Analyst Opinions Are Unreliable Lagging Indicators

Nothing frustrates investors more than listening to analysts telling them to buy stocks after large price increases -- after previously advising them to sell those same shares when they were much cheaper. Simon Property Group is America's premier operator of high-end malls. Its shares were knocked for a loop last winter after government imposed, COVID-related closures were put into effect. The stock plunged 71.8%, from almost $150 in January 2020 to $42.25 at its April 2020 absolute nadir. You'd have thought at least some analysts would have been recommending the shares at that enormously marked-down price. That's not how Wall Street works. Here are the opinions from Value Line on SPG starting with the pre-COVID January 2020 report and continuing, every three months, right through its January 2021 update. SPG was near its 2020 peak as 2020 began. Value Line had a hold opinion on it at $144.97. By early April the stock was available for about $50. Value Line said to sell. By July SPG had bounced back a bit, to $68.55. SPG had bounced by 36.7% in the three months between reports. Value Line's analyst downgraded SPG to Value Line's lowest, strong sell rating (1 = Top Buy 5= Strong Sell). Value Line's Oct. 2, 2020 full-page report on SPG kept that same strong sell rating on the shares, which fetched $64.87 at that time. The latest report on SPG came out right after the start of 2021. Traders who sold in October missed out a very nice 29% rise as SPG climbed back up to $83.65. What was Value Line's advice last month on what to do regarding SPG? Strong sell. Once again, that proved to be a bad idea. As of Feb. 11, 2021 SPG closed at $109.27, up $25.62 per share or +30.6% in just six weeks. Value Line's subscribers were told to hold at $144.97, would have sold near $50, and then missed out a 10-month rebound of 117.8% plus dividends. Value Line was not the only service that misled investors. Just last week two major brokerage houses finally upgraded Simon Property Group way too late. Morgan Stanley went to an overweight (read BUY). CFRA decided to exit its sell rating by going to a hold. The chart below shows that SPG was available to buy near $60 - $65 during the entire period from June 2020 through early November. These guys only became interested after the stock was back north of $100. While they were dithering, Simon's six-month return through Feb. 12, 2021 was 62.73% plus dividends. Real Money Pro subscribers got better advice from me concerning SPG. Here is my graphic from last September when the stock was still offered below $64. Despite its large rebound SPG still appears attractive as things continue to get closer to pre-COVID normals. Goal prices are always a moving target as quarterly reports and management comments trickle in over time. 2021 funds from operations (FFO) is now expected to rebound a bit less sharply than it was a few months back. I don't see the shares back at $200 right away. Even a conservative Price to FFO ratio, though, could propel SPG upward to $150 or so over the coming year. Add in the 4.77% yield and total return is quite appealing. Owning SPG outright is a fine, plain-vanilla way to go. Independent research house Morningstar now sees SPG very much like I do. It calls the stock a 4-star, out of 5, buy. Morningstar deigns to provide year-ahead target prices but does let us know what they feel is present-day fair value. For SPG that number sits at $151. Reaching that level over the coming 12 months would deliver greater than 43% in total return. The exemplary rating for Simon's management team is rarely awarded and appears well-earned. Option minded traders might want to consider selling naked puts out to Jan. 21, 2022 or even to the Jan. 20, 2023 expiration date. Worst-case, forced purchase prices on next January's $130 and $140 puts would drop to either $94.25 or $97.00 respectively. That provides from 10.9% to 13.5% of downside protection. Maximum gains on those put sales are not insignificant at either $3,575 or $4,300 per 100-share commitment. Setting up a 343-day duration, $130 buy write combination is yet another way to play for big gains using SPG. The graphic that follows shows the actual pricing in effect on Feb. 12, 2021 with SPG @ $108.95. On expiration day next January there are just two possible outcomes. SPG will either close at $130 or higher, or below $130. If the former situation plays out the best-case scenario detailed next would apply. Any upturn of at least 19.3% would translate into a phenomenal 116.84% total return. Buyers of SPG @ $108.95 without involving options would need to see the stock at $225 to do as well. What if SPG fails to hold above $130 next January? If so, the following worst-case scenario would unfold. Buy/write combination sellers would end up with double-sized positions in SPG, but at a discounted net cost of just $93.58 per share. Any drop of less than 14.1% would allow for immediate liquidation for at least a small gain. Future stock market action can never be guaranteed. That said, owning SPG at $93.58 would have been a winning position during all but nine of the preceding 120 months. Most of that decade saw Simon hovering between $140 and $190. Fundamentals are much better today, even in a COVID world, than they were back in 2011. FFO is up about 40.5% and annual dividends are 48.6% higher. Buy some SPG shares, sell some LEAP puts or consider going with full buy/write combinations as described.

Analyst Opinions Are Unreliable Lagging Indicators

You'd think at least a few analysts would have recommended Simon Property Group shares at their enormously marked-down price. That's not how Wall Street works.

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