Ignore Analysts

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Jan 27, 2015
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What are these guys (or gals) thinking?

Often a day late and many dollars short

Package delivery giant United Parcel Service (UPS, Financial) disappointed investors last week when Q4 EPS came in light and 2015 estimates needed to be reduced.

Analysts who had been loving the stock above $114 last Thursday were busy over the weekend downgrading from Buy to Hold.

Jan. 26, 2015's pre-market opinion changes helped UPS open on Monday morning at just $101.70, down a cool $12.70 a share from where it was rated as "Outperform" just two trading days earlier.

Waiting for those lowered ratings before selling cost traders 11.1%. That’s more than the DJIA gained in all of 2014.

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Even after the morning’s drop UPS was not especially cheap. It still fetched 19.1x the newly reduced 2015 estimate and yielded 2.64%. That compares unfavorably with the firm’s post-recession average levels of 18.2x EPS, along with 2.84% in current yield.

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Anlaysts often miss on the flip side as well. Oppenheimer saw fit to upgrade Bed, Bath & Beyond (BBBY, Financial) pre-market on Monday. BBBY shares were rated ‘neutral’ at $55 last summer and near $62 during October, 2014.

The stock was as low as $71.40 just days earlier. By the time you could act on the Jan. 26, 2015, upgrade, BBBY had opened at $77.22. Worse, the new price target is just $85. That only leaves another 10% in the shares if everything goes as well as the analyst hopes for.

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Bed, Bath & Beyond still has some appeal. It simply could have been recommended before the move back to near its record high.

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BBBY’s sterling balance sheet suggest an LBO offer could be waiting in the wings.

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Earlier this month Standard & Poors called Fair Value as $94.40.

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When BBBY was in the $73s, I played conservatively by selling some January 2017, $70 & $75 puts at $7.30 and $9.80 respectively.

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Break-even, A.K.A. the "if put" prices, were reduced to $62.70 and $65.20 providing a nice margin of safety along with the injection of cash received from the put buyers.

With every put sale the maximum profit is keeping 100% of the premium paid up front. The worse-case scenario would be the forced purchase of shares at the net exercise prices.

With BBBY either outcome will be okay with me.

Note: I received this very timely "Bull of the Day" alert from Zacks this morning (Jan. 27, 2015).

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They didn't see fit to recommend IBKR at $20.35, or $23.00 or even $25.78 just eleven days ago. Zacks decided that the Jan. 26, 2015, new multi-year high of $31.00 might be a good entry point, though.

CNBC just annnounced there were five separate downgrades on Microsoft (MSFT) today, after an almost 10% drop overnight.

With friends like these, who needs enemies?

Disclosure: Short UPS Jan. 2017, $90 puts, Long BBBY shares, short BBBY Jan. 2017, $70 & $75 puts