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Computerized Investing > July/August 2005

It’s Never Too Late: Trading on Stock Upgrades

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by Wayne A. Thorp, CFA

At some point in your investment experience, you will probably come across a stock you either hold or are considering buying that is upgraded by a brokerage firm or analyst, boosting its stock price by several percentage points, if not more. For a stock you are watching, the question is whether it is a good idea to buy the stock or pass on it, given the price spike. For a stock you already own, the question is whether or not this is the time to sell the stock.

Academic studies have shown that positive surprises, upward earnings revisions and analyst upgrades can result in outperformance that can be observed up to a year after the initial event takes place. But these studies assume that you are buying every stock with an upgrade or surprise.

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