AOL remains a core holding...all the bad news has been digested.
Net Madness: Holiday Basket Update
October 4, 1999
We have analyzed the stock price performance of ML internet analyst Henry Blodget's
"holiday basket" through October 1, 1999. We are using opening prices on August 18, 1999
as the starting point of our calculations because we believe that analyzing event-driven
performance based on the opening price is more reflective of real world performance. We
have ignored commission costs. See the table below.
The average return of the basket jumped to 18.2% vs. 9.9% last week. Buy-rated
performance increased due to a continued rebound in AOL and a major move in
AMZN while Accumulate-rated performance rebounded due to strength in ATHM and
ETYS.
YHOO was down for the week. Earnings are due Oct. 6.
ATHM gained on deal speculation. ETYS moved sharply higher on a Goldman
upgrade and price target boost.
AMZN and ETYS are ranked 2 and 1 in terms of performance and not surprisingly 7
and 8 in terms of upside potential. Both are seriously in downgrade territory.
BNBN, INKT, and LCOS qualify for upgrades based on > 20% upside potential.
BNBN and LCOS have qualified for upgrades during the whole existence of the
basket. INKT has flirted with upgrade and downgrade territory. This week it is in
upgrade territory.
We note that Blodget's comments in a recent LA Times article have generated a flood
of message board traffic and seem, in part, to contradict some of his recent research
actions.
Anticipated Research Actions (Holiday Basket)
Barring significant pre-announcements, we still do not expect the analyst to alter
his ratings or price targets until after these stocks report earnings. However,
given the analyst's latest comments in the LA Times, we believe the analyst may need
to clarify his position on these stocks. In the interim, we believe that the analyst's
ratings and the upside potentials suggested by his target prices should be treated as
mutually exclusive.
YHOO is scheduled to report on October 6. If the stock closes above $187.50 on that
date, we would expect the analyst to address his $225 price target because YHOO
would no longer meet the 20% upside requirement for a Buy rating. We do not foresee
a ratings downgrade unless YHOO reports disappointing earnings or expresses
concerns about its outlook. However, we believe that any downgrade effected on
the basis of valuation concerns could raise serious doubts about the validity of
the ratings on his other stocks. AOL would require similar attention above $125.
Unless AMZN sells off significantly, its price target will need some serious attention. In
reality, it needs attention right now. Based on the current price of $77 1/4, an
acceptable target would be $93. By the way, AMZN was still officially "overvalued" the
last time we checked.
Similarly, ETYS needs serious price target attention right now. Blodget missed an
opportunity to upgrade the stock, but Goldman didn't. Blodget is the only major analyst
we know of recommending purchase while having an official price target that
represents significant downside from current levels. Ironically, the Accumulate rating
may now work in Blodget's favor because it will allow him more flexibility to avoid a
ratings downgrade. Based on the current price of $65.50, a target of $73 would buy
Blodget some time. If ETYS were Buy-rated he would need $79.
Similarly, INKT may gain some advantage with its Accumulate rating. Although it
shares the same $150 price target as AOL, it does not enter downgrade territory until it
moves above $137.50 versus $125 for Buy-rated AOL. INKT is currently in upgrade
territory, but the analyst hasn't shown an inclination to upgrade the stock. When we get
a clearer understanding of "fantastically expensive", we'll reassess the likelihood of an
upgrade.
Based on upside potential, both BNBN and LCOS should be Buy-rated, but, so far, the
analyst hasn't acted. With AMZN moving further away from the book business, we'd
say that Blodget has room to justify an upgrade by citing BNBN as the premier book
play. Unfortunately for LCOS, Blodget isn't rating it relative to its peer (YHOO) based
on upside potential which it still has plenty of based on Blodget's target.
Deal speculation surrounds ATHM. We don't expect any upgrades, but are looking
forward to seeing what Blodget does if ATHM moves into downgrade territory which is
less than $1 away. Will ATHM be yet another example highlighting the eccentricity of
Blodget's ratings and price targets?
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