.
I’ve followed $VRT for some time and published a note in May of 2020 (on SPACvest since this was a de-SPAC) explaining why I was investing in the stock at ~$10 along with some analysis suggesting it was worth at least $20/share. At the time Goldman Sachs covered it and had a $12 price target. (I can’t imagine what they were basing that on.)
Eventually, the shares attracted more coverage as they rose and the price targets started coming in around the low-$20’s. Some of the laggards got around to coverage and had to put out a $27 price target.
Recently the company got caught between inflation and supply chain issues and printed a surprisingly disappointing quarter. The shares plummeted to $11 which is where I started buying them again. For the simple reason that the business is still worth pretty close to the same amount (let’s say $25) that it was before the miss. So at $22, it’s not attractive but at $11, well that’s a whole different story.
Yet some analysts downgraded the stock after the decline. One cited a “reset” to the model given the disappointing results. The problem is the market “reset” the stock price immediately to account for the miss.
In this case, the demand side of the picture remains excellent with a major backlog of business. Unlike many other management teams, this one has now baked in ongoing inflation and supply chain issues into their guidance.
They also did an excellent job on the call taking ownership of the issues and making it clear that they were on a mission to right things over the next several quarters.
If you build a long-term model and compute what we call present future value (PFV) a miss like this makes little to no difference in your valuation. Yet an analyst with a “buy” at $22 moves it to a “hold” at $11 and adjusts their “target” from $25 to $12.
Based on what? You might ask! Clearly not the right kind of modeling or investment thinking. And these are professionals making six figures, some with the vaunted “CFA” designation.
To be fair sometimes you have to do this so that you can have some impact later when you upgrade the stock in a few months at $17 and increase your price target back to $25. That’s part of the game but not very useful for investing.
I hope some of the analysts that didn’t downgrade were able to tell their clients that they were wrong so far as they didn’t see what was coming but now that it’s out and reflected in the shares they should be buying and not selling.