Merrill Analyst Says Colleagues Too Upbeat About Techs
09:01, 2001-06-20
By Karen Talley Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Breaking ranks with his colleagues, Richard Bernstein, chief quantitative analyst at Merrill Lynch, said the firm's technology analysts are too upbeat about tech stocks and haven't fully factored in deteriorating business conditions that are going to continue impacting margins - one of the chief measures used to value companies.
'If we are correct and the problems within the technology sector are structural as well as cyclical, then the optimism still imbedded in these margin forecasts suggests that considerably more disappointment lies ahead for investors in these stocks,' Bernstein said in a research report.
Bernstein studied 15 technology companies in his report, some of which he felt analysts hadn't completely factored in a reduced margin forecast.
The report urges caution and also shows that, counter to criticism, analysts do not march in lock step with one another by presenting uniformly upbeat outlooks.
Bernstein differs with colleagues within his own firm. In a separate report, ABN Amro breaks ranks with analysts at other firms, saying their earnings projections for telecom equipment makers are too high and should be ratcheted down. ABN Amro's report names industry giants Cisco, Motorola, Sycamore Networks and Tellabs as being too optimistically positioned.
These kinds of differing opinions might not win applause from colleagues, but could possibly score the industry points with investigators who are looking into whether analysts are too upbeat in their stock recommendations. The New York State Attorney General's office is looking into Wall Street's research practices, including whether analysts are presenting unbiased information to investors. A congressional subcommittee is also looking into this issue. The industry's trade group, the Securities Industry Association has also gotten into the action, last week laying out its own guidelines, or 'best practices,' for analysts to follow to ensure that they put the interest of investors first.
A number of firms, including Merrill and Prudential Securities, are also taking their own steps, requiring analysts to disclose if they own stock in the companies they write about.
These moves come as some analysts remained staunchly bullish about the companies they follow despite the stock market's slide And lately, after a brief respite, the market's downturn has continued, with the Dow Jones Industrial Average and the Nasdaq Composite Index falling for successive days, partially wiping out advances made earlier this spring.
The declines have again raised the issue of just how to value stocks, especially technology shares, in tough economic times.
Bernstein, in an interview with Dow Jones Newswires, said he doesn't shrug off the role of being something of a maverick, saying that more voices being heard can help investors make a better informed decision. The point, counter point between himself and the firm's tech analysts, 'is done in a collegial way,' Bernstein said. 'They know my opinions and I know theirs.'
In his report, Bernstein said Merrill's technology analysts 'evidently expect margin pressures to be temporary.'
But that's not the way he feels, noting 'we remain cautious on the technology sector because we believe margins will continue to compress in 2001 and 2002 beyond what analysts are expecting.'
Bernstein titles his report, 'Margins Might Be The Straw That Breaks the Camel's Back.'
To be fair, Merrill's ratings on big tech stocks aren't barn-burners, with buy and accumulate ratings mixed in with some neutrals and holds.
As a quantitative analyst, Bernstein takes a broad look at the tech industry while his colleagues, known as fundamental analysts, do more individual research on the companies they follow.
Margins are important to both quantitative and fundamental analysts because they measure how profitable a company is, the quality of those earnings and the company's ability to compete with others in its field. In at least one way fundamental and quantitative analysts differ: fundamental analysts consider measures like the quality of management as a way to help value stocks.
Forecasts for 2002 show that Merrill analysts are forecasting net profit margins to expand for three of 13 companies they follow and operating margins and net profit margins to expand for six companies, Bernstein said.
-By Karen Talley, Dow Jones Newswires, 201-938-5106 karen.talley@dowjones.com
Copyright c 1999-2000 Dow Jones Inc. All rights reserved.
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