<font color=Green> WSJ: Lousy SOLOMON SMITH BARNEY Analyst's Call Costs Investors millions of dollars
Analysiscoming out from The Colin Devine @ Solomon Smith Barney school of investing sticks investor in pocket book.
When Jack Grubman upgraded AT&T stock to a "buy" in November,
the star Salomon Smith Barney analyst made big headlines. …..
…and Salomon,… soon won a lucrative spot helping to manage
…..the $10.6 billion initial public offering of AT&T Wireless Group.
…..Everyone seemed to win -- everyone, that is,
except investors who heeded his call and bought AT&T stock…..
Among other stocks with "buy" ratings from Mr. Grubman that have headed south,
Verizon Communications is off 27% from its peak this year,
WorldCom is down 41%,
Nextlink Communications is down 52%
and Williams Communications is down 65%.
So when Solomon Smith Barney call on CNC…………..investor beware……..
TA
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October 4, 2000
Heard on the Street
Missed Call on AT&T Stock
Could Affect Salomon Analyst
URL for this Article:
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By RANDALL SMITH, DEBORAH SOLOMON and SUZANNE MCGEE
Staff Reporters of THE WALL STREET JOURNAL
When Jack Grubman upgraded AT&T stock to a "buy" in November,
the star Salomon Smith Barney analyst made big headlines.
AT&T, long criticized by Mr. Grubman, was thrilled.
And Salomon, a Citigroup unit, soon won a lucrative spot helping to manage
the $10.6 billion initial public offering of AT&T Wireless Group.
Everyone seemed to win -- everyone, that is,
except investors who heeded his call and bought AT&T stock.
It turns out Mr. Grubman's high-profile call came just as AT&T's stock price
was close to its high for the past year.
The stock since has been halved as the entire telecom sector has plunged.
So what has Mr. Grubman done about it? Well, nothing:
He has kept his "buy" rating on AT&T and most of the 34 other stocks he follows.
"If I had a crystal ball and knew what to do, I would have downgraded the whole group,"
Mr. Grubman concedes in an interview, in which he defends the AT&T upgrade but also
expresses some regrets about it. The sector -- battered by a host of earnings warnings,
a slowdown in the capital markets and increased competition -- "is in a tough space
right now because people are worried about all sorts of stuff," he says.
But Mr. Grubman maintains that "near-term stock picking has never been what I'm known for,"
and that clients value him more for his "industry knowledge and a long-term view of things."
Perhaps. But the 46-year-old analyst did downgrade Sprint to a "neutral" rating in July
after its merger with WorldCom collapsed. The stock, then at $43, has since fallen to $27.38.
When Sprint issued a third-quarter earnings warning last month, Mr. Grubman sent a blast
voice-mail telling clients the July downgrade "was about the only thing we did right in last six months."
Still, Mr. Grubman contends that most sell-side analysts (those at Wall Street brokerage firms)
don't post negative ratings, anyway. "Let's call a spade a spade," he says.
"Nobody on the sell side puts negative ratings on stocks.
Very few people have anything less than a positive rating."
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Other analysts have made similar bad telecom calls this year.
But there is a bit more riding on Mr. Grubman's coattails.
He has parlayed his stature as the top analyst in the sector – and
perhaps the most powerful analyst on all of Wall Street, making more than $25 million a year
to help his firm win a leading market share in lucrative telecom underwriting and merger
advisory assignments. Last year, Salomon Smith Barney received about $350 million
in disclosed fees from such work, tops on Wall Street, according to Thomson Financial Securities Data,
which tracks investment-banking activity.
Yet Mr. Grubman's "Jack-of-all-trades" role -- he effectively is part analyst,
part investment banker, part salesman -- depends partly on the credibility and
respect he commands among his money-manager clients.
And while many money managers still value Mr. Grubman's insights into the telecom business,
some say the AT&T call, together with his other actions in promoting companies
that use Salomon Smith Barney for their stock offerings, could hurt his stature.
"I think he blew the AT&T call," says Jerry Castellini, who manages $1.2 billion as a
co-founder of Chicago-based CastleArk Management LLC. "That's a story that he
could have perhaps anticipated. There were so many moving parts, and so much
potential for something to go wrong." Mr. Castellini says the AT&T upgrade
jeopardized Mr. Grubman's credibility enough that rivals could try to exploit it to capture business.
"That's an argument that worked" for rivals, he says.
