Beware of Recommendations from the Wall Street Buy Machine

Commerce One (CMRC), an internet business-to-business provider filed for bankruptcy on September 23, 2004. The once high-flying stock peaked at a split-adjusted $1,356. The company never made any money, yet the Wall Street buy machine hyped the stock from its initial public offering in July 1999 until January 2001 when it was apparent that the company would never make a profit. The chart of CMRC upgrades (green arrows) and downgrades (red arrows), based on data from Yahoo Finance, shows the Wall Street mentality of buy at any price at anytime. Analysts told investors to buy on the upside, the downside, on short-term rallies and corrections. No price was off limits - buy high, buy low and buy at every price in between.

The pattern of downgrades is equally revealing. No firm downgraded the stock on the basis of valuation; no matter how high it went, the stock was still a buy. They waited to downgrade the stock until it was deep into the downside at very low prices. Once the downgrades began, they came in a landslide. The dense cluster of red arrows in the spring of 2001 shows the herd mentality. So much for independent thinking. And, of course, they were the eternal optimists, who were late to the party, and told you to unload the stock at even lower prices.

This case study shows why you need to be very careful of buy and sell recommendations from professional analysts. Individual analysts may make timely recommendations but collectively their record is very suspect. As a whole Wall Street needs you to buy stocks so they will promote them at almost any price and at anytime. See Beware of Professional Buy and Sell Recommendations for another example of misguided upgrades and downgrades.