We’ve talked a lot about why you want to pay attention to what Wall Street does, not what it says. Today we’re going to tackle that subject again.
Because you’ve got another king-sized opportunity with Twitter stock, or at least that’s what one analyst wants you to think.
Before I tell you what it is, though, I have to begin with a story that sets the stage. So grab a cup of your favorite libation and take a seat.
What you do next has a direct impact on your financial future.
Enron Fooled Analysts – and They’ve Been Blinded by Twitter, Too
Surprisingly, few investors remember Enron despite the fact that it’s a famous tale of American greed, arrogance, and hubris that ranks right up there with the Big Banks today.
Starting from humble roots in 1985, the Houston-based energy, commodity, and services company rose to become one of Wall Street’s darlings. Words like innovative, maverick-like, and ruthless were all uttered breathlessly in the media at the time as the stock dumped the old-line ways of traditional utility companies and shot to prominence as an energy “trader.”
At its peak, the company was worth $70 billion and shares traded at almost $90 each. And then it fell to Earth, ultimately ceasing operations in December 2001, when its shares didn’t even rate penny-stock status.
“Another one bites the dust,” or something like that, goes the refrain.
What I want you to focus on is what Wall Street did as Enron tanked.
Traditional Wall Street analysts are paid to have opinions that are overwhelmingly bullish. Not only is this a cozy relationship for investment bankers and their clients, but it’s helped Wall Street generate billions in commissions from a nervous investing public desperate for good news. Interestingly, this bullish predisposition is strongest at times when investors are not inclined to buy – like the present.
More than half of the 15 analysts following Enron rated the company a “Buy” or a “Strong Buy” as late as November 2001. Warburg and RBC Capital Markets downgraded the company a week later after it had fallen from $84.87 to $4.14.
You’d think that they’d figure things out, but that wasn’t to be the case. Even after the stock was removed from the S&P 500 and fell to a mere $0.61, four analysts still rated the company a “Buy,” and two of the same four felt so strongly about Enron’s potential for a recovery that they rated it a “Strong Buy.”
Again, this is after the stock had fallen from $84.87 to $0.61 – a 99.28% drop!
Fast forward to today.
Stifel Nicolaus analysts made headlines when they recently downgraded Twitter Inc. (NYSE: TWTR), noting that they were returning their rating to “where it should have been all along – Sell.” Other analysts are piling on.
Now, you and I’ve been talking about this since December 2013, when I called it out as one of my three top shorts in my 2014 Outlook. So it’s not a surprise to us.
Twitter’s fallen by 75.49% since then, and if you’ve been following along as directed, you’re sitting on some great profits.
So the question for millions of investors becomes what to do now.
…Do you continue to bet on Twitter’s imminent demise?
…Or do you take your profits and say thanks for the ride?
When to Quit While You’re (75.49%) Ahead
Twitter is what’s called a “crowded trade” at this point.
That’s a Wall Street term meaning that a lot of people know about it and are already on board. So sticking to the trade if you’re already on board or jumping in at this point means you’re late to the proverbial party.
What you really want to be asking under the circumstances is, “how much more money would be required to take the stock lower and how much profit potential does that represent?”
When I first recommended that you short Twitter, it was trading at $69 a share and ripe for a fall. The company had never earned a profit, never generated positive free cash flow, and users were leaving in droves.
Now, though, it’s down 75.49% and trading at $16.91 a share. That means that your profit potential, even if it goes all the way to zero, is only $16.91/share, not the $69/share it was 25 months ago.
The short interest is 9.78% at the moment. That means 9.78% of outstanding shares are short, having been borrowed by people betting the stock will go down further. That’s considerably lower than it was in December, which tells me the smart money is not hanging around.
At the end of the day, the company still hasn’t turned a profit and may never do so. Facebook Inc. (Nasdaq: FB) is #eatingitslunch and generated $6.1 billion in free cash flow by comparison.
The fact that analysts – who have a long history of doing one thing and saying another – are beginning to throw in the towel tells me it’s time to take your profits. And move on to the next big short.