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SO when do you listen to an analyst?

Never. Sometimes. Have they ever been right? Of course I am asking this question in jest, yet there obviously is a bit of truth in the comment. Not more than three or four weeks ago an analyst downgraded DE for all the reasons the talking heads were downgrading CAT. As I heard the downgrades coming in on CAT I thought fundamentally they made sense. Slowing mining industry, lower price in gold, soft or hard landing in China all make sense why CAT was heading down. On the way home I was on the phone with a friend discussing the market. While talking “shop”, our code word for pretending to be a CNBC analysts’, I let him know someone was going to downgrade DE tomorrow. Why he asked? All the analyzing I had done brought me to one conclusion, “Since CAT was being downgraded and DE follows CAT, I am just expecting it”. Fundamentally nothing was wrong with DE. In fact, most research pointed to higher highs for DE.

Next day DE was downgraded and fell 2% because apparently the analysts have some great information. Unfortunately, the information stated in the downgrade was not only inaccurate but the similar, overlapping reasons CAT was downgraded. If you trade, learn to read the financials to truly know how a company is doing. Learn to understand revenues, liabilities, assets, margin, and debt obligations. Understand why a company makes money and how it compares to the industry or sector. If you’ve read the analyst’s report on DE, it digresses from the company reported SEC Filing at earnings. Apparently, in the financial markets, analysts’ know more than the officers of a company. Also, apparently forward guidance and past performance have nothing to do with future results. What  do you think?

All I know is that DE filled the gap within a week and it appeared this was nothing but a small pullback. I often wonder if downgrades are to help companies buy back into the stock at a cheaper price? Do these people really know what they are talking about and how much do they get paid? With so many downgrades and upgrades do we even need an analyst to explain why? After the pullback the company really started the bearish downtrend. That’s when I realized something is to be said for analysts’ reports on companies. The companies these analysts work for have more money and time than I do to do the research to justify their findings. Here’s what I do now when a new upgrade, downgrade or analyst report comes out.

First, I want to see what the main points are in their report. These main points are the red flags I then need to look for in the near future. I also check any numbers in the report with a company’s’ financials. Maybe there is something I missed, misunderstood or a tip for the future. NO I never trade on an analyst report on a company. I do see if the reasons for the downgrade or upgrade make sense. If there are trends in other industries, sectors or parts of the world why not know about it. I want as much valid information as I can get to make my best educated decision on what to do next. It could be time to buy a protective put for downside protection. A covered call can give me a small amount of downside protection to weather a small pullback. It could mean it is time to exit the equity all together. In real life this is one person’s opinion and best guess at the future. If predicting the future was easy, I guess we would all be doing it. Right….?

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