ebook essays pieces of the puzzle
Thursday, January 5th, 2012
on conviction

In a flat market yesterday, Chipotle (CMG) and Lululemon (LULU) were star performers after they were given an extra dose of conviction by Goldman Sachs.  (No comment on how good you might look in the latter if you have too much of the former.)

In a posting I did concerning the hit LULU took a few weeks ago, I said, “There are likely to be a lot more trading opportunities as the stock finds different hands.”  The same chart format used in that earlier effort is displayed above for CMG, so that you can compare the two.  This one has been a growth and cash flow machine.

I’ve written about the Goldman conviction list before, back when I was experimenting with a PDF format that ultimately led to the development of pix.  The chart then was in response to Microsoft (MSFT) being added to the list.  My comments at the time still apply:

“I have no knowledge of the record of Goldman in terms of the performance of ‘conviction’ buys versus regular buys.  But I have seen firms for which such a move is a behavioral leap too far until the stock has already done well, so comfort equals confidence and the strongest of buys have worse performance than run-of-the-mill ones, because the opportunity is already recognized.  Confidence often equals overconfidence.”  (MSFT has underperformed the market by 18% since that upgrade.)

If you have information on the performance record of the Goldman conviction buy list, please send it along.  Until I see evidence that the list has generated alpha for the firm’s clients (and those others who adopt a knee-jerk response to news stories about it), I’ll continue to regard it as a marketing construct that does more harm than good.  (Chart:  Bloomberg terminal.)