It’s not just your perception that Apple can’t catch a break in this unforgiving market. It really has been the case that bad news has kept coming — and coming.
If history is any guide, this stream of bad news is likely to continue before the outlook for Apple AAPL, +0.49% turns up. That’s because analyst revisions tend to come in waves. A downward revision is more likely than not to be followed by another downward revision — and vice versa. (See accompanying chart.)
Investors who pay attention to analyst behavior caution against being trigger-happy with buy orders. They instead suggest waiting until analyst revisions start turning back up. Though such caution doesn’t always pay off, it often does. Consider a column on this subject that I wrote late last July about Facebook FB, +2.50% , headlined “Watch out for analysts’ avalanche of price-target cuts on Facebook’s stock.” Facebook’s stock had already dropped more than $40 when that column appeared; since then it has dropped another $40.
Why do analyst revisions tend to come in waves? Researchers have identified several factors:
Uncertainty. Even the best analysts never possess enough data to make more than an educated guess, so they prefer to wait before the data’s message is overwhelming before changing their forecasts. Reputation. Analysts want their clients to believe that they are independent thinkers rather than herd followers. Imagine if you are one of the 17 Apple analysts (out of the 43 that FactSet includes in calculating the analyst consensus) who have yet to downgrade your price and earnings forecasts. Even if you believe that you should downgrade, you will want to resist the appearance that you’re following the leads of the 26 analysts who have already done so. Relationships with company management. Analysts don’t want to endanger the relationships they have with management, on whom they rely for information and access. So they often avoid making overly negative comments about a stock.The net impact of these various factors? One widely-cited academic study found that analyst forecasts typically reflect just 66% of the information that the market itself has already taken into account.
When analysts do get around to downgrading their forecasts, their actions typically cause the stock’s price to fall even further.
This idiosyncrasy of analyst behavior would be of little more than academic interest if it didn’t have further consequences of its own. But it does: When analysts do get around to downgrading their forecasts, their actions typically cause the stock’s price to fall even further.
Another consequence is that downtrends often last longer, and cause stocks to decline further, than they would otherwise. A reverse “upward spiral” works when a stock is an uptrend.
One thing that this focus on analyst behavior doesn’t help us do is determine when Apple’s downward spiral will come to an end. But you don’t necessarily need to engage in that guessing game. Instead, watch and wait until the analyst downgrade wave begins to turn into an upgrade wave.
It will happen eventually, even if many beleaguered Apple investors have already given up and dumped their shares.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com .
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