But Mr. Castellini remains an admirer. "He's still the guru," says Mr. Castellini, who has known
Mr. Grubman since they both started analyzing telecom stocks in the early 1980s
. "Unlike most other folks in this space, the guy has a global understanding of the industry.
His knowledge goes beyond the services side to the technology. That's invaluable."
Some money managers insist that AT&T wasn't exactly Mr. Grubman's top pick to begin with.
"While Jack did recommend AT&T, our sense is he preferred other names,"
says Spiros Segalas, chief investment officer at Jennison Associates,
a unit of Prudential Insurance Co. of America that manages about $70 billion.
Mr. Segalas says Jennison still has "enormous respect" for Mr. Grubman, who remains
"a very valuable resource" even though telecom stocks are down.
And in any case, he adds, "we make our own decisions" what to buy or sell.
Some investors say they are willing to accept Mr. Grubman's dual roles.
"Jack knows more about what's going on in telecommunications than anyone else around,"
says Erik Gustafson, a money manager for Stein Roe & Farnham in Chicago.
"But you have to understand that Jack Grubman is an investment banker,
is paid to be an investment banker -- and is a very good one at that."
Mr. Gustafson asks: "Was his recommendation of AT&T stock just a short while
before they spun off the wireless unit a coincidence? I know I have my answer.
He answers to different masters." Still, Mr. Gustafson credits Mr. Grubman for
insights into the telecom business that have been very profitable for investors.
For instance, Mr. Gustafson has held WorldCom for several years based on
Mr. Grubman's comments. "He's been wrong on the stock for the last year,
but dead right for the last five," Mr. Gustafson says.
Mr. Grubman defends the AT&T recommendation, saying when he upgraded
the stock he believed the company's strategy of buying cable companies to get
a faster pipe into homes and businesses would be profitable long term.
"We still had issues with the core business but were convinced that the
cable initiatives could generate a decent return over a four to five-year period," he says.
However, the core business has continued to decline faster than anyone
predicted and "is even far worse than we had thought," Mr. Grubman says.
"If I had to do it all over again I wouldn't have upgraded the stock,
mostly because the core business deteriorated much more quickly than anyone anticipated."
To be sure, other analysts have also stayed on the sidelines as companies such as
AT&T and WorldCom plummeted. Big-name analysts such as Daniel Reingold,
of Credit Suisse First Boston and Frank Governali of Goldman Sachs,
have also kept a "buy" rating on AT&T even as its shares slipped to 52-week lows.
Other analysts have also remained bullish on AT&T. Lehman Brothers has a "strong buy"
rating on the firm and Merrill Lynch, which downgraded AT&T from a "long-term buy"
to a "long-term accumulate" in July, still has a "short-term buy" on AT&T.
WorldCom also still has several strong ratings, including an "outperform" from Morgan Stanley Dean Witter
and "buys" from firms such as Bear Stearns and ABN Amro.
Merrill and A.G. Edwards have an "accumulate"
on the stock.
However, Lehman analyst Blake Bath downgraded some of the stocks, including
WorldCom, from a "buy" to an "outperform" last month.
Among other stocks with "buy" ratings from Mr. Grubman that have headed south,
Verizon Communications is off 27% from its peak this year,
WorldCom is down 41%,
Nextlink Communications is down 52%
and Williams Communications is down 65%.
But make no mistake: Telecom banking is more important to
Mr. Grubman's firm than many others. The telecom sector,
wireless and other related areas, accounted for 49% of Salomon Smith Barney's
stock underwriting in 1999, the most of any major securities firm, according to
Thomson Financial Securities Data. By comparison, it represented 28% for
Goldman Sachs Group, 25% for Morgan Stanley and 17% for Merrill.
Of course, Mr. Grubman isn't the only key member of his firm's telecom banking team.
Eduardo Mestre, head of investment banking at Salomon Smith Barney, is a longtime
telecom specialist, as is Thomas King, co-head of world-wide mergers and acquisitions.
But the team has also lost a few major players to rivals.
Some money managers cite the poor performance of Salomon-led initial public
offerings of telecom companies. Salomon has the second-worst record among
10 major securities firms for its IPOs in 1999 and 2000, according to Thomson
Financial Securities Data. Collectively, they are down an average of 27.5%
through Monday from their offering price.
A spokesman for Salomon Smith Barney declined to comment on the IPO
performance, but says the firm's telecom investment banking business remains healthy.
"Notwithstanding the current weakness in domestic telecom equity issuance,
our global revenue and backlog continue to grow rapidly," he says. |
