Is HOLD a signal for SELL?
There are a lot of buy and hold investors out there. I certainly do not consider myself one of them so when I see an analyst downgrade a stock to HOLD or Neutral, this is a signal for me to GET OUT, to SELL as opposed to sticking around and waiting for it to be upgraded back to BUY. Of course the stock may have already been dumped enough for it to hit my automatic sell price so I won’t have a choice anyway. To be clear, the situation is when the stock is DOWNGRADED and the target price was lowered or unchanged. It’s not the same if the stock is upgraded from SELL to HOLD/Neutral or if the analyst has initiated coverage and started with HOLD/NEUTRAL. As mentioned in an earlier blog: Initiating Coverage – Can we take advantage of it? http://wp.me/pOz5p-v , an analyst initiating coverage could be a sign of good news to come. I looked over analyst opinions that I have been tracking in the last 3 weeks and out of 95 opinions where the stock was downgraded to HOLD/Neutral and the target price was unchanged or lowered, only 19 stocks had their price rise that day and out of those 19, only 6 had a rise of more than 2%. The remaining 76 opinions resulted in price drops, and 46 of 76 dropped more than 2%. This confirms that the market is viewing these downgrades negatively. Investors/institutions are cashing out to buy something with more upside potential.
Why would you hold the stock if there are no recommendations to buy it? No buyers means no demand, which means over-supply, which means price drop. This is especially true if there is no dividend to pay investors while holding the stock. Having already discussed how seldom analysts recommend selling, going forward a downgrade to HOLD/Neutral to me is as good as a SELL to me.