OFF TOPIC
o n t h e m o n e y
Analysts Demystified
By Jim Evans
October 08, 1997
They are among the most powerful and best-paid stars in the
corporate/Wall Street universe, and can be as controversial as
they are influential. In the high-tech world in particular they
are fixtures--often the most sought-after individuals at
conferences by everyone from journalists to the executives of
the companies they cover.
"They" are financial analysts, and the perception of what they
actually do varies depending on who's being asked. "I don't
think this business is really understood," says Charles
Boucher, a semiconductor analyst with UBS Securities. "It's
not as hard as being a rocket scientist, but it's not the easiest
job in the world either."
Analysts say that lack of understanding bubbles to the surface
when an analyst makes a negative call and the market takes a
dive. Invariably, Internet posting sites such as Silicon Investor
will burn up with angry traders alleging incompetence and
conflicts of interest. "The stock market is inherently dynamic,
regardless of an analyst's impact," Boucher says. "If you take
the inherently dynamic system and add an analyst's paid
opinion, then you generate an element of controversy."
But what about complaints that an analyst's opinion has more
to do with how much business their bank does with a
particular company than with a company's financial strength?
Surprisingly, some analysts agree--off the record. "There is
a tendency to treat corporate clients with kid gloves," says
one. "I think institutional investors understand that, but for
the retail investor it might be a problem."
The problem is that banks have basically two revenue
flows--banking and trading profits--says another former
analyst. With the advent of alternate means of trading stocks,
such as the Internet, trading profits have dwindled, putting
more pressure on banks to attract and keep corporate clients.
That, in turn, puts the pressure on the analysts, who are
already dealing with pressure on several fronts.
Perhaps the issue here is that the sell-side analyst is a slave to
multiple masters. The banker may want different behavior
than the trader who may want different behavior from the
investment client who may want different behavior than the
corporate client. The analyst is forced to solve the complex
problem of figuring how to walk the line between them all.
Investor Beware
Boucher says that because the Internet now gives individual
traders access to information that only institutional investors
used to be privy to, such as research reports, more untrained
eyes now scan sophisticated materials. As a result, traders
make bad decisions, then turn around and blame the analysts.
When it comes to analysts, the lesson seems to be, let
individual investors beware, because they might not be as
knowledgeable about potential conflicts or even about how to
read an analyst's report. Long-time tech industry observer G.
Dan Hutchenson, president of VLSI Research Inc., agrees.
"The average investor should have a little bit more
knowledge," Hutchenson says. "There's bias in the financial
analysts, but I don't think they're that harmful.
"I know they don't often make 'sell' recommendations,
because the companies will be all over them," he adds.
That might further strain already sensitive relationships, say
others. One investor-relations representative at a major
high-tech company says companies do all they can to deliver
the best information to analysts, but can be burned by an
analyst who makes blind calls within a company and gets an
employee to talk. That kind of back-street information can
often be blown out of proportion when combined with a
competitor's good news.
"It gets really tiresome when you've got to defend yourself
and every decision," says the source. "The sky is falling every
time. Worst case, we'll talk to an analyst every other day
because we have to do all we can to cultivate a relationship,
and [we] take off-beat behavior with a grain of salt."
UBS's Boucher says that for the most part companies try to
provide analysts with accurate information and are
understanding when an analyst downgrades a stock. But
companies do get upset when hit with a bad rating. "There are
going to be times when the essence of the business outlook
will not be pretty," Boucher says. "A lot of times there will
be an emotional reaction in the near term, but a company does
respect an analyst who's even-handed."
And analysts who make the best calls are rewarded at the end
of the year, when analysts are ranked. Those who finish the
highest are usually the best paid, says VLSI's Hutchenson.
"They've got a job where every six months they're rated,"
Hutchenson says. "Gauging the reality in the product market
and the perceived reality in the stock market is a difficult
thing to do. That's why they get paid so much." |
