Bearish Blodget's tail should be between his legs
If you're like most investors, you are filing Henry Blodget's latest slew of Internet stock downgrades in the "thanks for nothing" category right about now.
The widely quoted Merrill Lynch (NYSE: MER) Internet analyst lowered his ratings on 11 stocks on Monday, most of which were already at fractions of their prices when Merrill Lynch initiated coverage. And, to make matters worse, the company defended the downgrades by characterizing them as merely "a more precise differentiation of our current opinions." Mr. Blodget didn't even use the word downgrade in his report, choosing instead to say he was "resetting the investment ratings."
NOW YOU TELL ME
Some investors might want more than a reset if they followed Mr. Blodget's advice. Consider that of the 11 companies downgraded by Merrill Lynch, 6 are business-to-consumer (B2C) electronic-commerce companies -- Barnesandnoble.com (Nasdaq: BNBN), Buy.com (Nasdaq: BUYX), eBay (Nasdaq: EBAY), eToys (Nasdaq: ETYS), Pets.com (Nasdaq: IPET), and Webvan (Nasdaq: WBVN). Two others are online content companies: IVillage.com (Nasdaq: IVIL) and Quokka Sports (Nasdaq: QKKA) Both sectors have been decimated this year.
The other three stocks Mr. Blodget downgraded were 24/7 Media (Nasdaq: TFSM), Doubleclick (Nasdaq: DCLK), and Safeguard Scientifics (NYSE: SFE).
Here is a quick look at some of the numbers surrounding the stocks in question. The average loss for the 11 stocks since the time that Mr. Blodget initiated coverage for them was 62.85 percent. Particularly ugly were Pets.com, which has shed 82 percent of its value from the time that Merrill Lynch took them public in March, and eToys, which is down 89 percent since Mr. Blodget initiated coverage. Merrill Lynch was a co-underwriter on that IPO. In fact, 24/7 is the only stock of these 11 that currently is trading at a higher price than when Mr. Blodget began coverage.
Mr. Blodget's report did appear to have an impact on some, but not all, of the downgraded stocks. Seven of them finished down for the day on Monday. But Doubleclick actually surged almost 10 percent despite the downgrade, and the broader tech market shrugged off the report as the Nasdaq gained 2 percent.
WHOSE SIDE ARE YOU ON?
In fairness, Mr. Blodget was not the only analyst caught with his pants down when the Internet bubble burst in April. Many analysts have been eating crow since the market's irrational exuberance affected even their ostensibly objective analysis. But Mr. Blodget has been a highly visible bull of epic proportions, so in contrast, his mistakes appear even greater.
And the resistance to downgrade stocks that are obviously in trouble until after they have already taken a huge fall underscores some of the inherent conflicts of interest brokerage firms and sell-side analysts present. In addition to Pets.com and eToys, three other companies that Mr. Blodget downgraded on Monday had been brought public with Merrill as either a lead manager or co-underwriter on the offering.
The fact that Merrill Lynch chose to veil the downgrades by not calling them a downgrade shows the lengths to which analysts will go to avoid being seen as too critical and subsequently sabotaging the firm's chances at getting a company's future business. Blodget tempered his remarks further by stating "we believe that many of the stronger stocks may be near seasonal bottoms," making some of the stocks "increasingly attractive." So you have to wonder then, why downgrade in the first place?
Stock message boards across the Internet lit up with the news of Merrill Lynch's downgrades, and the bitterness of the too-little-too-late sentiment was palpable. One angry investor put it bluntly, saying "any six-year-old could do what Blodget does for much less money."
Of course, the media is partially to blame for perpetuating the relevance of many sell-side analysts by quoting them incessantly and relying on them for information. Consider this a resetting of our rating of Mr. Blodget, a little too late of course.
You can find this article at: redherring.com |
