Keep Your Eye on Analyst Downgrades: GNK, EGLE, ADBE
Utilize Analysts Upgrades and Downgrades to Your Advantage
Feb 7, 2011 8:45:37 AM PST
In a different article I posted how shorting companies could be a lucrative strategy, that is if you get the hang of it and start mastering the skill of countercyclical trading. I can't speak on behalf of all the other traders and investors, but I can tell you what works in the strategies that I use that helps me login quick gains or realize a profit in a matter of couple weeks. Some investors, or I should say traders prefer to add to their position after the earnings, while others such as myself like to get in on the stock two or three days prior to the earnings release, and get out before the earnings announcement. When you see a volume that is continuously increasing two or three days prior to the earnings, most likely a large move is anticipated. If you hold on to your stock until the announcement, you better hold on to your hat, because the large swings can go either way.
Five months ago, I short sold Adobe (NYSE: ADBE) at $32.03 a week prior the earnings release. I went against my better judgment, held the stock until the earnings day and got lucky. Company stock plummeted at the earnings announcement as the company did not meet its analyst expectations. What was more interesting is that I was trying to go long on the stock, but I already read about the troubles that they were having with the government contracts and how they were losing business to the new competitors and decided to take the short side. I would be completely wiped out if I had gone long, so it is important to know your risk appetite before putting all your eggs in one basket before an earnings announcement, which is a very speculative strategy.
Another strategy that you can implement is to keep an eye out on companies that are downgraded from "Buy to Hold" or "Hold to Sell". It's interesting to track these companies that are downgraded to see if the analysts are in fact correct in their predictions, since there are times where a company could be downgraded, but the stock is still showing strength with an increased activity in volume, relentlessly holding on to its gains. This is rare, but it does happen.
Two companies that are on my watch list currently are Genco Shipping & Trading (NYSE: GNK) and Eagle Bulk Shipping (NASDAQ: EGLE) that have been downgraded by Dahlman Rose. Pretty much all of these small-cap shipping companies have been downgraded after the Egypt protests and the speculation that these carriers will see higher costs for shipping and it will hurt their bottom line. The funny thing is that two days ago these companies actually rallied because of the Egypt uprising. Who knows what is going on anymore?