For the second day in a row, a major Wall Street firm has downgraded a company to Sell.
Before the open Friday, Goldman Sachs analyst Will Nance downgraded Robinhood Markets HOOD from Neutral to Sell and announced a $13 price target. The nature of the rating and the price target makes Robinhood the PreMarket Prep Stock of the Day.
Understanding Wall Street Ratings: One thing to keep in mind is that ratings from Wall Street firms on individual companies are meant to be used on a relative basis.
In other words, when a rating is announced, it is making a comparison to other companies in the industry. Therefore, when Goldman Sachs downgraded Robinhood to Sell, it was a stern warning to investors that if an investor wants to play the brokerage sector, there are much better options.
A Word About Price Targets: Just as the words imply, a price target is an analyst’s future price of a security. For the most part, a stock’s price target is an analyst's attempt to determine what the stock will be worth in the next 12-18 months.
The price targets are based on the company’s valuation. As a result, significant increases or decreases in earnings and revenues will have a corresponding effect on the analyst’s price target. Many price target adjustments are announced following the company’s earnings report.
A Confusing Robinhood Price Target: After recently trading as high as $16.49 on March 29, the issue ended Thursday’s session at $12.07. Along with the downgrade, Goldman Sachs put a $13 price target on the issue. To PreMarket Prep co-host Dennis Dick, this makes no sense on a strictly numerical basis.
“This is the stupidest thing ever. If you see a stock is at $12 and you come with a Sell rating, do not tell me it is going to $13," he said.
“If it's at $12 and going to $13, that is buck higher — a roughly 10% gain.”
Wall Street makes things too confusing, Dick said.
"If a stock is at $12 and you put a Sell rating on it, at least put a lower price target.”
The discussion on Robinhood from Friday’s show can be found here:
HOOD Price Action: Investors are choosing to put emphasis on the Sell rating more than the firm’s $13 price target.
After a lower open ($11.46 vs. $12.07), Robinhood had a brief rally to $11.69 and resumed its move lower.
The ensuing decline took the issue to $11.06 and it was not far off that level near the end of Friday's session, trading down 5.34% to $11.42, according to Benzinga Pro.
After peaking in its fifth day of trading at $85 last August, the issue made its all-time low in February at $9.93.
Photo courtesy of Robinhood.
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