How to Spot "Drive-By" Stock Research
Rush Limbaugh frequently uses the phrase "drive-by media" to describe what he sees as the media's tendency to do quick, sloppy, and negative research, especially in regard to him. While I venture no opinion of the EIB Network and its controversial host, I am a fan of the phraseology.
In fact, I'd like to adopt it for a tendency I've seen in stock research. So much of it today seems hasty, careless, and cynically put together for ratings. I hereby coin this trend "drive-by stock research."
I think you all know what I'm talking about. Morgan Housel recently documented it when he cited Andrew Ross Sorkin's piece on recent stock performance and talked about the media's strange tendency to leave out dividends.
Some of us are old hands at spotting this kind of thing. But for the uninitiated, here are three clues that will let you know you're looking at drive-by stock research.
Clue No. 1: The analyst makes buy and sell recommendations without demonstrating awareness of the company's story.
You see this all the time online -- or from your business-school classmates. "Stock No. 1 has a lower P/E than Stock No. 2; therefore, I recommend Stock No. 1. Problem solved."
If only stock analysis was as easy as simply comparing numbers. A ratio doesn't tell you anything about a company's corporate culture. It doesn't tell you anything about its market position. It doesn't tell you anything about its corporate governance.
In short, it doesn't tell you anything about what makes a company a company: its people, its product, and its customers.
We here at the Fool frequently hammer on the fact that ownership of stock is ownership of a business. You wouldn't even buy a mall kiosk on comparing just two numbers, so why would you do it when you take ownership in the public market?
Let's look at Steinway Musical Instruments (NYS: LVB) , a holding of mine. (Yes, I realize this is somewhat self-serving.) A recent article on another website had the author rating Steinway as a sell because Steinway has a P/E of 61. That seemed "far too high" to him, and therefore it was a sell. Easy as pie.
If only. What the author totally ignored -- besides the fact that the company trades below liquidation value -- is that Steinway is undergoing significant corporate restructuring activity, including a possible sale of the band business. Activist shareholders are inside the company and own 40% of it. Even more significant is that one of the activist shareholders, Samick Musical Instrument, owns 30% and recently announced that it's considering a tender offer (i.e., acquiring the whole company).
Gee, might activist shareholders and an announced potential takeover be significant, to put it mildly? According to the author, no. He doesn't show any situational awareness toward the company at all. To him, 61 is a high P/E, and therefore it's a bad buy.
Clue No. 2: The analyst focuses on short-term stock performance, not company performance or valuation.
Of all the gazillion articles focusing on Facebook (NAS: FB) , a good number of them openly revile Mark Zuckerberg because of the company's lousy short-term stock performance.
What's ignored is that Zuckerberg's job is not to stage-manage the company's share price. His job is to manage and grow the company. It's not his fault investors paid a rich price for his company's stock at the IPO. In fact, his job was to get the highest price possible to raise capital in the cheapest manner for the long-term shareholders.
He did that, and now Zuck is taking grief for doing such a great job.
"Let no good deed go unpunished."
The same can be said for the flak Reed Hastings of Netflix (NAS: NFLX) has taken. Hastings has done a tremendous job growing the company's fundamentals over the long term. It wasn't his fault the stock tanked. Investors grossly overpaid at a triple-digit P/E.
Over the long term, what determines a company's stock performance are fundamentals and the price you pay for them. The latter is up to you, and the former is up (in part) to the CEO. Criticizing a CEO for the stupidity of investors is unfair and creates terrible incentives.
Clue No. 3: The author's investment advice is politically charged
Never confuse politics for investment analysis. Never.
Look, I've made no bones about it that I think Keynesian stimulus -- tax cuts and stimulus spending -- would help the country with its terrible unemployment problem, or that the Keynesian model has done the best job of explaining the crisis.
Has this altered my investment decisions? No. I bought stocks even when Paul Krugman and other Keynesians said the world was ending back in 2008. If I had let my economic model determine my buying, I would have missed out on the stock market rally. Instead, I looked to valuations.
The same, ironically, would have been true if you had followed what many Austrian theorists were saying and stayed out of stocks. You would have missed the opportunity to get in cheap.
You're free to be a Republican, and you're free to be Democrat. But for the sake of your retirement -- and your future Super PAC -- I wouldn't let that influence your investment decisions.
I realize many of the Ron Paul gold bugs are going to disagree with me on this, because they've made money buying gold when their political ideology led them to do so. But imagine if you've been holding gold since the 1980 peak, when your political ideology also led you to do so. The real return you've realized has been terrible.
You can own gold if you'd like, but keep the political ideology out of it.
It's interesting to see that Peter Thiel, the libertarian venture capitalist who turned $500,000 into $1 billion with Facebook, lost 90% of his macro-fund's money after making ideologically driven bets on the economic recovery, oil, the dollar, and other such things. He's seems to have learned his lesson, as he has turned his focus back to private equity and venture capital.
The upside to "drive-by" research
There is an upside to so much bad research: The more misunderstood a stock is, the greater the probability that it's mispriced. That spells opportunity for patient, long-term investors.
If you're one of them, and you want a better look at Apple along with continuing updates and guidance on the company whenever news breaks, we've created a brand-new report that details when to buy and sell shares in the company. Get started now.
The article How to Spot "Drive-By" Stock Research originally appeared on Fool.com.Fool contributor Chris Baines is a value investor. Follow him on Twitter, where he goes by@askchrisbaines. Chris' stock picks and pans have outperformed 96% of players on CAPS. He owns shares of Steinway Musical Instruments. The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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