"Of Little Predictive Value"
This is the first in a multipart series of my lambasting the shortcomings of brokerage stock opinions and rankings.
Saturday 1-15-2000
By John Pitera
After years of study, I have found that brokerage rating and recommendations
Are sometimes right and some times very wrong, and are of no specific
Predictive value.
WCOM was Salomon Smith Barney's best pick at the end of May and within 3 weeks
Had made a top for the 1999 and indeed had declined in price by 36% by the second
Week of January 2000.
Joe Kernan and David Faber who are two of the better analysts and commentators
On cnbc actually make sport of pointing out how brokerage firms will all be recommending
A stock when it has had a run up often only starting to cover it when it has had a large
move up and will then downgrade the stock en masse, After the stock has declined
Precipitously. Often an earnings or revenue miss or negative forward guidance will
Have sent the stock in question into freefall.
The brokerage house herd mentality is so pronounced that Faber will initiate
a video clip of penguins scurrying to the edge of a little iceberg cliff and then plunging
one after another into the water. They will actually say there goes Morgan Stanley, there goes
Merill, there goes Smith Barney. Kernan and faber do this exercise and point to the chart with
The telestrater and say here you were saying it was a buy at 75 and now at 32 you are saying
It is a sell, and there are at least 4 of you firms telling us it's a sell now.
It takes 4 downgrades to initiate this penguin video, and it is used when the downgrades come
After the stock being downgraded by at least 30% usually.
This video has been show almost weekly over the past year or two and highlights the precarious
Nature of putting much faith in analyst rating without doing much more independent research.
You might say well if the firms are always wrong, then I'll just fade the ratings of the street firms
And make a mint. That does not work either. As the analyst opinions are right about half of
The time.
The Overarching theme is that the general Wall Street Research is of no specific predictive value
And hence should be a minor background consideration in designing investment decisions.
We must remember that Wall Street is a sell side business, and studies have been done where
There are only about 30 stocks that are listed as sells when there are more than 7000 stocks that
Are listed. The reason more are not listed as sells, is that The Wall street firms are in business, to
Sell you stocks and to do underwriting, provide secondary offerings of existing stocks, to arrange
New bond issues and other credit facilities for companies. It is of no use to jeopardize these
Income possibilities from companies by having a sell on a stock.
Smith Barney had a neutral rating on T for 4 years and created a stir when Jack grubman, one
Of the top industry analysts raised T to a buy, this is after it had tripled from Q1 of 1997 into the
Summer of 1999.
He had some very valid concerns of whether they could have success with their costly cable
Strategy. It was commented upon on CNBC that the real reason that SSB may have gotten in line
And issued a buy on T was to be eligible to participate in the lucrative spinning off of
The T wireless unit, into a tracking stock, the same way the FON spun off PCS.
So this missive provides some insights as to why Wall Street rankings are of very limited
Predictive value.
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More to come on this topic. |
