NEW YORK (TheStreet) -- From this analyst's perspective, there has always been an art to issuing a stock upgrade. First, you have to know when to time it so it receives maximum attention. Usually, just before an earnings release or after a horrific plunge in the stock price based on some news event will garner the most visibility. The second piece to the puzzle is clearly stating why the upgrade is happening at this point in time. Has the market overreacted to otherwise bad news? Has the market shrugged off news that should be valued higher given its impact on future earnings and cash flow?
All of these factors are key considerations, and often investors are advised to chase analyst upgrades or rising earnings estimates with little attention paid to the actual research.
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This "buying with your eyes closed" could lead to trouble, however. So keep these rules of thumb in mind when seeing upgrades. In order to buy into the upgrade news, you want to see these basic things:
1) There is something fundamental on the near-term horizon -- a new product or service -- that is not being properly valued on the Street. For example, if XYZ Tool Co. has a key hammer being launched in the fourth quarter, yet the stock just got nailed on a dreary third-quarter earnings report, I suspect an analyst upgrade would occur on the hope the new hammer reignites sales over coming quarters.
2) A company is reviewing its cost base. Reviews of this nature usually take a few months, and tend to lead to cost-savings announcements (or, a Hewlett-Packard-type breakup) that cause the Street to overlook weak sales.
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