Good read from Briefing...
Post-FD Analysis : The world is still adjusting to regulation FD (fair
disclosure). In the pre-FD world, sell-side analysts would try to pick tops and
bottoms in a sector primarily by relying on their contact with industry executives
who would alert them to inflection points before the rest of the world. With that
lifeline severed, analysts are now operating in what appears to be a vacuum. They
no longer have an early read on industry trends courtesy of a friendly phone call
from CFO. And at the same time, they understand that they cannot wait to see an
actual improvement in numbers before upgrading a stock or sector -- by then, the
move will already have occurred. Thus, in the hyper-competitive world of
sell-side analysis, analysts are left with one unpalatable option - the educated
guess. Two recent examples have been Morgan Stanley upgrades of the semi
equipment sector today and of Cisco (CSCO) last week. Our intention is not to
single out Morgan Stanley -- these upgrades stand out because the firm's influence
made them market-moving calls, but Morgan Stanley is by no means alone. In
the case of both upgrades, there were detailed arguments, including a CIO survey
offered in support of the Cisco upgrade. But the bottom line was that these were
both cases of analysts taking a calculated risk in calling the turning point for the
stocks. There is nothing wrong with this, indeed their job is to make calls on
stocks. But investors should recognize that there is a fundamental difference
between the nature of these calls vs the same calls in years past. This year's
forecasts are based on analysts' industry projections, not early guidance from
corporate executives. As such, they are subject to the same risks and uncertainties
as anyone's industry forecasts. Given the inherent positive bias in the investment
banking world, they should perhaps carry even less weight. Increasingly,
investors might turn their attention to boutique firms such as Fechtor Detweiler
that have relied on channel checks and contact with middle management at firms
(FD only applies to executives, not lower level employees). These firms never
relied on a call from the CFO, and the value of their research is now on the rise
as a result. One final note: Fechtor Detwiler remains negative on the semi sector
based on its research. - Greg Jones, Briefing.com |
