The Dreaded Double-Downgrade. Is This a Reliable Short Sell Signal?

Today, Heico, the 18 billion high-flying aerospace company, got a double downgrade from investment bank Bank of America / Merrill Lynch.   The analyst took his rating from a Buy to an Underperform, saying that it is trading at an "unprecedented valuation" and he see more risk due to below average air traffic growth year-to-date.  The analyst kept his $105 price target on the stock (the stock currently trades for $135).

This certainly sounds pretty bad, here's how the stock performed today.
intraday chart of $HEI on double downgrade


Looks like buyers were more than happy to buy this gap down today on the analyst's fears.

This got me wondering, how have other double downgrades performed?

Here's Big Lots $BIG on June 3rd, 2019, the day after it reported earnings and got a double downgrade to sell also at BoA/Merrill.

intraday chart on double downgrade to sell of $BIG


Well, looks like that dip got bought too.

Here's another example of AmerisourceBergen $ABC on April 10, 2019 when they got a double downgrade to sell also at BoA/Merrill.

4 day intraday chart after double downgrade to sell of $ABC


So that's 3 examples where the stock either barely responded or eventually rebounded.

Most of these double downgrades were valuation calls, the analyst basically saying that the stock has gotten too expensive.  But hey, we're in an expensive market right now.  If you want to own high flying stocks you're going to have to pay a premium (ahem Zoom $ZM, Slack $WORK, Beyond Mean $BYND trading at 40x sales).  So it makes some sense why valuation calls would not bring out enough fear in investors to sell.

But what if the double downgrade has to do with something intrinsically wrong with the company?

Here's CannTrust $CTST, who got in trouble with the Canadian government over its regulated cannabis and on the same day got a double downgrade from BoA/Merrill due to concerns that the government may pull its license completely.

3 day intraday chart of CannTrust $CTST after double downgrade


That one certainly sold off and hasn't recovered yet.

So in summary, I think we can say that tracking double downgrades may be an edge, but not a reason to blindly short any stock.

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Comments

Nana Yaw posted -
Honestly for my short time l been in the markets l've taken analyst upgrades and downgrades with a grain of salt my main focus for identifying market  sentiments are usually most recent catalyst,recent earnings and (short) interest 
Yh so is  this positive or solid enough to try to formulate a trade plan from ??
Any insights Jake ?  
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