Friday, March 23, 2001, 02:31 p.m. Pacific
Timely study for analysts: being
bearer of bad news
by Monique Wise
Bloomberg News
NEW YORK - About 100 Merrill Lynch stock analysts went to
class yesterday for a lesson on how to lower ratings on the
companies they cover without alienating corporate clients.
In the first bear market in almost two decades, they may be doing
a lot more of it.
"Downgrading stocks is among the toughest challenges facing
analysts," says a March 15 e-mail from Eric Hemel, deputy head
of U.S. equity research, to the rest of his department at the
biggest U.S. brokerage. The e-mail invited employees to a session
called "Managing Investment Downgrades."
The topics covered, according to Hemel's e-mail were: "Working
through the psychological barriers" to downgrading a stock, such
as having "persuaded investors previously to buy the stock at a
higher price" and handling "the diplomatic aspects of downgrading
so as to preserve as much as possible one's access to company
management."
Research analysts at Wall Street firms typically try to avoid
publicly lowering their view on the companies they cover. Their
investment banking units earn fees offering merger advice to and
selling securities for those clients. When a chief executive is
unhappy with a recommendation, he may take his business
elsewhere.
Analyst recommendations have barely budged as stocks
plummeted from their peaks in early 2000.
In March 2000, about 72 percent of the recommendations on
6,000 stocks tracked by First Call/Thomson Financial advised
buying. Almost 27 percent of recommendations counseled holding
and less than 1 percent suggested selling a given stock.
The Nasdaq composite index has since plunged 64 percent from
its record on March 10, 2000, and the Standard & Poor's 500
Index has fallen 27 percent and the Dow Jones industrial average
15 percent.
About 69 percent of recommendations still suggest buying, 30
percent suggest holding, and 1 percent advise selling, according to
First Call/Thomson Financial.
Merrill Lynch spokeswoman Susan McCabe said the firm has cut
ratings on 176 stocks this year and upgraded 41.
"It's a problem with the Street. Clearly, we all know it is," said
Geoffrey Hance, an analyst at Northern Trust. "There are so many
young people they haven't been through a lot of bear markets, or
even one bear-market environment."
Suggesting that more cuts may be on the way, Hemel and the
panelists at the seminar covered how to "position downgrades,
especially on previously favored stocks, vis-a-vis" Merrill's
salespeople and pension-, mutual- and hedge-fund clients.
"The series was prompted by our perception that internal training
was a good thing, and we should do more of it," said Hemel.
"Had this been two years ago, we would have had the same topic.
It's a fundamental issue in being an analyst - in good times and in
bad."
Hance said the lessons on downgrading are "a little late. From the
timing standpoint, it's a little embarrassing. But I think it's
important that they impress upon their analysts that one of the
value-added services they're supposed to be providing is a little
more objective guidance, including making negative calls."
The seminar panelists include several who made Institutional
Investor magazine's list of top stock-research analysts at least
since 1998.
Lauren Fine, who covers publishing, lowered her
recommendations on Gannett and True North Communications in
the last six months. Jerry Labowitz follows electronics and
component-makers and cut his "near-term" recommendations on
CommScope, Belden and SCI Systems to "hold" from "buy" early
in March. John Casesa, who covers automakers, last month cut
his "near-term" rating on Magna International to "hold."
Copyright © 2001 The Seattle Times Company |
