As Tech Stocks Fall, Some Analysts Still Optimistic
March 4, 2001
As Tech Stocks Fall, Some Analysts Still Optimistic
By SAUL HANSELL
As technology stocks advanced in the last few years, so did Henry Blodget.
A 35-year-old with wavy blond hair whose optimism shone as strong as the
market's, he transformed himself from aspiring journalist into one of
Wall Street's best-known analysts and a fixture on CNBC, his pay rising
into the millions.
Today, the market is bloodied, but not Mr. Blodget. His top recommendations
are down 79 percent, on average, from the beginning of last year, with
several trading for less than $1. But Mr. Blodget, the senior Internet
analyst at Merrill Lynch, the nation's largest brokerage, keeps his chin up.
"Things change," he said last week, furrowing his brow after every
few words. "The market went from saying, `We like companies that are growing
quickly but are losing a lot of money' to saying, `We want to see earnings.'
It's very hard to predict a 180-degree turn like that."
Not that Mr. Blodget's picks, often delivered with caveats, were
demonstrably worse than those of some other Internet analysts.
Last August, in fact, he started to turn somewhat more cautious.
But the story of how Mr. Blodget and others like him encouraged
investors to bid stocks up to levels he now admits were unjustifiable
goes a long way toward explaining why the market for technology
stocks has since crashed.
Just one year ago this Saturday, the Nasdaq index, the new economy's
leading barometer, peaked at 5,049. On Friday, it closed at 2,117,
down 58 percent over the past 12 months. The sell-off of technology
stocks continued to unfold last week, as did the consequences.
Federal Reserve Chairman Alan Greenspan has said that the market's
drop endangers the health of the economy, as corporations and consumers
suddenly find themselves less wealthy.
Looking back a year after the peak, it is clear that prices were bid up
to astronomical levels in part because of a euphoria infecting not just
minor day traders but international firms like Merrill and Mr. Blodget,
who had accurately called shots as the market rose, was in the center of it.
"When someone appears to be right, they become larger than life," said
Peter Bernstein, a veteran consultant to big money managers. Watching
fortunes being made from the Internet, investors were looking for reasons
to believe and leaders to follow. Analysts like Mr. Blodget obliged.
"All the tinder was ready waiting for the match to be lit," Mr. Bernstein said.
Indeed, one of the paradoxes of the financial world and perhaps
one of the explanations for the euphoria that gripped Wall Street
during the boom years is that Mr. Blodget may have served his employer
well by being wrong over the last year.
It was clear to many market veterans that young companies were
being accorded values based more on fantasy than finance. But the
profits being made by investors and firms were quite real. If Merrill
had an analyst spinning doomsday scenarios, it would not lure high-tech
companies as clients for initial public offerings, among Wall Street's
most lucrative activities. But neither could the company risk legal
action by armies of widows who lost their savings when the bubble burst,
as it surely would.
So Mr. Blodget served both audiences. He carefully alternated buy
recommendations and sky-high target prices with cautions about volatility,
and advice for investors to limit their dot-com holdings to just a
fraction of their portfolios. He made headlines when he said 75 percent
of Internet companies would fail.
"I don't think we fanned the euphoria," Mr. Blodget said. "I said over
and over that all trees don't grow to the sky."
Such warnings did not prevent all investor complaints. Debases Kanjilal
last week filed a formal complaint, seeking arbitration, with the
New York Stock Exchange; he blames Mr. Blodget and his firm for hundreds
of thousands in losses on an investment in InfoSpace, an online Yellow Pages.
The stock has fallen 96 percent since Mr. Kanjilal bought it.
Mr. Kanjilal contends that Mr. Blodget was trying to protect a deal
Merrill Lynch had been negotiating. Merrill says the charge is baseless
and that Mr. Blodget did not know about the deal until a few days before
it was announced. Merrill continues to back Mr. Blodget. The firm recently
gave him a choice, added assignment, covering Microsoft, one of the
world's most widely held stocks.
"He is a top-rated analyst of absolute integrity, and Merrill Lynch
stands behind him," Susan McCabe, a company spokeswoman, said.
Though Wall Street analysts are often M.B.A.'s, Mr. Blodget had an
undergraduate degree in history from Yale. Seven years ago, his dreams
of a career in journalism had gone no further than a job as a
proofreader for Harper's magazine.
So Mr. Blodget looked elsewhere. He became a Wall Street trainee,
soon winning a job as an Internet analyst at CIBC Oppenheimer,
a small brokerage firm affiliated with a Canadian bank.
He was much like the young entrepreneurs who started the companies
he follows: he was early to see the rise of the Net and, without
much to lose, he bet his career on it.
In December 1998, he won sudden prominence with an outlandish
prediction: that Amazon.com, then trading at $240, would soon rise
to $400. And this for a company, already up sharply, with no profits in sight.
Merrill Lynch's Internet analyst, Jonathan Cohen, scoffed and
said that Amazon would drop to $50.
Less than three weeks later, Amazon blew past Mr. Blodget's target.
His reputation was made. "I expect my obituary will read,
`Henry Blodget comma who predicted Amazon would hit $400 comma,' " he said.
Shortly thereafter Mr. Cohen left Merrill to become research director
at Wit Capital, a new investment bank, and Mr. Blodget got his job.
Through 1999 and well into 2000, Mr. Blodget's recommendations
at Merrill all ranged from "accumulate" to "strong buy." Even with
his help, however, Merrill found it difficult to lure the most promising
initial public offerings away from Goldman, Sachs and Morgan Stanley Dean Witter,
which has its own star analyst in Mary Meeker.
Merrill did win assignments from Internet Capital Group, Pets.com,
Buy.com and Quokka Sports. Mr. Blodget, following Wall Street's
custom, gave favorable ratings to them all.
By March of last year Internet stocks started heading down.
Mr. Blodget was hardly alarmed. Like many investors, he was
trained by experience to see dips as simple precursors to further
jumps. So he left his buy ratings intact.
Many of his favorites rebounded during the early summer. But by August,
of the 29 stocks he followed, the 18 that had been around since Jan. 1
were down an average of 54 percent. Mr. Blodget then cut his ratings
(he preferred to say "reset") on 11 of the 29, including some that
had gone public through Merrill.
But he maintained his top ratings on companies like Yahoo and InfoSpace,
saying he remained optimistic about the industry.
In October, Mr. Blodget won the highest possible accolade, as money
managers voted him his industry's top analyst, beating out Ms. Meeker.
But he could not command the markets. As the dot-coms continued
to fall, he slowly lowered more of his ratings, often after the
companies reported disappointing results.
This year, the stocks he follows sank further. Of the companies
Merrill took public, with his backing, the most successful, the
Internet Capital Group, is down from a high of $193 to $3.25.
Pets.com, which he had strongly recommended until August, became
one of the first prominent dot-coms to shut down, in November.
Mr. Blodget discounts his role as a promoter. "Demand from investors
was so strong, we didn't have to sell these," he said. "This is what
the market wanted."
He is not one to apologize, instead emphasizing how much money investors
could, for a while, make. "From 1995 to 2000, the real risk was
missing the rise," he said.
He remains convinced that the surviving Internet companies will
rebound. "The PC industry had a nasty bear market from 1983 to 1985,
then it snapped back to create over $1 trillion in market value,"
he said. "My assumption is the Internet will be the same."
But last week, Amazon.com hit a two-year low of $9.56 within a dollar,
adjusting for splits, of where Mr. Cohen, Mr. Blodget's predecessor,
said it would land.
"I wouldn't say I'm vindicated," Mr. Cohen said. "But I'm amused." |
