How "Safe" is an Overweight Stock?

[DoubleDown]

I realize this is a pretty squishy question, but if you could assign some confidence level to a stock whose median analyst rating is "overweight," how confident do you feel in its prospects? Are there any historical probabilities showing how likely it is for a stock with positive ratings to go down in the near term (say, within 1-2 years)? I'm sure it has happened where companies viewed favorably tanked for whatever reason, but is that 1% of the time historically? 10% of the time? More?

For specifics, I've been holding stock in Oracle (Nasdaq:ORCL) for a long time, and it's done very well over the years. I feel good about the company, their business model, outlook for the future, etc. Its average analyst rating is "Overweight", so it doesn't feel like a particularly risky proposition. However, I have a fairly large amount of my total non-real estate investments in this ONE stock -- about 15% of total investments. The other 85% is well diversified in stocks, bonds, securities, etc. It feels risky to have so much piled into one company, but I'd also like to avoid pulling out of what has been (and appears to continue to be) a winning investment. I know no one can predict the future of what will happen with any one company, but do the analyst ratings have any historical backing for how reliable they are?

[TLV]

I have no opinion on whether to sell or not, but if you decide to sell it and diversify, it might be good to do it before the end of this year thanks to the "fiscal cliff" and possibility of capital gains taxes rising dramatically next year.

[tooqk4u22]

I wouldn't rely on analyst ratings - remember it is almost impossible for them to put a sell rating on anything and analysts go with the heard and if the buy side is loading up or holding for its investors they won't go against this.    There may be some marginal validity to it but for me it would be a non-factor. 

As for too much in one stock, if you like it great - the last piece of analysis you have to do is to ask yourself how you would feel or what position you would be in if you woke up tomorrow morning and Oracle filed for bankruptcy and the stock is worthless (ala Enron).  Not saying this will happen but this is what matters - if you are still comfortable then it doesn't matter.

[tooqk4u22]

I have no opinion on whether to sell or not, but if you decide to sell it and diversify, it might be good to do it before the end of this year thanks to the "fiscal cliff" and possibility of capital gains taxes rising dramatically next year.

+1

[smedleyb]

As far as analyst ratings go, my experience shows them to be rather unreliable as timing indicators, but for the most part, my sense is the more bullish the analyst community is on a stock, the less buying power that exists to drive it higher (since everyone is already "in" the stock due to it's "overweight" status).  The best long-term investments, IMO, are the companies which are still outside the scope of the analysts community. 

[Nords]

I realize this is a pretty squishy question, but if you could assign some confidence level to a stock whose median analyst rating is "overweight," how confident do you feel in its prospects? Are there any historical probabilities showing how likely it is for a stock with positive ratings to go down in the near term (say, within 1-2 years)? I'm sure it has happened where companies viewed favorably tanked for whatever reason, but is that 1% of the time historically? 10% of the time? More?

Let me ask the question from a more general perspective.

If you picked a diversified asset allocation and rebalanced occasionally, then you could stop worrying about what other analysts think of this one stock-- and you could go enjoy your life.  It would take you less total effort to learn about asset allocation & diversification (or to learn what you don't already know), choose your mix, and decide when to rebalance than it's currently taking you to assess a single stock.

If you're analyzing Oracle for fun or entertainment then... if you have to question your judgement in light of that of other analysts of dubious qualification & track record, I'd wonder how enjoyable it really is.

I've been in your shoes.  The reward/effort ratio is not big enough and the risk/reward ratio is way too high.  It turns out that I'd much rather be surfing than doing this type of investing.

[DoubleDown]

Thanks all for the replies, they are definitely helpful. And I'll be waiting to hear what happens on fiscal cliff talks/capital gains taxes to help decide when to sell.

Nords, I definitely hear you about the overhead/stress of trying to choose individual stocks to beat the market, and I am definitely with you on that. In this case, it's a stock that I've owned for a long time, and one that I'm considering cashing out within the next 5 years or so to fund some ventures. But your point is still true even if it's not a case of me deciding to make a purchase to beat the overall market, but rather deciding whether or not to hold.

What I was hoping to hear is that there was some kind of historical reliability of analyst ratings to help me decide if/when to sell. If, say, there was historical data showing that analyst ratings held true 99% of the time over the long run, then I would feel a little more at ease "letting it ride" in this one stock and not diversifying it now. But you all have let me know that there is no such reliability to those ratings, so that's helpful insight (even if it's not what I hoped would be the answer).

My plan for now is, if capital gains taxes don't change, I'm going to continue to hold onto ORCL, as I remain confident in it, and it wouldn't be the end of the world for me if it fell. I'll probably sell about 50% of it in the next year or two, or if it gets closer to its "target" share price, and put it in more diverse holdings.

Thanks again for the help.

[Nords]

What I was hoping to hear is that there was some kind of historical reliability of analyst ratings to help me decide if/when to sell. If, say, there was historical data showing that analyst ratings held true 99% of the time over the long run, then I would feel a little more at ease "letting it ride" in this one stock and not diversifying it now. But you all have let me know that there is no such reliability to those ratings, so that's helpful insight (even if it's not what I hoped would be the answer).

Ha!  Good one.

The closest I can think of is Mark Hulbert's ranking of analysts and financial newsletters.  I'm not suggesting that it's worth the subscription, but if you're interested in digging into analyst's tricks then it will definitely deglamorize the mystique.

[KingCoin]

Analysts rating are not indicative of either:

1) Performance - If analyst recommendations consistently outperformed the market, it would be a simple matter to get long the "overweights" and short the "underweights" and clip the performance differential on a levered basis. There's no statistical evidence that analyst ratings are a predictor of stock performance and change in analyst rating is basically instantly absorbed by the market.

2) Risk - Analysts can have overweight and underweight ratings on both high and low risk stocks.

The option implied volatility will be a much better proxy for risk than analyst ratings.

My 2 cents? ORCL is one of the most studied companies in the world. Unless you know something the market doesn't (and 15% is the optimal Kelly criterion), you don't have any edge and a 15% allocation is very heavy.

[DoubleDown]

Thanks KingCoin, I really appreciate the free expert advice. No, I don't know anything that the market doesn't, so because of your 2 cents that I value much higher than 2 cents, I'll be greatly accelerating my plan to diversify part of my holdings in ORCL. Ellison is a very smart and shrewd man, and I believe the company has a winning (and proven) plan for increasing profits, but it's not like that's mysterious information unknown to everyone but me.

btw, even though I majored in math all the way through graduate school and I've done a lot of card counting and reading on gambling over the years, for some reason I don't recall ever hearing of the Kelly Bet or Kelly Criterion. I learned something new today, although recalling the term "stochastic process" in my reading was something I had hoped to forget and never see again :-)

[DoubleDown]

Quick update: I pulled the trigger and sold half my ORCL stock today at $36.20 (up about 13-14% since I started this post in late Nov.). I hung on until now because it kept going up and the news/earnings/outlook was all good. I kept half when selling today because I still feel solid about the company, but wanted to lock in some gains and not be too heavily invested in this one stock. I'll move the amount I sold into some kind of boring, index fund at Vanguard.

[RoseRelish]

Analyst ratings are slow to change, so they're not too reliable.

I've found that analysts are pretty good at forecasting earnings/cash flow, but not so good at making stock picks. If they were great stock-pickers, they'd be on the buy-side.

[Nords]

If they were great stock-pickers, they'd be on the buy-side.

... and they'd be financially independent, too...