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Magazine Cover Curse Strikes Akamai (AKAM) at Trader’s Narrative





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About a year ago I mentioned the powerful, contrary sentiment, punch that magazine covers pack. At the end of April 2006, the Economist did a glowing review of Goldman Sachs (GS) titled “On Top of the World”.

I wrote:

“…the recent Economist cover (above) should send shivers down the backs of anyone who is long Goldman Sachs…”

Here’s what happened to Goldman’s stock price from the time of the article to now:

goldman sachs GS economist cover story.png

With the exception of a short term blip that took GS to ~$165, the shares fell from $158/share to a low of $135.75. At best, GS was dead money for around 5 months.

The most recent company to be afflicted with the magazine cover curse was Akamai Technologies (AKAM):

akamai AKAM forbes cover story April 2007.png

Forbes featured Akamai in a glowing article in late April 2007 titled “Video Prophet”. You may think that the blame should rest squarely on Akamai’s disappointing fourth quarter earnings report but what, if not sentiment, is responsible for expectations being so high in the first place?

A recent Financial Analysts Journal article titled “Are Cover Stories Effective Contrarian Indicators?” by finance professors Tom Arnold, John H. Earl, Jr., and David S. North (from the University of Richmond, Virginia) argues that this sentiment signal shouldn’t be used to go long/short on negative/positive cover stories. Instead, their conclusion is the positive stories signal the end of outperformance for a stock, and negative stories signal the end of underperformance.

If I ever run a company, there will be standing policy to hang up on any and all media calls which may result in cover stories.

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