Sell-side snafu of the day, JP Morgan edition

By Felix Salmon
July 16, 2010
ATP Oil and Gas over the past five days: it plunged at the open on Tuesday, and then soared at the close today. And it's all because of Joseph Allman, the analyst for ATP at JP Morgan

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This is the stock chart for ATP Oil and Gas over the past five days: it plunged at the open on Tuesday and then soared at the close today. And it’s all because of Joseph Allman, the analyst for ATP at JP Morgan

ATP stock closed at $10.43 on Monday and then dropped to $9.12 on Tuesday morning — a fall of more than 12.5% — when JP Morgan put out a very bearish research note with the title “Trading at a Premium; Financing Needs Likely Greater Than Market Thinks; Downgrading to Underweight.”

The headline was bad enough, including as it did a downgrade on the stock, but the meat of the note was worse: Allman calculated that ATPG would need $500 million of external capital — more than its entire market capitalization.

Oops.

At the end of the trading day today, Allman put out a second research note, saying that the first note was wrong:

In our July 13 note, we stated that it appeared that ATPG would need $500MM of external capital. This model corrects that error and reduces that need to $50MM.

Yep, JP Morgan was out by an entire order of magnitude in the calculations which prompted the downgrade. And when it admitted its mistake today, the stock went straight back up to $10.12, a rise of 11.1% on the day and of a whopping 14.4% from the day’s low.

When JPM’s mea culpa appeared today, ATP’s stock immediately shot back up — but of course by that point it was too late for anybody who had been stopped out on the way down.

And if you were lucky enough to have any kind of early access to JP Morgan’s research product, you could have made a fortune first selling ATPG on the way down and then buying it back on the way up.

There are three lessons to this story, I think. Firstly, small stocks are volatile. Secondly, paying too much attention to sell-side analysis can be hazardous to your wealth. And thirdly, prices really do move on sell-side research. Even when it’s utterly wrong-headed.

3 comments

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The good news is that the robots that read the original note and algorithmically brought down the price of the stock were probably the same ones who read the correction and brought it back up.

Oh wait, maybe that’s bad news.

Posted by absinthe | Report as abusive

The biggest lesson — what stocks are WORTH depends on their long-term performance. The number quoted in the market is merely what you can sell them for at this moment. That number fluctuates wildly, and even that broad trading range often does not encompass the true value.

Do your own analysis and move slowly. If you believe in a company and the stock is downgraded, then buy more.

Posted by TFF | Report as abusive

^what TFF just said. Sell-side analysis, perhaps only slightly more useful than a 2006-vintage MBS rated AAA by Moodys / S&P.

Posted by McGriffen | Report as abusive