Do Goldman Sachs Downgrades Matter?

I’m an owner of Limelight Networks (LLNW) stock, which was recently downgraded by Goldman Sachs. The reasoning for the downgrade seemed pretty straightforward, but there was no new news in the article. Basically, they said, Limelight is in a tough business with big competitors and have announced losses over the last few quarters-no new catalysts and no discussion about the new CEO. That’s ok, the stock has decreased from $2.77 at the time of the downgrade to $2.58, the price it’s at currently.

Out of curiosity, I wanted to see the short and long-term effects of a Goldman Sachs downgrade, so I did the very unscientific method of picking a year (2015) and picking the top results for “Goldman Sachs Downgrades” for that time period from a Duck Duck Go search. Then I tracked the price on the day of the downgrade, five trading days later, six months later, one year later, and its current price. Due to price splits, sometimes the prices in the older articles don’t match the split-adjusted prices in my table.

Bottom line up front: if one were to have bought an equally weighted basket of Goldman Sachs downgraded stocks, for the first year, they would have lost money. But if the holder had patience, and held these bags until today, they’d be up ninety percent over six years for a fifteen percent annualized return.

In the following paragraphs, I discuss what I found from each stock.

Goldman Sachs removed Citrix Systems (CTXS) from the “buy list” in May of 2015 and maintained a price target of $69 from its price of $51.47. They did not see any near-term catalysts to propel the stock higher than that. After a very minor drop, the stock is now around $115 about 125% above the 2015 price. 2020 was an exceptional year for Citrix, perhaps because of the spike in remote working.

Next is Myriad Genetics (MYGN), which was downgraded to ‘sell’ around March 26, 2015. Due to dwindling market share and increased price competition, Goldman cut their price target to $25 when the price at the time was $33. This stock held steady and made gains in the short term, but is currently nine percent below its 2015 level. Myriad Genetics makes genetics screening solutions for different diseases, and it would seem to me that the market is, indeed, crowded.

In the same article that downgraded Myriad, they mentioned Exact Sciences (EXAS) also receiving a downgrade, but after further research, they initiated EXAS as a ‘buy’. Oddly, in the short term, they were way off, as the price dropped dramatically to just under six dollars from twenty for a decrease of seventy percent. But, if you bought there, you would be happy now, as the price is now $114, or an increase of 450% from March 2015.

Blackberry (BBRY) was downgraded from a neutral to a sell as the company shifted from cutting costs to returning to profitability by focusing on the enterprise business. Goldman didn’t feel the company would thrive in this competitive market. Blackberry did bleed after the downgrade by losing 34% of its value one year later but is now only 4% shy of its 2015 price.

The bank Comerica (CMA) received a sell downgrade from neutral in July of that year due to interest rate pressures. The company must’ve adjusted well to the rates because, after only a minor hit that year, the stock is up 57% from its 2015 price. Add a four percent dividend and it’s not too shabby.

Goldman’s biggest mistake was Microsoft (MSFT), which ironically on April 1st, 2015, they downgraded to a ‘Sell Now’. The reasons were competition, Microsoft raising prices on its popular server software, the free Windows 10 upgrade, and the shift from profitable enterprise products to cloud versions where margins are thinner. One year later, the stock was up 40% and an amazing 596% today. In December, they upgraded the stock to neutral for a successful cloud transition, continuing profit growth, and getting past the recent headwinds.

Foot Locker (FL) was downgraded from a neutral to sell in January of 2015 due to ‘peak margins on basketball shoes” maybe being at risk. I do know that there are sneakerheads who enjoy collecting basketball shoes and maybe they saw the trend dying. The stock did not drop that year and is up only eight percent over 2015.

Lumber Liquidators (LL) was famously hammered on the television news show 60 Minutes for selling contaminated flooring. This caused a rating change from ‘buy’ to ‘neutral’ from Goldman Sachs. There was some question as to whether 60 Minutes used quality testing methods, but Lumber Liquidators would struggle to regain consumer confidence, either way. This stock has stayed consistently down since the downgrade and currently sits 35% below 2015 levels.

Medicine maker MannKind (MNKD) received a sell downgrade from ‘hold’ on March 3, 2015. They expected pricing on a diabetes medicine and a new inhaled insulin product to fall short of expectations. This stock dropped dramatically in the short term and remains way down. It’s now currently is only fifteen percent of its 2015 price.

On September 11th, the banker downgraded the price of oil. This famously volatile commodity is hard to predict and they gave a $45 dollar price prediction but warned of a drop to $20 from the price of $44.57. Price did indeed drop, and eventually reached a low of $18 at the height of the pandemic trading panic. The price now sits at about $72 or up near 65%.

Valeant Pharmaceuticals (VRX) had a name and ticker change to Bausch Health Companies (BHC). In 2015, they were accused of making fake accounts to make it seem as if they sold more than they actually did. Goldman Sachs downgraded the company from a ‘buy’ to a ‘neutral’ on November 2, 2015. The stock was hit the hardest in the short-term with a 15% drop after a week and remains down today at only 30% of its 2015 price.

Two downgraded stocks were taken off the market and shares purchased from shareholders. Precision Castparts (PCP) was downgraded in February 2015 from a ‘buy’ to a ‘neutral’ because, while they would continue to grow, they were not growing at their expected rates. PCP was bought by Berkshire Hathaway for $235 a share, which was an 8% premium over its price at the downgrade. Interestingly, in 2021, Warren Buffet admitted that he paid too much for PCP after writing off $9 Billion of the $32 billion purchase. He said he was too optimistic about the profit potential of the company.

Another company, Verifone, was downgraded in December of 2015 from a ‘buy’ to a ‘hold’. But, in April of that year, they had upgraded the stock from a ‘neutral’ to a ‘buy’ saying it was not a ‘one-trick pony’. However, in April of 2018, the company went private and paid shareholders $23 a share, which was a premium of 54% over the price at that time. The price at the December 2015 downgrade was $26.43, but I don’t have a chart to verify this was unaffected by splits. If not, the buyout was 12% below the 2015 price.

Does this little experiment change my mind about Limelight Networks? Not really. I’m frustrated with the investment, and it was frustrating that Goldman Sachs would release a downgrade with no new information, but I’m betting on a positive earnings surprise in the next quarter or two. Hopefully, Goldman Sachs is Microsoft wrong on this pick and I’ll be sitting pretty.

If you enjoyed this, let me know. I could look at different years, upgrades, and different predictors. None of this will give us a clear insight into the future but may remind us how difficult it is to predict.