The rocket science behind stock ratings

Certain professions fascinate me in the brilliance required of their practitioners. How do quantum physicists wrap their heads around abstract, theoretical activities that take place at the sub-atomic level? How to geneticists figure out how to isolate one gene from the 6-billion that make up the human DNA? And how smart do you have to be to come up with - or dispute - the big bang theory?

But the one that stands out time and time again is how stock market analysts get away with what they do (and get paid enormous sums of money to do it)?

A case in point is rocket scientist Todd Coupland, an anlyst at CIBC World Markets. In the wake of recently passed U.S. legislation to prohibit online gambling companies from accepting U.S. transactions, and in a stroke of brilliant economic wizardry, Coupland Tuesday downgraded the online gambling market from "sector outperform" to "sector outperform."

What's so special about Coupland's shrewd financial guidance? Two things:

• I'm not sure it takes a Nobel prize winning economist to figure out that wiping out 300-million potential customers (by some estimates, the U.S. accounts for half of online gambling revenues) will have an adverse effect on the industry trying to serve those customers. Are there more complex or abstract economic factors at play here, or is just me?

• Even more telling is the Coupland's downgrade of the sector was made on Tuesday, the day after the Senate passed the legislation, months after a previous version of the law was tabled to Congress, and after upwards of $6-billion in company value had already been wiped out of the online gambling market. By the time Coupland shared his brilliant insights with the market, shares in companies like World Gaming, PartyGaming, 888 Holdings and Cryptologic had already lost between 25- and 70% of their value. Did Coupland not read up on the market before Tuesday, or does he just not have email?

As I've said before (and is obvious here) my out look on equity analysts is skeptical at best, and perhaps best illustrated by what I continually read as the typical expert opinion on a given stock: "given current market conditions, the share price will absolutely go up in value...unless it doesn't."

For some background information and sources of some of my figures, check out two articles on the topic: Know when to hold 'em from the Globe & Mail, and Internet gaming firms on losing streak, from Ireland's Electric News.

Coupland hasn't helped changed that skepticism. In fact, he's actually motivated me to conduct an experiment I've heard about numerous times in the past; tracking the performance of randomly selected stocks under the hypothesis that stocks with negative ratings actually outperform those with postive ratings.

Stay tuned as I get the experiment up and running. In the meantime, if Coupland or other stock analysts are reading this, please tell me: how do you get away with it, and how can I get in on the action?