FINANCIAL FOCUS

Upgrades & Downgrades

      In this installation of Financial Focus, we will discuss the topic of upgrades and downgrades of equities. As always, we will provide some education and commentary for the inexperienced and/or uninformed 

      In our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), in Chapter 1, we introduce the concept of Human Emotion and Market Psychology. One of the most sensitive moments for an individual stock is following and upgrade or downgrade, often causing an “over-reaction” to the rating change.  

      Upgrades and downgrades of company stocks occur on a daily basis, and should be treated differently, based on the source, when investing and trading. There are essentially two types of grading, one by market and/or financial analysts, and the other by the company itself. 

      The first, from economists, financial institutions, fund managers, etc., are generally derived from periodic fundamental analysis, and/or “projected” future business/sales. These professionals are generally tasked with examining the financials of publicly traded companies, and placing an investment rating upon them. These ratings include overweight/strong buy, neutral/hold, and underweight/sell. These opinions can be based on current earnings reports by the company, new products or services with expected future sales, news, or just periodic reviews of their business. A change in an analyst rating often causes price action in the stock price, once publicized, but often fade back to the mean after a few trading days. There are multiple daily ratings changes in the financial arena, and are generally taken with a grain of salt from most experienced investors/traders. 

      The second, and more important, type of upgrade or downgrade derives from the company itself. Whenever the owner, CEO, or board member purchases or sells company stock, there is often an emotional market reaction, based on fear or greed. No attention is paid to whether the insider was awarded shares, has a pattern of periodic buys, or sells, or is required to sell to lessen their vested control of company. However, when the CEO or spokesperson publicly upgrades or downgrades their own stock, that is when the most attention should be paid. Who else has more inside knowledge of a company than its owner, CEO, or CFO? They run the company, prepare the paperwork, and make the financial decisions. They know whether the future is promising, or the company is in trouble, which are important facts an analyst may not know when reporting their findings. When an individual at the top ranks of a company provides information, which is not often, the effects normally last much longer than a general analyst rating. 

      There are two occasions when management may announce a ratings change to their company. The first will occur whenever they randomly feel it appropriate to make such an announcement, and special attention should be paid as they are not required to say anything.  

      The second is during earnings season. Once per quarter (4 times per year), a company will publicly announce the prior quarter’s earnings per share, on a pre-scheduled date. On this date the company will announce those figures (lagging information), but also provide what is referred to as “forward guidance” (an outlook for next 1-2 quarters). Any significant change in expected performance can immediately change the market sentiment regarding that equity, as internal information is much more reliable than external estimates. Trading just prior to, or during, a company’s earning date is not suggested, unless you are experienced in trading sophisticated options strategies that can benefit from price movement in either direction.  

       For additional discussions and education, please continue to visit our BLOG section here on ASTRO-FIN, where we provide periodic updates on a variety of topics.

***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions.