Analyzing the Analysts
By James J. Cramer
8/2/00 5:35 PM ET
Periodically I get an email that is so right that I have to pass it on in full. Earlier this year, I praised Jon Joseph for making a call that seemed right about the semiconductors. I got a lot of really vicious email about praising the call and I struck back and described how the purpose of an analyst should be to get you out before things go bad. It looks like, from my screen, Joseph did just that.
I just got this terrific email, though, from Stuart Johnson, a retired semiconductor analyst who, without him knowing it, made me a ton of money over the years. Here's his response and I think it is spot-on.
When I was a semiconductor analyst, it seemed to me that an analyst's action could result in one of four outcomes: The analyst would be:
1. Right (on the stock/group) for the right reasons (i.e., a correct investment conclusion that stemmed from insightful and accurate analysis/anticipation of events).
2. Right (on the stock/group) for the wrong reasons. This could be due to plain, dumb luck. Often, it stemmed from an accurate reading of market psychology, but analysts have to give some sort of fundamental reason for an investment opinion ("I think the stock's going down" doesn't have much impact). In fact, I knew an analyst almost 30 years ago who was notorious for the outlandish estimates that would accompany his buy/sell recommendations. His reason, as he told me, was that he felt portfolio managers were too dumb to buy a cyclical semiconductor stock as the analyst was cutting his estimates. He felt that, by the time it was clear his estimates were out of line, the stock would have made the expected move and no one would care.
3. Wrong for the right reasons. This can be due also to plain, dumb (bad) luck, to a misreading of market psychology, or to a failure to appreciate what is already "in" the stock. In the most favorable case, it can simply be being "too early" (which, however, still hurts until the market wakes up).
4. Wrong for the wrong reason. Obvious.
Mr. Joseph is, so far "right." Is he "right" for the "right reasons"? We don't know yet; he is calling for a cyclical top within 6 to 9 months. Not years. Some of his analysis regarding tantalum caps has been challenged. One thing I learned about the market and the semis is that it (the market) oscillates between "it's cyclical and the cycle is going to turn NOW" and "it's different this time" -- often as a result of the experience of the prior cycle (due to the horrors of the 1984 to 1985 collapse, the market, after the 1987 stock market crash, spent the next two years waiting for a cycle top).
Stuart Johnson.
Stuart's right, we don't know yet which it is, but I am right that it was a good call from the point of view of the short term. I think this note gives us a terrific matrix with which to grade analysts and I will keep it close to my desk from now on.
thestreet.com
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Interesting thought on analyst calls.
Jack |
