The Investment Scientist

Google’s Revenge: Morgan Stanley Downgrade Fiasco

Posted on: July 19, 2011

On July 8, Morgan Stanley downgraded Google. Their reasons?

Given Google’s aggressive hiring plans, rising compensation costs and heavy advertising spending on Chrome and other products, the company’s EBITDA margins will decline this year and next year.

Morgan Stanley said Google is on pace to add 7,000 new staffers this year, well above the previous estimate of 4,000 new hires.

Investors, presumably including many of Morgan Stanley’s own wealth management clients, promptly sold off GOOG, causing its stock to tumble 3% that day.

On July 14, Google announced profit and sales results that shattered Wall Street’s dim view. The stock rallied 12% after the earnings announcement. Just imagine the chagrin on the faces of those investors who listened to Morgan Stanley.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

What’s the lesson here?

Don’t listen to Wall Street analysts! Why?

  1. They tend to cover only glamour stocks.
  2. They put too much focus on near term earnings.
  3. Their earning projections are like a monkey throwing darts

I read a story once that Warren Buffett received a research package from a famed Wall Street analyst. He kindly sent back a note: “Next time, please just send me the stamp.”

That’s about the right attitude towards Wall Street analysts.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

Error: Twitter did not respond. Please wait a few minutes and refresh this page.

%d bloggers like this: