The above email exchange is key for a couple of reasons.
One, we often cite Wall Street research on "Mad Money," noting relevant facts that are presented by different brokerage firms as key data points that help guide our investment conclusions. In addition, sometimes an upgrade or a downgrade by a brokerage firm shifts our view of a stock we had previously been bullish or bearish on. On Wednesday, for example, Jim discussed how Goldman’s upgrade on Research in Motion based on a sum-of-the-parts analysis made him more bullish on the stock, particularly because the firm had ridden the stock down over 70 percent with its previous appropriate 'sell' rating that many others missed.
HOWEVER, it is key to note that using research from Wall Street brokers needs to be used only as a jumping off point for forming your investment decisions. It is just ONE tool in the toolbox—and relying on any particular source or strategy just doesn’t cut it when it comes to making a sound investment decision. After all, there are often big discrepancies between the views of different firms—so of course going with the view of one particular analyst isn’t prudent. In fact, on "Mad Money," we have presented “Wall Street brawls” when research analysts have, well, exactly opposite views about a stock.
Worse, though, there is a tendency among the sell-side community to fall into “group think” where there is overdone adulation of a stock (or, conversely, overdone negativity). Case in point: Green Mountain Coffee, a stock that seems to be in the news nearly every day. While off its lows, this name has been cut in half since mid-September from over $100 a share to a bit over $50 a share on concerns that renowned hedge fund manager David Einhorn raised about their K-Cup patent along with recent slowing consumption trends. In the company’s most recent conference call, the analysts did not even bring up a question about the patent, nor was it acknowledged in the widely positive research notes, defending the stock without a mention of the loss of 50 points.
You as an investor, though, cannot ignore those 50 points. The company’s lack of acknowledgement to consider increasing competition upon a patent fall-off (and research analysts choosing to ignore this fact) frankly means that their growth forecasts are off base. You, as an investor, must acknowledge these risks and issues, even if research analysts ignore them. Perhaps if the Green Mountain analysts were attuned to the red flags that healthcare analysts pay attention to, they would have been more wary of patent issues. These are highlighted all the time at Eli Lilly, Bristol Myers and others in the pharmaceutical cohort. Instead, the GMCR consumer analysts have focused only on consumer variables, missing a huge piece of downward pressure on the stock.