Why Analysts Are Wrong Sometimes


One of the businesses we own is ETSY. For those of you who don’t know about Etsy, it is a global e-commerce business specifically catering to small businesses. As opposed to Amazon or Shopify, Etsy specializes in mom and pop shop creators who often are making unique or customized handmade items for sale.


Etsy has had a very, very good year. They grew their sales by over 125% since March of 2020. During a pandemic Etsy was very well positioned to take advantage. Not only were their brick and mortar competitors closed in many places, Etsy specifically lends itself to a lot of the buying that happens in a pandemic. They sell a lot of housewares and coincidentally that’s what people tend to buy when they’re quarantined in their homes. On top of that, Etsy really leaned into the protective mask market and sold many millions of dollars of custom made and fashionable masks. In fact, masks were such a big hit that they contributed about 30% of Etsy’s 125% of growth.


Clearly these are very strong numbers. And therein could lie a problem for Etsy shareholders in the short term.


It’s very unlikely that Etsy will be able to repeat the very strong performance of 2020 in 2021. It’s certainly possible that they will continue to grow in 2021, but the idea that their business is going to double again is unlikely. Since the stock market is forward looking this means that the next 12 months are in some respects going to be worse than the last 12 months (this really only applies to their growth numbers but since some investors only care about growth, it is relevant for the stock price). Now of course they’re still going to make more money then they did last year, they are still going to add more users and more sellers and generally improve their business in lots of positive ways. BUT, their stock price might go down in the short term.


Yesterday the analyst Keybanc essentially warned as much. Keybanc issued a report downgrading Etsy to a Sector perform whereas previously they had Etsy as Overweight. This is specifically what Keybanc said: “We believe that Etsy remains one of the best long-term growth opportunities in our coverage. Etsy posted some of the best financial results across our coverage in 2020… However, we move to Sector Weight given what we view as a fair valuation and lower likelihood of near-term earnings beats.”


I’m not a big fan of these kind of analyses. It basically implies that Etsy is a great business, but we should sell it in the short term because it’s unlikely to grow as fast as it did last year. Then in a year we can buy back in when the year over year comparables look better. Investing is easy!


I’ve said many times that predicting what the stock market is going to do over shorter periods of time is almost impossible to do. Unfortunately for analysts like Keybanc, that’s exactly what they get paid to do. It’s what their clients want and “whose bread I eat, his song I sing.”


The good news is, this kind of short term thinking is great for long term investors like us. It creates what we call a “time arbitrage”. A time arbitrage is where the market thinks the stock will go down in the short term, but ALSO thinks that the stock will go up in the long term. In a time arbitrage we make money by simply being willing to wait for the long term positive result. It sounds simple but most people just aren’t willing to wait.


Etsy shares were down 4% yesterday on the downgrade. That means we got a 4% sale price on buying the stock whose long term value hadn’t changed.


- Craig White, BA, LL.B., CIM®


Craig White is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Craig White an Investment Advisor for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.

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