Sell Your Shares So I Can Get Them Cheaper

By Dr. Duru

December 7, 2005

Analysts have been much aligned since the bursting of the technology stock bubble. Some things have changed, but not much. Every now and then, I read some really whacky analyses of stocks and equally whacky recommendations for how to act on those recommendations. Tuesday brought two more examples, and now I cannot resist making some colorful commentary of my own.

On Tuesday, reported that Wedbush reiterated a Hold rating and $24 price target on PortalPlay (PLAY). The stock closed at $24.57 the day before this announcement. Wedbush lowered its estimate for Q4 earnings by 2 cents a share and moved those 2 cents out to the next quarter. Apparently, Wedbush got privvy to a "channel check" where they found some potential weakness in PLAY's business. Never mind that we have no idea how they conducted the channel check. Never mind that shifting 2 cents of earnings from this quarter to the next means nothing material has really changed. What I found fascinating about their news is that "they believe a broad based consumer IC seasonal sell-off may potentially present investors with a better entry point." OK. Now let's pretend we are rational people and break down the decisions we are being told to make. First, the stock is already at their price target. Shouldn't I SELL and not just HOLD onto PLAY? Moreover, a sell-off could be around the corner, and I sure want to get out of the way of THAT! Next, if everyone reads this news, and everyone anticipates a sell-off, and eveyrone anticipates a return to $24 or so, why should anyone sell below $24? You would have to be a sucker to panic into a sell-off knowing full well that the company is worth about $24. Right?!? Sounds to me like these guys are trying to get a sell-off going so that they (and/or their clients) can grab some shares at lower prices. It seems we are practically being dared to panic. So what happened after this news dropped? The stock went UP of course! At the time of writing, two full trading sessions after the reiteration to hold PLAY's shares at the target price, the stock has tacked on another point to $25.55. Ah, the poetic justice...

Also on Tuesday, AP reported that Morgan Stanley analyst Scott Coleman downgraded the shares of Polycom (PLCM) from "overweight" to "equal-weight." Coleman's main beef is that the video communications market has not taken off as expected. Despite this disappointment, Coleman suspects that Polycom may beat expectations next year. Just as with the PLAY downgrade, a longer-term view tells us that this news is no news. From what I can tell from the note, Polycom's business is not over or sinking into the toilet, it is just that the next big thing has not happened....yet. So what is an investor to do? I do not really know, but I have long been a fun of Polycom, so I used the subsequent sell-off to do some buying and start a new position (read my disclaimer here). If you tell me ahead of time that you expect a company to beat expectations, I expect to make some money when the big surprise hits! As of the time of writing, I did a quick check of the scales - the PLCM position is not overweight...yet.

As always, be careful out there!

DrDuru, 2005