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I know we’ve discussed this before. I still can’t fully understand how JP Morgan can both short alphawave and have a higher broker rating. Can anyone explain please!
Yes we've discussed before. Rather than impart my own foolish wisdom I thought it would be fun to get my friendly AI CoPilot to answer this question for you:
An appointed broker analyst who provides both a buy recommendation with a high target price and simultaneously places a significant short position on the same stock might seem contradictory. However, let’s explore potential reasons for this apparent inconsistency.
1. Diverse Roles and Perspectives:
Broker analysts wear multiple hats. They analyze stocks, provide recommendations, and manage portfolios. Their roles can be compartmentalized.
The buy recommendation could be based on long-term fundamentals, growth prospects, or undervaluation.
The short position might reflect a short-term view, technical analysis, or hedging against market volatility.
2. Market Timing:
Analysts consider different time horizons. A buy recommendation may focus on the long term, while a short position could exploit short-term market movements.
The analyst might anticipate a near-term decline (e.g., due to overvaluation) but still believe in the stock’s long-term potential.
3. Risk Management:
Analysts manage risk for their clients. A short position can act as a hedge against potential losses from their buy recommendations.
By shorting, they protect their portfolios in case the stock’s price falls unexpectedly.
4. Conflicting Interests:
Brokerage firms have various divisions (research, trading, investment banking). Conflicts arise when these divisions have opposing interests.
An analyst’s buy recommendation benefits clients, while a short position may serve the firm’s trading desk.
5. Market Sentiment and Timing:
The buy recommendation might align with positive market sentiment or upcoming catalysts.
The short position could be a tactical move to capitalize on short-term market fluctuations.
6. Complex Strategies:
Sophisticated strategies involve both long and short positions. Analysts may employ pairs trading, market-neutral strategies, or sector rotation.
These strategies aim to profit from relative performance rather than absolute stock direction.
Remember that financial markets are intricate, and analysts’ actions can be multifaceted. The apparent contradiction may stem from different perspectives, timeframes, and risk management considerations.
Hopefully this helps.
Thank you. Timeframes it appears.
“Thank you. Timeframes it appears.”
You’re welcome. My own two pennies worth on this matter is that it is important to remember that as individual private investors we tend to be far more emotionally involved in the stocks that we choose to invest in while the likes of JP Morgan analysts are just doing their job. It is far easier to hedge on a stock that the analyst may not have a personal investment in. Alphawave Semi has increased by more than 60% in the space of month and a half, so even if the stock has amazing fundamentals and brilliant future growth prospects, based on the average performance of stocks in the wider market, any stock that rises by a significant amount in a short time frame tends to get treated as being overbought regardless of its fundamentals which is why you’ve seen an increase in short positions on Alphawave in the last week or so.
Consider that Nvidia on 20 Mar 2020 was a little over $50. Twenty months later it was trading at almost $330. That’s a 760% increase, And yet from that mighty height it declined to almost $110 less than 11 months later on 14 Oct 22. Imagine if in Mar 2020 you bought $10,000 at $50/share, how euphoric you might have felt in Nov 2021 having stock worth $66,000 and then being deeply dejected seeing it dwindle down to $22,000. At this point you may have decided to sell and preserve the 120% profit you still had.
And then fast forward 16 months to today you see your once beloved stock is now worth almost $800 per share and you’re thinking if only you had left it well alone you’d be sitting on $160,000 worth of Nvidia stock. And all that time in between you considered several times about getting back into the stock but didn’t for fear it had already reached it’s optimum.
These are the kind of emotions and psychology you have to deal with when investing in volatile growth stocks like this. Alphawave Semi will be no different and it’s vital to take that potential volatility into account when considering what your strategy should be.
And just in case any reader here knows the history of Nvidia share prices well, I should clarify my Nvidia example in the previous post takes into account the four for one share split that happened in July 2021. In reality, in March 2020 the shares were trading around $200 not $50 and by July 2021 they were around $750 but reduced to $187.50 while the holding of 50 shares was automatically increased to 200. Personally, I’ve never bought Nvidia shares (unfortunately).
BR - great analysis on the psycology of investing. It reminds me of a quote in Ben Graham’s book - my bible - The Intelligent Investor. “In the end how your investments behave is much less important than how you behave”