DEFINITION of 'Clowngrade'

Clowngrade is an upgrade or downgrade of a security for reasons considered to be not serious, even ludicrous. A sell-side analyst could change an opinion on a stock for reasons other than the fundamental health and profitability of the company, or overstate the significance of, or overreact to, a piece of financial data or trivial news item. Smart institutional investors would regard this as a clowngrade.

BREAKING DOWN 'Clowngrade'

The speed at which information can spread has increased rapidly in the age of computers, the internet and social media. Investment opinions are provided by analysts employed by financial institutions or companies linked to Wall Street. The extent to which these opinions are disseminated depends on how they are provided, with the traditional means of newspaper, radio and television being increasingly supplanted by the internet. Analysts who change their ratings on the companies they follow can now "tweet" out their upgrades or downgrades. However, on Wall Street there is fierce competition to be the first to come up with actionable ideas for clients to generate trading flows for the broker-dealers that employ these sell-side analysts. The temptation to change a rating with any piece of news on a company in order to get the attention of investors may lead to less-than-rigorous analysis. A clowngrade could result.

Even without pressure to gain mindshare of investors with attention deficit disorder, an analyst may suddenly weigh in on the potential growth of a stock without a clear understanding of the mechanics of the issuing company. For example, an analyst may issue a downgrade for a technology company based on the profit margin of one of the company’s products. While the profit margin may be an important driver in a portion of a company’s earnings, it may not warrant a revision of overall EPS estimates and subsequent downgrade of the stock. In this case, a faulty or laughable analysis that caused a downgrade of shares from "Buy" to "Hold," for example, would be dismissed as just another clowngrade.

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