HollyFrontier has been downgraded by Deutsche Bank. A bullish sign?
Some equity analysts’ reputation is so stellar that their opinion really moves the stocks they cover. Others just follow the market. And then there are analysts like Ryan Todd at Deutsche Bank. According to TipRanks.com, Todd had a hold rating on refiner HollyFrontier (HFC) throughout most of 2015, as the stock made its way from $30 to the low $50s. On October 7th, 2015, he apparently figured that the hold had become untenable, and upgraded the stock to a buy rating. Adjusting for past dividends, the stock closed at $50.54 that day. This marked almost exactly the top for HFC! As Todd periodically reiterated his buy recommendation, the stock gradually lost value, and is now down well over 50% from the time of the initial research call, nine months ago.
Today, Todd finally gave up on his call and downgraded HFC to a hold. The investing community took no notice, with the stock being up, in line with the broader market.
I will refrain from the many snarky comments that spring to mind, mostly because I am down on my own long position in HFC, albeit by only 5%. But hold this position, I will.
Wall Street ratings are an imprecise art under the best of circumstances. Ratings originating from investment banks are even more suspect, as the companies issuing them have interests that may have nothing to do with the stock at hand. Let’s hope for Mr. Todd, that this the case here, and that his career is not in any danger due to the spectacularly poor timing of his HFC calls. But most investors have experienced something similar to this breakdown. I certainly have. So, for the sake of argument, what if this were an actual investor’s decision? What could be learned from that experience?
Just as natural pearls are created from the agony of an oyster trying to fend off a tiny intruder, human insight is also often bought with great pain. To me, the pearl that this particular failure holds for the investment student, is this: Bad stock decisions that go unchecked, hold the seed for the next bad decision. The perfect time to buy a stock is the time when the pain for most holders becomes unbearable. Now, for HFC holders. If you have allowed an old position to fester to this point, you are not only unlikely to be willing to buy more, and thus profit from the upswing, you are in agony over the existing position, and most likely to give up on it. Like Ryan Todd just did. This is a loss-maximizing strategy.
If a position turns into a loss that is unlikely to be made up in the originally anticipated investment time frame, it needs to be cut. Not necessarily to zero — maybe one still feels that the original thesis is intact. But it needs to be cut enough to ensure that a further drop will not cause the investor to sell at the worst possible time.